Merrill Lynch Settles SEC Charges for Nearly $9 Million


Wall Street behemoth Merrill Lynch, Pierce, Fenner & Smith agreed to pay nearly $8.9 million to settle charges by the Securities and Exchange Commission. The SEC says that the firm failed to disclose a conflict of interest regarding how the firm decided to continue to offer certain products.

The SEC determined that the conflict of interest arose from how Merrill Lynch handled its third-party products.

The financial products were managed by a U.S. subsidiary of a foreign multinational bank, wherein at least 1,500 of Merrill’s retail advisory accounts invested nearly $575 million. According to the SEC order, Merrill Lynch halted new investments into the third-party products, mainly due to pending management changes at the third party. Further, Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors.

Per the SEC order, the third-party manager tried to avert the termination by opening a dialogue with senior Merrill Lynch executives, leveraging the broader business relationship.

Pursuant to the conversations, and in a break from ordinary practices, the Merrill Lynch governance committee did not vote and chose to defer action on termination. In doing so, the governance committee lifted the product hold and opened the third-party products to new Merrill Lynch accounts. In the end, the SEC’s order found that Merrill Lynch failed to disclose to its clients the conflict of interest in its decision-making process.

Failure to Disclose Material Facts

“By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.”

Without admitting or denying the findings, Merrill consented to the SEC’s order, which finds that the firm was negligent in violating the antifraud policies and procedures provisions of the Investment Advisers Act of 1940. Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest and a more than $4 million penalty.