WASHINGTON (CN) — Merrill Lynch will pay $415 million to settle SEC charges it misused billions of dollars of customer cash per week that should have remained in reserve accounts during the financial crisis.
Merrill Lynch used its customers' money to make complex option trades from 2009 to 2012, and could have exposed customers to massive losses if Merrill Lynch collapsed, the SEC said Thursday in announcing the settlement.
"The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed," SEC Enforcement Director Andrew Ceresney said in a statement. "Merrill Lynch violated these rules, including during the heart of the financial crisis."
Ceresney said the SEC is making a targeted sweep of other financial firms to encourage self-reporting of similar violations of its Customer Protection Rule. The 2003 rule requires broker-dealers to keep certain amounts of cash and other collateral on hand when borrowing securities from customers.
The investigation, which was made public in 2015 and was kick-started when several former Bank of America executives came forward, found that Merrill Lynch used language in its employee severance agreements that impeded whistleblower reports, and failed to adequately monitor its own trades to provide regulators with information.
The risky trades, known as leveraged conversion trades, involved options financed by customers via margin loans extended by Merrill Lynch. Typically the trades were hedged to insulate them from market risk, but if Merrill Lynch collapsed — which was possible during the economic crisis — the customer cash could have been seized by lien from a third party.
The SEC order states that from 2009 until 2015 Merrill Lynch held as much as $58 billion per day in customer securities in a clearing account that could have been tapped by the clearing bank if Merrill Lynch went belly-up. SEC rules require banks and other investment firms to keep customer securities in lien-free accounts.
Bank of America spokesman William Halldin said in a statement that no customers were harmed and no losses were incurred.
"The issues related to our procedures and controls have been corrected," he said. "We have cooperated fully with the SEC staff throughout this investigation.
Bank of America bought Merrill Lynch in 2008 when the investment firm took major losses from collateralized debt obligations after the housing bubble burst.
Merrill Lynch's former regulatory reporting director William Tirrell also faces action from the SEC, which says he was responsible for watching how much cash Merrill Lynch kept in its special reserve account, and that he failed to adequately monitor trades. Tirrell will face a public hearing before an administrative law judge. He was head of regulatory reporting for Merrill Lynch until April.Follow @NickRummell
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