Merrill Lynch agreed to settle the charges filed by the Securities and Exchange Commission (SEC) by paying $415 million and admitting wrongdoing for misusing customer cash to generate profits.
The firm also acknowledged its failure to safeguard customer securities from the claims of its creditors.
Merrill Lynch put customers at significant risk
The SEC investigated Merrill Lynch and found that it violated the Customer Protection Rule by misusing customer cash that should have been deposited in a reserve account.
According to the SEC, the firm “engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.”
Merrill Lynch freed up billions of dollars per week and used it to finance its trading activities from 2009 to 2012. The SEC emphasized that customers would have been exposed to a massive shortfall in the reserve account if the firm failed in the middle of those trades.
The securities regulator added that Merrill Lynch also failed to comply with the requirements of the rule that fully-paid customer securities be held in lien-free accounts and protected from claims by third parties should the firm collapse.
The SEC found that Merrill Lynch held as much as $58 billion of customer securities in clearing account per day from 2009 to 2015. Those were subject to a general lien by its clearing bank. The firm also held additional securities in accounts worldwide that were similarly subject to liens.
Customers would have been exposed to significant risk and uncertainty in recovering their securities of Merrill Lynch collapsed at any point during that period.
Furthermore, Merrill Lynch found in violation of the Exchange Act Rule 21F-17 by using language in severance agreements that prevent employees from providing information voluntarily to the SEC.
SEC to find potential violations of ther firms
SEC Division of Enforcement Andrew Ceresney, said, “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.”
On the other hand, Michael Osnato, the chief of the Complex Financial Instruments Unit of the Division of Enforcement of the SEC, said, “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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