Bank of America’s Merrill Lynch unit has agreed to pay $415 million to resolve a regulator’s claims it violated federal securities laws requiring broker-dealers to protect the cash and securities of their customers.
In announcing the settlement on Thursday, the Securities and Exchange Commission said Merrill admitted to wrongdoing in the activities, which began during the financial crisis and in some cases continued as recently as this year. The regulator also announced Thursday an SEC initiative to uncover similar customer abuses at other broker-dealers.
The $356 million fine portion of the settlement is by the largest for a company accused of violating the SEC’s customer protection rule, Bloomberg News reported.
The SEC said its investigation found multiple types of Merrill violations involving federal customer protection rules.
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In one, Merrill Lynch financed its own complex trading activities through a maneuver that improperly reduced by billions of dollars the amount of customer cash that should have been deposited in a reserve account, the SEC found.
The trading “lacked economic substance,” the regulator noted. Had Merrill failed during that time, its customers would have been exposed to a massive shortfall in the reserve account, the regulator said.
Merrill further violated the customer protection rule by failing to follow requirements that customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse, the SEC said.
Merrill held up to $58 billion a day of customer securities in a clearing account that was subject to a general lien by Merrill’s clearing bank. Merrill held additional customer securities in accounts worldwide that were also subject to similar liens.
“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” Andrew Ceresney, director of the SEC’s enforcement division, said in a statement.
“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,” Ceresney said.
In a statement, Merrill spokesman Bill Halldin noted that no customers were harmed or losses incurred in connection with the activities.
But, Halldin added, “our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes. The issues related to our procedures and controls have been corrected.”
Bank of America had disclosed the probes in earlier securities filings. Halldin said the settlement will have no impact on Bank of America’s second-quarter earnings, which the bank will report next month.
The SEC also announced Thursday charges against William Tirrell, whom the regulator said served as Merrill Lynch’s head of regulatory reporting when the firm was misusing customer cash for the trading.
According to the SEC, Tirrell was ultimately responsible for determining how much customer money Merrill would reserve. He also failed to adequately monitor trades and provide specific information regulators about the substance and mechanics of the activities, the regulator said.
Tirrell, 61, remains employed for Merrill in New York, Halldin said declining to describe his current role. Tirrell served as acting chief financial officer for Merrill from August 2014 to this past April, according to the SEC.
In a statement, Tirrell attorney Steven Witzel said his client is “justifiably proud of his distinguished 35-year career and leadership positions in the securities industry.”
“While we are disappointed that the SEC filed this action, Mr. Tirrell looks forward to the opportunity to vindicate himself at trial,” Witzel said.
Also Thursday, in separate actions, the SEC and Financial Industry Regulatory Authority announced a total of $15 million in fines against Merrill over claims the firm made misleading statements to investors.
Merrill Lynch did not admit to any of those charges, which accused the firm of failing to fully disclose costs connected to notes linked to Merrill’s proprietary volatility index.
The inadequate disclosures made it appear to investors that the costs were lower than they actually were, regulators said.