Bank of America admitted to wrongdoing in settling a U.S. regulator’s allegations that it misused billions of dollars in customer funds to finance trades that benefited the firm.
The bank will pay $415 million over claims that its Merrill Lynch unit engaged in complex transactions to reduce the amount of client funds that had to be set aside in reserve accounts, the Securities and Exchange Commission said in a statement Thursday. Had the firm failed, its customers would have been exposed to a “massive shortfall,” the regulator said.
The $356 million fine portion of Bank of America’s settlement is by far the largest for a firm accused of violating the SEC’s customer protection rule. The agency was assisted by multiple former Bank of America executives who reported wrongdoing and cooperated with the investigation, according to Jordan Thomas, an attorney at Labaton Sucharow who represents the whistle blowers.
“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, head of the SEC’s enforcement division.
From 2009 to 2012, the SEC said Merrill Lynch engaged in trades that artificially reduced the amount of customer funds that had to be set aside. The transactions in question “lacked economic substance” and allowed Merrill Lynch to finance its own trading activities.
“While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes,” said Bill Halldin, a spokesman for Bank of America. “The issues related to our procedures and controls have been corrected.”
The penalties “will have no impact” on the Charlotte, North Carolina-based bank’s second quarter earnings, Halldin said. Bank of America has said it’s “reasonably possible” that its losses from litigation and regulatory matters could be as much as $2.4 billion more than the amount the bank has reserved for, according to company filings. Bank of America doesn’t disclose how much money it has set aside to resolve lawsuits and government probes.
The SEC also sued William Tirrell, Merrill Lynch’s former head of regulatory reporting. The agency said he was ultimately responsible for determining how much money the firm would set aside and that he failed to disclose information about the trades to regulators.
“While we are disappointed that the SEC filed this action, Mr. Tirrell looks forward to the opportunity to vindicate himself at trial,” his attorney Steven M. Witzel said in a statement.
The regulator also announced a new initiative to uncover abuses tied to its customer protection rule, which mandates how brokers should safeguard client balances and segregate funds from other business operations. The SEC said it will conduct exams of certain firms and ask the industry to proactively report potential violations.
Bank of America will separately pay $15 million to settle an investigation by the SEC and the Financial Industry Regulatory Authority that accused Merrill Lynch of issuing misleading offering documents tied to structured notes. Specifically, the bank failed to disclose a fee that imposed a 1.5 percent fee on the products each quarter, the regulators said.