Merrill Lynch, Pierce, Fenner & Smith Inc., headquartered in New York, New York, consented to a $10,000,000.00 fine by The Securities and Exchange Commission (SEC) in connection with an SEC Order containing findings that Merrill Lynch made misleading statements regarding costs pertaining to structured notes issued by Bank of America – Merrill Lynch’s parent. SEC Press Release 33-10103 (June 23, 2016).

According to the SEC Order, Merrill Lynch made misstatements to retail investors in offering documents pertaining the five year structured notes, marketed as Strategic Return Notes, that were tied to a proprietary volatility index (VIX). These Notes were apparently geared to provide investor returns based on the performance of the VIX, which was based on multiple S&P 500 options.

Retail investors were reportedly informed by Merrill Lynch that their costs in connection with the Notes investment would contain annual fees of 0.75 percent, and a sales commission of 2 percent, per the distributed offering documents. However, the Order stated that the Notes’ offering documents omitted an additional cost contained in the volatility index, referred to the execution factor, which carried a quarterly cost of 1.5 percent of the volatility index’s value.

According to the Wall Street Journal, the firm reportedly accumulated $150,000,000.00 from nearly four thousand investors in connection with the risky Strategic Return Notes. The Notes, which were designed to provide investors with only a cash payout upon the maturity of the Notes at the end of a five-year term, reportedly lost an estimated ninety-five percent of their value. The massive loss was apparently due to declines in market volatility subsequent to the Notes’ issuance, and drastic increases in costs of purchasing options that the Notes were tied to.

The SEC stated that in connection with the Notes issued, Merrill Lynch was primarily responsible for the retail pricing supplement’s creation and review. The Order stated that the firm’s procedures and policies were defective in this regard, in that the staff members were responsible for properly disclosing the execution factor’s impact on investor returns. The SEC found that Merrill Lynch’s conduct of obtaining investors monies through material omissions and misstatements in the course of securities sales was violative of Securities Act of 1933 Section 17(a)(2).

Guiliano Law Group

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