7) Legal Claims and Actions
The company’s subsidiary Merrill Lynch has faced significant regulatory enforcement actions over the past decade, resulting in substantial financial penalties and regulatory sanctions.
In June 2016, Merrill Lynch agreed to pay $415 million to settle SEC charges for Customer Protection Rule violations between 2009 and 2015. The SEC found that Merrill Lynch misused customer cash to generate profits for the firm and failed to safeguard customer securities from creditor claims. The violations included engaging in complex options trades that lacked economic substance and artificially reduced required customer cash deposits in reserve accounts, freeing up billions of dollars per week for the firm’s own trading activities from 2009 to 2012. Additionally, Merrill Lynch held up to $58 billion per day of customer securities in accounts subject to liens from 2009 to 2015, violating requirements for fully-paid customer securities to be held in lien-free accounts. The settlement also addressed Exchange Act Rule 21F-17 violations for using language in severance agreements that impeded employees from voluntarily providing information to the SEC. The $415 million penalty included $57 million in disgorgement and interest plus a $358 million penalty, with Merrill Lynch admitting wrongdoing as part of the settlement.
In August 2008, Merrill Lynch & Co. Inc. reached a settlement with state securities regulators regarding Auction Rate Securities (ARS) investigations, agreeing to pay a $125 million civil penalty. The regulatory action addressed allegations that the firm misled clients by falsely assuring them that ARS were as safe and liquid as cash. Following the ARS market freeze in February 2008, investors were unable to access their funds, leading to widespread complaints. Under the settlement terms, Merrill Lynch agreed to buy back all ARS purchased by retail investors with accounts of $4 million or less by October 2008, and all other retail and institutional investors with accounts of $100 million or less by January 2009. The firm also committed to reimburse retail investors who sold ARS at a discount after the market failure and to provide liquidity solutions to institutional investors.