Risk & Compliance

Merrill Lynch to Pay Record Customer Protection Fine

The Bank of America unit violated broker-dealer rules that require customer cash and securities be safeguarded in case a firm fails.
Matthew HellerJune 23, 2016

In the largest consumer protection settlement in U.S. Securities and Exchange Commission history, Merrill Lynch has agreed to pay $415 million to settle charges that it misused customer cash and exposed customer securities to claims from its creditors.

The SEC on Thursday said the Bank of America unit committed “significant” violations of the Customer Protection Rule that requires broker-dealers to safeguard the cash and securities of customers so customer assets can be quickly returned if the firm fails. The violations allegedly began during the financial crisis and continued until this year.

According to an administrative order, Merrill Lynch engaged in complex options trades to remove up to $5 billion of customer cash week per week from its customer reserve account. It then used the cash to finance its own trading activities.

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Additionally, the order alleges the bank held up to $58 billion per day of customer securities in a clearing account that should have been deposited in a lien-free reserve account. Had Merrill Lynch failed at any point, the SEC said, customers may not have been able to retrieve their assets.

“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 J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “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.”

Some Merrill employees were aware of the lien on the clearing account as early as 2009 but the firm did not take steps to fix the issue until the SEC brought the problem to its attention, Ceresney said.

“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,” a Merrill Lynch spokesman said.

Separately, the bank also has agreed to pay a $10 million penalty to resolve SEC allegations that it made misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.