(CN) – Merrill Lynch & Co. has agreed to a $1 million penalty after the company and two of its adviser representatives were charged by the Securities and Exchange Commission late last week with failing to disclose conflicts of interest to clients.
“Merrill is being charged directly, but Callaway and Swanson are being charged with causing the violations” said Laura Josephs, the Assistant Director of the SEC’s Division of Enforcement.
Michael Callaway and Jeffrey Swanson, two men who worked in one of Merrill Lynch’s Florida offices, were charged with misleading clients when recommending transition management to clients.
Transition managers are used when an investor decides to change money managers. Usually, an investor must sell his stock in his original portfolio, then transfer the money to a new manager so they can reinvest it. Transition managers help investors navigate through this process, researching which stock the investor can keep and which he must sell.
The order describes how Callaway received a commission on the business he directed towards Merrill Lynch’s transition management services.
Both men purportedly did not disclose how the office selected managers for clients, and Calloway allegedly did not disclose his conflict of interest when recommending that clients trade stock using Merrill Lynch brokers or when recommending they use Merrill Lynch money managers.
According to Josephs, clients who used both Merrill Lynch consulting services and Merrill Lynch brokerage services were able to pay off their consulting service fees with the return of their investments. She explained that the company did not make clear to clients that the consulting services would deduct more than the original fee.
In addition to making misleading statements, Merrill Lynch was charged with not maintaining important records, and inadequately supervising its investment advisors.
Merrill Lynch paid the penalty without admitting or denying the charges. Callaway is contesting his charges but Swanson has settled.
Assistant Director Laura Josephs is representing the SEC.