Merrill Lynch Pays Over $400 Million to Settle SEC Charges

The U.S. Securities and Exchange Commission (SEC) recently announced that Merrill Lynch has agreed to pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.

This investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account. Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.

The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch ultimately used to finance its own trading activities. If Merrill Lynch had failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.

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The brokerage firm further violated the Customer Protection Rule by failing to adhere to requirements that fully paid for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse.

Between 2009 and 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.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, commented:

The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed. 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.

Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added:

Simultaneous with today’s action, SEC staff will begin a coordinated effort across divisions to find potential violations by other firms through a targeted sweep and by encouraging firms to self-report any potential violations of the Customer Protection Rule.

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