Security & Fraud

SEC Hits Merrill Lynch With $415M Fine

Merrill Lynch found itself in hot water with the Securities and Exchange Commission and, as a result, will be paying out $415 million on accusations that the firm misused customer cash.

According to a release from the SEC, Merrill Lynch also put customer securities at risk and has admitted to wrongdoing as part of the settlement terms.

The results of this came following an SEC investigation that discovered the firm had violated the SEC’s Customer Protection Rule. What that rule required is that cash should have been placed in a reserved account, but instead, according to the SEC, “Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.”

What this led to is billion of dollars per week over a three-year period between 2009 and 2012 that Merrill Lynch then used to finance its own trading activities, instead of depositing it into a reserve account, posing a risk to its customers. If Merrill Lynch had miscalculated those financial trades, its customers could have been impacted and would have seen what the SEC called a “massive shortfall in the reserve account.”

“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “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.”

Moreover, the SEC said Merrill Lynch also violated the Customer Protection Rule by failing to adhere to requirements related to its customer securities accounts that are to be held in accounts that would be protected if the firm was to collapse. According to the report, between 2009 and 2015, “Merrill Lynch held up to $58 billion per day of customer securities in a clearing account,” noting that if “Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities.”

“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,” said Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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