Archive for the ‘Merrill Lynch’ Category

FINRA Orders Merrill Lynch to Pay Over $2.5 Million In Connection With Unit Investment Trusts Sales Charge Discount Failures

Thursday, August 19th, 2010

The Financial Industry Regulatory Authority (”FINRA”) said yesterday that it has fined Merrill Lynch $500,000 for failing to provide sales charge discounts to customers on eligible purchases of Unit Investment Trusts (”UITs”).  Further, FINRA found that Merrill Lynch failed to have an adequate supervisory system in place to ensure customers received appropriate UIT discounts.  Merrill Lynch also agreed to provide remediation of more than $2 million to affected customers.

“Firms have been on notice since at least 2004 that they must develop and implement procedures to ensure customers receive appropriate sales charge discounts for UIT investments,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “In this case, it was critical for the firm to ensure that its brokers were diligent in providing sales charge discounts to which customers were entitled. This failure resulted in increased investment costs to Merrill’s customers.”

A UIT is a type of investment company that offers redeemable units, of a generally fixed portfolio of securities, that terminate on a specific date. UIT sponsors generally offer sales charge discounts to investors, known as “breakpoint discounts” and “rollover and exchange discounts.”

A breakpoint discount is a reduced sales charge based on the dollar amount of the purchase – the higher the amount the greater the discount. Breakpoints generally function as a sliding reduction in the sales charge percentage available for purchases, usually beginning at $25,000 or $50,000 (or the corresponding number of units).

A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.

In March of 2004, the NASD n/k/a FINRA issued a Regulatory Notice to firms titled, Unit Investment Trust Sales.  (A copy of the Regulatory Notice can be found here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003157.pdf)

The Notice reminds broker-dealers that they should develop and implement procedures to ensure customers receive appropriate sales charge discounts for UITs.

FINRA found that before May 2008,  Merrill Lynch’s written supervisory procedures had little to no information or guidance regarding UIT sales charge discounts. Even after the firm established procedures addressing UIT sales charge discounts, the procedures were inaccurate and conflicting.

FINRA also determined that Merrill Lynch’s procedures lacked substantive guidelines, instructions, policies or steps for brokers or their supervisors to follow to determine if a customer’s UIT purchase qualified for and received a sales charge discount. As a result of its defective procedures, between October 2006 and June 2008, the firm failed to appropriately apply discounts on rollover and breakpoint purchases resulting in customers being overcharged on their UIT purchases.

According to FINRA, Merrill Lynch also approved for distribution, and for use in client presentations, inaccurate and misleading UIT sales literature. The presentation discussed sales charge discounts, but led clients to believe that they were only entitled to a discount if they used UIT proceeds to purchase a new UIT offered by the same sponsor.

As part of the settlement, Merrill Lynch is providing restitution to all customers who were overcharged when purchasing UITs through the firm, from January 2006 to the present. Merrill Lynch settled this matter without admitting or denying the allegations, but consented to the entry of FINRA’s findings.

Posted in Enforcement, FINRA, Merrill Lynch | No Comments »

NY Attorney General Andrew Cuomo Files Martin Act Suit Against Bank of America, Former CEO Kenneth Lewis

Thursday, February 4th, 2010

New York’s Attorney General Andrew Cuomo filed civil charges today against Bank of America and its former CEO Kenneth Lewis.  The charges arise from the bank’s controversial acquisition of Merrill Lynch in 2009.  The suit is being filed under the Martin Act, a New York securities law that permits both civil and criminal penalties.

Andrew Cuomo accuses Kenneth Lewis and Joe Price, the former chief financial officer of Bank of America, of misleading investors ahead of their late 2008 vote in favor of the Merrill deal.  Price is currently head of the bank’s consumer banking division.

Andrew Cuomo said Bank of America’s executives kept investors in the dark about Merrill’s deteriorating financial condition in the run-up to the shareholder vote on the merger.  “We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said at a press conference.  Cuomo added, “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Posted in Bank of America, Martin Act, Merrill Lynch, NY Attorney General | No Comments »

SEC Charges Bank of America for Failing to Disclose Losses at Merrill Lynch

Monday, January 18th, 2010

Last week, the Securities and Exchange Commission charged Bank of America with violating the federal proxy rules by failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder vote that Merrill Lynch had incurred a net loss of $4.5 billion in October 2008 and estimated billions of dollars of additional losses in November. Bank of America erroneously and unreasonably concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. Bank of America’s failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.

Last August, the Commission filed a separate action charging Bank of America with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. Last week’s filing follows a ruling by the Honorable Jed S. Rakoff that the SEC’s proposed charges relating to the Merrill losses should be filed separately rather than being consolidated with the current complaint challenging the bonus disclosure. That case is currently set for trial to begin on March 1, 2010 before Judge Rakoff.  

According to the SEC’s complaint filed, the actual and estimated losses at Merrill Lynch for the fourth quarter of 2008 together represented approximately one-third of the value of the merger at the time of the shareholder vote and more than 60 percent of the aggregate losses that the firm sustained in the preceding three quarters combined. The SEC’s complaint further alleges that Merrill’s deteriorating performance represented a fundamental change to the financial information that Bank of America provided shareholders in the proxy statement used to solicit votes for approval of the merger. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.

The SEC’s complaint charges Bank of America with violating Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote.

Posted in Bank of America, Enforcement, Merrill Lynch, SEC | No Comments »