Bank of America Corp's Merrill Lynch unit has agreed to pay $10 million as part of a settlement with the U.S. Securities and Exchange Commission (SEC) that has accused it of fraudulently misusing customer orders so it could trade for its own benefit.
As part of the settlement, Merill did not admit wrongdoing. It was represented by Bruce Coolidge, a partner at Wilmer Cutler Pickering Hale and Dorr in Washington.
The SEC had accused Merill of using customer order information to place proprietary trades on a desk it no longer operates. Merill was also accused of charging hidden trading fees to institutional and high-net-worth individuals (HNIs).
Though Wall Street's securities firms generally carry out proprietary trading business by front-running, or trading ahead of customer orders, in Merrill's case, the allegations are the opposite. The SEC claim the proprietary trades were executed minutes after the customer orders were completed.
According to Scott Friestad, associate director in the SEC enforcement unit, Merill owed a duty to its customers to keep their orders confidential. Investors have the right to expect that their brokers won't misuse their order information. The conduct here was clearly inappropriate, Friestad said in a statement.
The market watchdog had also found that from 2002 to 2007 Merill had charged some institutional and HNI customers hidden fees when filling their orders for riskless principal trades.
Charging these undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers, said Robert Kaplan, co-chief of the SEC's Asset Management Unit, in a statement.
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, Kaplan said.
The $10 million penalty, SEC said, takes into account remedies taken by Merrill after Bank of America (BofA) acquired the company at the beginning of 2009.
BofA, which is the largest U.S. bank by assets, said in a separate statement that Merill has adopted a number of policy changes to ensure separation of proprietary trading and other trading to address the SEC's concerns.
The unit, BofA spokesman Bill Haldin said, has voluntarily implemented enhanced training and supervision to improve the principal trading processes.
The settlement follows the recent release of a study by The Financial Stability Oversight Council of leading regulators that expresses concerns that banks could disguise proprietary trading through market making activities, in which they facilitate buy and sell orders for clients.