SEC’s whammy on Merill Lynch with $42 million penalties for misleading clients

The US Securities and Exchange Commission (SEC), announced yesterday that it is penalising Merrill Lynch about $42 million. The fine or, to use the SEC’s terminology, ‘civil penalty, is the result of the wealth management firm misleading customers over order executions.

The SEC charged Merrill Lynch, Pierce, Fenner & Smith with misleading customers about how it handled their orders. Merrill Lynch agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty.

From 2008-2013, the American Wealth Management firm deceptively conveyed customers that it had been executing the millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers, according to the US regulator’s order.

Merrill Lynch termed this practice as “masking.” Masking entailed reprogramming Merrill Lynch’s systems to misleadingly report execution venues, modifying records and reports, and providing misleading responses to customer inquiries. By masking the broker-dealers who had executed customers’ orders, Merrill Lynch made itself appear to be a more active trading platform and decreased administering fees they usually paid to the exchanges. 

After the firm discontinued masking in May 2013, even then customers were not informed about its past practices, nevertheless, took misleading paces into hide its misconduct.  Altogether, the SEC’s order found that Merrill Lynch falsely told customers that it executed more than 15 million “child” orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers. 

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

“Institutional traders often make careful choices about how and where their orders are sent out of a concern for information leakage,” said Joseph Sansone, Chief of the Enforcement Division’s Market Abuse Unit. “Because of masking, customers who had instructed Merrill Lynch not to route their orders to third-party broker-dealers did not know that Merrill Lynch had disregarded their instructions.”         

Hence, the SEC’s order censures Merrill Lynch and requires it to pay a $42 million civil penalty. Courtesy: SEC sources

US equities and bond yields stabilized, while EURUSD is biased for a new low to be set under 1.1510, but the rebound from 1.1530 suggests a delay to that. Resistance is seen in the 1.1630-1.1660 region, with a move through there an early sign that we may actually be moving into a broader range between 1.1510 and 1.1850, rather than a direct move to new lows. We could still foresee the 1.1510-1.1435 area as the ideal region for the low point within a medium-term range, 1.18-1.20 the main resistance in such a process. Long-term perspective highlight 1.0350 as a major low.

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