More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
Bank of America (BAC) said early Friday that it had reached a settlement to end a class-action lawsuit with investors and will pay $2.43 billion, while also making certain corporate-governance reforms. According to industry experts, the lawsuit and its resolution should have a negligible impact on the thundering herd of Merrill Lynch and Merrill Edge advisors.
The suit—which entails the biggest settlement arising from the 2008 financial crisis—was brought against the firm in 2009 in relationship to shareholders who purchased or held Bank of America securities when the company announced plans to acquire Merrill Lynch. Though it reached the settlement, BofA maintains that it did not make false or misleading statements about the financial health of the institutions involved in the merger.
“Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” said CEO Brian Moynihan (left), in a press release. “As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients.”
On Friday, BofA shares traded down 1% at $8.90, down more than 66% from September 2008, when plans for the merger were first made public.
The governance reforms to be instituted or continued through early 2015 include measures associated with majority voting in director elections, the annual disclosure of noncompliance with stock ownership guidelines, policies for a board committee regarding future acquisitions, the independence of the board’s compensation committee and its compensation consultants and an annual “say-on-pay” vote by shareholders.
“This has been an ongoing issue for BofA-Merrill for some time,” said Mark Elzweig, an executive-search consultant in New York, in an interview with AdvisorOne. “And even with a large settlement, this should enable [employees and advisors] to put the matter behind them and go forward.”
The recruiting expert notes that in recent years this issue “has not had an impact on the firm one way or another as a brand” from the clients’ perspective. “It’s not an issue that [advisor] clients have been looking at,” Elzweig explained.
On Sept. 14, 2008, BofA—led at the time by Ken Lewis—said it was in talks to buy Merrill. Bob McCann, then head of Merrill Lynch's brokerage force, moved to UBS about a year later. He quickly hired other Merrill veterans such as Bob Mulholland. BofA soon tapped Citi veteran Sallie Krawcheck to lead Merrill.
In terms of recent recruiting action, the BofA issues have not had an impact, mainly because Merrill’s “not in the game,” said recruiter Rick Peterson of Rick Peterson & Associates in the great Houston area, in an interview at AdvisorOne.
“If they had been on full-steam-ahead mode for the past year, the BofA problems certainly would have impacted their success in recruiting, but they’re not in the mode.”
Instead, the company has been focused on retention and hiring, particularly in the Merrill Edge channel.
On Monday, it hired Michael Maghani, previously with Morgan Stanley (MS), to become its new managing director and head of insurance and annuities. The news was shared with BofA-Merrill’s 17,500-plus advisors in an internal memo.
BofA says the amount to be paid will be covered by a combination of litigation reserves and incremental litigation expense to be recorded in the third quarter of 2012. The company estimates that the total litigation expense will be about $1.6 billion for the three months ended Sept. 30, 2012.
The bank has also explained that the litigation expense, improvements in the company’s credit spreads and the U.K. tax charge are expected to negatively impact reported third-quarter EPS by roughly $0.28.
According to the company, third-quarter 2012 financial results will be adversely impacted by some $1.9 billion (pretax) in negative fair value option (FVO) adjustments and debit valuation adjustments (DVA), a previously reported charge of about $800 million to income tax expense for changes in the U.K. corporate tax rate and the related effect on the deferred tax asset valuation.
Bank of America plans to report its third-quarter 2012 financial results on Oct. 17.