More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
The Securities and Exchange Commission on Tuesday charged Merrill Lynch with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees.
To settle the SEC's charges, Merrill agreed to pay a$10 million penalty and consent to a cease-and-desist order. Merrill currently has some 15,500 financial advisors and $1.6 trillion in assets under management.
"Investors have the right to expect that their brokers won't misuse their order information," said Scott W. Friestad, associate director of the SEC's division of enforcement. "The conduct here was clearly inappropriate. Merrill's proprietary traders had improper access to information about the firm's customer orders, and misused it to place trades on the firm's behalf."
The SEC said that its order found that Merrill operated a proprietary trading desk between 2003 and 2005 that was known as the Equity Strategy Desk (ESD), which traded securities solely for the firm's own benefit and had no role in executing customer orders.
“This matter involved issues from 2002 to 2007 at Merrill Lynch,” said Bank of America, Merrill’s parent company as of early 2009, in a statement. “Merrill Lynch adopted a number of policy changes to ensure separation of proprietary and other trading and to address the SEC's concerns. Merrill Lynch also voluntarily implemented enhanced training and supervision to improve the principal trading processes at the firm.”
According to the SEC, Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, but the firm's ESD traders obtained information about institutional customer orders from traders on the market-making desk. They then used it to place trades on Merrill's behalf after executing the customers' trades, including trades involving stock in Comverse Technology, Teva Pharmaceuticals and Harmony Gold Mining, the SEC says.
In doing so, Merrill misused this information and acted contrary to its representations to customers, the SEC maintains. An ESD trader on one occasion told a market maker in an instant message: “[I] always like to do what the smart guys are doing.”
The SEC's order also found that, between 2002 and 2007, Merrill had agreements with certain institutional and high net worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades.
However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market, the government agency says.
The charges affected institutional clients trading stock in NetApp, Novell and BEA Systems, for instance, according to the SEC.
"Charging these undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers," said Robert B. Kaplan, co-chief of the SEC's Asset Management Unit, in a statement. "Brokers must act honestly and transparently when charging fees to their customers. There is no place in our markets for charging investors undisclosed trading fees."
Without admitting or denying the SEC's findings, Merrill consented to the entry of an SEC order that censures Merrill, requires it to cease-and-desist from committing or causing any violations and any future violations of certain sections of the Securities Exchange Act of 1934 and Rule 17a-3(a)(6) and orders it to pay a penalty of $10 million.
In determining to accept Merrill's offer, the SEC says it considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America.
SEC brought charges of securities fraud involving issues at Merrill Lynch from 2002 to 2007.
The SEC says that Merrill's ESD traders used information from institutional customer orders for the firm's benefit.