Merrill Lynch resolved claims that it misused customer order information, charged certain customers undisclosed trading fees and failed to maintain proper records. The firm consented to the entry of a cease and desist order and agreed to pay a $10 million civil penalty. In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., Admin. Proc. File No. 3-14204.
The Order for Proceedings alleges violations of three Sections of the Exchange Act: 1) Section 15(c)(1)(A) for effected transactions in a manipulative or deceptive manner; 2) Section 15(g) for failing to establish written procedures to reasonably prevent the misuse of material non-public information; and 3) Section 17(a) for failing to make records of certain terms and conditions of customer orders.
The conduct on which the Order is based occurred from 2002 through 2007 and centers on three types of transactions. The first concerned the use of certain customer order information by the firm’s Equity Strategy Desk. That Desk began operations in February 2003 and continued through 2005. It traded securities for the benefit of the firm and had authority over $1 billion in capital.
Merrill told customers that information regarding their orders and business affairs would be kept confidential. This point was confirmed by its Guidelines for Business Conduct published on the firm website. Contrary to those representations, in certain instances the firm’s market making desk shared institutional customer order information with its proprietary trading desk. The Order cites several instances where institutional customer order information was used by the firm’s proprietary trading desk to trade in securities. While the Order states that there were “other instances,” there is no indication regarding the number of instances when this occurred or the magnitude of the difficulty.
The second involved improper mark-up and mark-down charges. During the time period Merrill operated one of the largest NASDAQ market making operations in the world. Its institutional and high net worth customer orders for NASDAQ securities were, for the most part, executed on an agency basis through a computer system. The firm also executed orders on a principal basis through its market making desk.
During the time period Merrill had agreements with certain institutional and high net worth customers to only charge an agreed upon commission for executing riskless principal trades. Nevertheless, in certain instances the firm charged these customers an undisclosed mark-up and mark-down. The Order cited several examples which occurred between 2002 and 2006 while noting that there were “other instances.” There is no indication of the magnitude of the difficulty.
Finally, in some instances during the time period Merrill agreed to guarantee a customer a specific per-share execution price or a price tied to an agreed upon benchmark. Usually the firm made these agreements orally and in many instances failed to record them in writing as required by Section 17(a)(1). As a result of this conduct Merrill violated not only the Sections cited above but it also failed to reasonably supervise persons subject to its supervision as required by Section 15(b)(4)(E). It failed to reasonably supervise traders associated with its proprietary trading desk and its NASDAQ market making operations with a view to detecting and preventing violations of the Exchange Act
The Commission’s press release regarding the case notes that the settlement reflects the cooperation of Merrill after its acquisition by Bank of America.