SEC Charges Merrill Lynch, Pierce, Fenner & Smith Incorporated for Misusing Customer Order Information and Charging Undisclosed Trading Fees

Source- http://www.sec.gov/news/press/2011/2011-22.htm

Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with securities fraud for misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees.

To settle the SEC's charges, Merrill has agreed to pay a $10 million penalty and consent to a cease-and-desist order.

"Investors have the right to expect that their brokers won't misuse their order information," said Scott W. Friestad, Associate Director in the SEC's Division of Enforcement. "The conduct here was clearly inappropriate. Merrill's proprietary traders had improper access to information about the firm's customer orders, and misused it to place trades on the firm's behalf."

The SEC's order found that Merrill operated a proprietary trading desk between 2003 and 2005 that was known as the Equity Strategy Desk (ESD), which traded securities solely for the firm's own benefit and had no role in executing customer orders. The ESD was located on Merrill's main equity trading floor in New York City, where traders on Merrill's market making desk received and executed customer orders. While Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, the firm's ESD traders obtained information about institutional customer orders from traders on the market making desk. They then used it to place trades on Merrill's behalf after executing the customers' trades. In doing so, Merrill misused this information and acted contrary to its representations to customers.

The SEC's order also found that, between 2002 and 2007, Merrill had agreements with certain institutional and high net worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

"Charging these undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers," said Robert B. Kaplan, Co-Chief of the SEC's Asset Management Unit. "Brokers must act honestly and transparently when charging fees to their customers. There is no place in our markets for charging investors undisclosed trading fees."

Without admitting or denying the SEC's findings, Merrill consented to the entry of a Commission order that censures Merrill, requires it to cease-and-desist from committing or causing any violations and any future violations of Sections 15(c)(1)(A), 15(g), and 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(6) thereunder, and orders it to pay a penalty of $10 million.

In determining to accept Merrill's offer, the Commission considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America.

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