Bank Of America Merrill Lynch Admits Misleading Customers, Pays $42M SEC Fine

by Ike Obudulu Posted on June 20th, 2018

Washington, D.C., USA: The U.S. Securities and Exchange Commission, SEC, today charged Bank of America Corp’s Merrill Lynch unit with misleading customers about how it handled their orders. Bank Of America Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty.

According to the SEC’s order, Bofa’s Merrill Lynch falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers. Merrill Lynch called this practice “masking.” Masking entailed reprogramming Merrill Lynch’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries. By masking the broker-dealers who had executed customers’ orders, Bank of America Corp’s Merrill Lynch unit made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges.

After Bank of America Corp’s Merrill Lynch unit stopped masking in May 2013, it did not inform customers about its past practices, but instead took additional steps to hide its misconduct. Altogether, the SEC’s order found that Bank of America Corp’s Merrill Lynch unit falsely told customers that it executed more than 15 million “child” orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers. Merrill falsely told customers that more than 15.8 million orders worth over $141 billion had occurred in-house.

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

“Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, Chief of the Enforcement Division’s Market Abuse Unit. “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.”

Merrill was also accused of concealing from customers the possibility that high-frequency traders who traded in its dark pool, known as Instinct X, might be counterparties.

Dark pools are private trading venues designed to let people quietly trade shares, often to get large orders done with minimal price movement.

The SEC’s order censures Bank of America Corp’s Merrill Lynch unit and requires it to pay a $42 million civil penalty.

The settlement follows a similar agreement with the New York attorney general in a related probe nearly three months ago, under which Bank of America Corp’s Merrill Lynch unit also admitted to wrongdoing and agreed to pay a $42 million (£36.9 million) fine.

Bank of America referred to a statement in made on March 23 about the New York settlement, when it said: “At all times we met our obligation to deliver the best prices to clients. About five years ago, we addressed the issues concerning communicating to clients about where their trades were executed.”

Merrill was acquired by Bank of America in January 2009.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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