More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
Merrill Lynch agreed on Thursday to pay a whopping $131.8 million to the Securities and Exchange Commission after the agency charged Merrill with making faulty disclosures about collateral selection for two collateralized debt obligations (CDOs) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.
The deals took place between 2006 and 2007.
The SEC said Merrill failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and had significant influence over the selection of collateral for the CDOs Octans I CDO Ltd. and Norma CDO I Ltd. Magnetar bought the equity in the CDOs, and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.
“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George Canellos, co-director of the SEC’s Division of Enforcement, in a statement. “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”
Merrill Lynch consented to the entry of the order and agreed to pay disgorgement of $56.3 million, prejudgment interest of $19.2 million, and a penalty of $56.3 million. Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.
"We are pleased to resolve this matter, which predated Bank of America’s acquisition of Merrill Lynch," the firm said in a statement. It said its reserves from the third quarter would cover the fine.
The SEC released a detailed explanation of the charges, including the inaccurate books and records charges. It has also charged related parties.
Check out SEC Issues ‘Bad Actor’ Guidance Under Rule 506 on ThinkAdvisor.