Merrill Lynch, Pierce, Fenner & Smith Inc., headquartered in New York, New York, was fined $358,000,000.00, and issued a Cease and Desist Order by The Securities and Exchange Commission in connection with findings that Merrill Lynch failed to properly safeguard the clients’ assets from creditor claims, and improperly utilized investors’ funds in order to rake in firm profits. SEC Admin Release 34-78141 (June 23, 2016).
According to the SEC Admin Release, SEC’s Cease and Desist Order was issued pursuant to Securities Exchange Act of 1934 Sections 15(B) and 21C, amid findings that the firm violated The Customer Protection Rule. Particularly, the SEC found that between 2009 and 2012, the firm effected complicated trades that involved utilizing customers’ monies in order to finance the firm’s business operations. The SEC found that the complicated trades, referred to as leveraged conversion trades, were effected by the firm in order to improperly reduce customer reserve accounts.
Apparently, the firm raked in billions of dollars in connection with margin loans in order to effect the financing of trades on a riskless basis. The SEC Admin Release indicated that these riskless trades, which Merrill Lynch had structured and subsequently executed with various counterparties, contained terms which were undefined and which lacked economic substance. The firm’s transactions, which left customer reserve accounts underfunded, eventually turned into roundtrip transactions whereby Merrill Lynch’s operations and activities were funded rather than addressing investment objectives of customers.
Additionally, from 2009 through 2016, the firm had seemingly poor supervisory protocols regarding custody of customer accounts, in which Merrill Lynch was found to have committed numerous violations of Rule 15C3-3(C). Apparently, Merrill Lynch improperly held customer securities in accounts subject to liens which subjected customers to the firm broker-dealer’s creditors, when such securities were required to be held in lien-free segregated accounts.
The SEC Admin Release noted that from June of 2009 through April of 2015, the firm held an estimated $58,000,000,000.00 in a clearing bank subject to a clearing bank’s general lien. As of year-end 2015, an additional $1,380,000,000.00 of customers’ securities were reportedly held by the firm in accounts with six additional clearing accounts in Asia and Europe which were subject to liens. Further, as of year-end 2015, an estimated $4,800,000,000.00 in customers’ securities were held in forty-eight accounts in Asia, Europe, and Australia which did not document that such accounts were free of liens.
The Securities and Exchange Commission found that Merrill Lynch’s conduct constituted willful failures of Securities Exchange Act of 1934 Section 15(C)3, Rule 15C3-3; Section 17(A)(1), Rule 17A-3(A)(1), 17A-5(A), Rules 17A-5(D)(3), 17A-11(D), and Rule 21F-17. Merrill Lynch reportedly submitted an Offer of Settlement to the SEC, in which the firm accepted that it committed violations of federal securities laws.
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