The latest compliance issues in wealth management across North America.

SEC, Merrill Lynch
US broker-dealer Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges with the Securities and Exchange Commission for failing to disclose a conflict of interest, arising out of its own business interests, by continuing to offer clients products managed by an outside third-party advisory firm.  

The SEC found that the conflict of interest arose from Merrill Lynch’s handling of third-party products managed by a US subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million.

According to the order, Merrill put new investments into these products, which were on hold due to pending management changes at the third party, and Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on the termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process. 

Without admitting or denying the findings, Merrill consented to the SEC’s order, which finds that the firm was negligent in violating the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940. Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.