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Regulation and Compliance > Federal Regulation > SEC

Merrill Exec Gets ‘Cease and Desist’ in Biggest Customer Protection Case Ever

By Janet Levaux

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The Securities and Exchange Commission has decided William Tirrell, who used to lead Bank of America Merrill Lynch’s regulatory reporting department, was negligent in the firm’s violations of securities rules for which it was fined $415 million in 2016. The regulator, though, took no actions against Tirrell, who left the firm in July, other than demanding that he “cease and desist” from future transgressions, according to an order it released Friday.

In a statement shared with ThinkAdvisor, Tirrell’s attorney Steven Witzel said: “The terms of the settlement — no fine, no suspension, no penalty — speaks for itself. After four years of investigation by the SEC, Mr. Tirrell is more than ready to put this matter behind him and move on with his life.”

Tirrell, 64, had worked for the regulatory reporting group at Merrill since 1980. He was head of the group from 2004 to April 2016. (Merrill Lynch declined to comment on the matter.)

About a year ago, Andrew Ceresney, director of the SEC’s Enforcement Division, said Merrill’s $415 million fine was “by far the largest customer protection settlement in SEC history, and the severity of the misconduct is much more significant than prior cases.”

As part of the actions it took against Merrill Lynch in June 2016, regulators also filed a cease-and-desist action against Tirrell, tied to the use of client cash to conduct leveraged conversion trades — conversion trades that used listed options financed by customers through margin loans extended by Merrill Lynch.

The SEC’s Enforcement Division alleged last year that Tirrell “was ultimately responsible for determining how much money Merrill Lynch would reserve in its special account, and failed to adequately monitor the trades and provide specific information to the firm’s regulators about the substance and mechanics of the trades.”

Complex Case

In June 2016, the SEC said Merrill agreed to pay $415 million and admit wrongdoing in the abuse of client cash used to generate profits for the firm and for its failure to safeguard customer securities from creditors’ claims. In addition, the regulator said at the time that it would conduct a sweep of broker-dealers regarding their compliance with the Customer Protection Rule broken by Merrill, Rule 15c3-3.

The SEC investigation found that Merrill, instead of putting customer cash into a reserve account, used it for “complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account” while financing its own trading activities from 2009 to 2012. If Merrill had gone under, the regulatory group says, clients would have been exposed to “a massive shortfall” in the reserve account.

Furthermore, Merrill violated the Customer Protection Rule by not holding client securities that had been fully paid for in lien-free accounts and not shielding the securities from claims by third parties during and after the financial crisis, the SEC says.

“From 2009 to 2015, Merrill Lynch held up to $58 billion per day of customer securities in a clearing account that was subject to a general lien by its clearing bank and held additional customer securities in accounts worldwide that similarly were subject to liens. Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities,” the SEC explained in the order.

For its part, Merrill Lynch said in a statement at the time, “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. The issues related to our procedures and controls have been corrected. We have cooperated fully with the SEC staff throughout this investigation.”

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