Merrill Lynch fined US$415m for using customer funds

The $415 million settlement with the Securities and Exchange Commission – the largest payout to the agency since 2013 – comes as regulators push banks toward less complex structures, meant to safeguard consumer assets from the sort of market risks investment banks regularly weather.

Bank of America Corp’s Merrill Lynch brokerage unit will pay $415 million and admit to wrongdoing to settle charges that it misused customer cash, the top USA securities regulator said on Thursday.

Bank of America Corp. bought brokerage firm Merrill Lynch in January 2009 as Wall Street was struggling in the financial crisis.

The SEC charged Merrill Lynch violated its Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a protected reserve account.

“Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed today reflects the severity of its failures”.

According to the SEC’s order instituting a settled administrative proceeding, the offering materials emphasized that the notes were subject to a 2 percent sales commission and 0.75 percent annual fee. It does so by “eliminat [ing] the use by broker-dealers of customer funds and securities to finance firm overhead and such firm activities as trading and underwriting through the separation of customer related activities from other broker-dealer operations”.

The securities regulator added that Merrill Lynch also failed to comply with the requirements of the rule that fully-paid customer securities be held in lien-free accounts and protected from claims by third parties should the firm collapse.

“While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes”, said Bill Halldin, a spokesman for Bank of America.

SEC Division of Enforcement Andrew Ceresney, said, “The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed”. As The Journal previously reported, those savings generated profits for employees in a small unit known as Structured Equity Finance and Trading.

The investigation was disclosed in Bank of America’s 2015 and 2016 SEC filings. Merrill Lynch neither admitted nor denied the structured note charges made by SEC and Finra.

The loans reduced the amount of funds the bank held as a cushion and lowered its financing costs, the SEC said. The bank was also required to amend its severance agreements to remove language that the SEC said discouraged employees from speaking to regulators over compliance concerns.