Bank of America’s Merrill Lynch unit has agreed to pay $8.9 million to settle Securities and Exchange Commission allegations that it failed to disclose a conflict of interest to customers with hundreds of millions of dollars at stake.
The regulator accused Merrill, a subsidiary of Charlotte-based Bank of America, of knowingly breaking federal law. Specifically, it said Merrill violated a section of the Investment Advisers Act of 1940 that makes it illegal for an investment adviser to engage in practices that are fraudulent or deceive clients.
Merrill did not admit to or deny findings, according to the SEC’s order issued this week. In a statement, Merrill said it had “promptly” enhanced its policies and procedures.
According to the order, an internal Merrill Lynch due diligence unit recommended in December 2012 that Merrill get rid of products being managed by a U.S. subsidiary of a foreign multinational bank. More than 1,500 of Merrill’s retail advisory accounts had about $575 million invested in the products.
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The order did not disclose the name of the multinational bank or its U.S. subsidiary.
The recommendation followed an announcement that the person at the outside bank who had managed the products for a long time was being replaced by a team of people based in a different location, the SEC said.
At Merrill, replacing an outside portfolio manager generally triggered an in-depth internal review of affected products.
In making its recommendation, the Merrill unit found the new team lacked comparable experience in selecting bonds for similar portfolios, according to the order.
Previously, that team had been responsible for institutional accounts with a minimum of $100 million invested in diversified portfolios of roughly 150 bonds, the SEC said.
The products the team was being put in charge of, though, were historically held in retail accounts with a minimum of $100,000 invested in portfolios of 20 to 25 bonds specifically selected by the previous portfolio manager.
When it learned from a Merrill employee about the proposed termination, the subsidiary’s executives contacted Merrill to prevent it, the SEC said. The pitch from the subsidiary included “an appeal to the broader business relationship between the companies,” according to the order.
After those conversations, a Merrill Lynch governance committee did not hold an expected vote in January 2013 on the recommendation, the order said. Instead, the committee moved to defer the terminations until further review of the new team’s performance.
That deferment was a departure from past practices, the SEC said: The governance committee had previously voted on and approved all termination recommendations from the due diligence unit.
In slapping Merrill with penalties, the SEC said the firm’s clients did not expect Merrill to evaluate products based on its other business interests.
“By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,” Marc Berger, director of the SEC’s New York regional office, said in a statement.
“Retail clients must feel confident that their advisers are eliminating or disclosing such conflicts and fulfilling their fiduciary duties,” he said.
Merrill spokesman Bill Halldin said in a statement that the firm’s enhancements to its policies and procedures will ensure the confidentiality of the due diligence unit’s future recommendations.
He declined to comment on whether Merrill took any disciplinary action against its employees.
Merrill also violated a section of the 1940 act that requires investment advisers to adopt and implement written policies and procedures reasonably designed to prevent a violation of act, the SEC said.
Merrill’s settlement payments include a more than $4 million penalty. The firm also agreed to a cease-and-desist order.