Merrill ordered to pay $9.7 million for failing to disclose foreign exchange fees

The SEC enforcement action is another example of the agency's increased scrutiny of wrap-fee programs.

The SEC ordered Merrill Lynch to pay $9.7 million for failing to disclose foreign exchange fees in advisory accounts that required currency conversions.

The brokerage offered clients a wrap-fee program that charged them a fee based on assets under management. For that fee, they would receive services including foreign currency exchanges because accounts could only be held in U.S. dollars. Under the wrap-fee arrangement, clients also would have to pay a markup or markdown on the exchanges.

The SEC alleged that from May 12, 2016, through June 29, 2020, Merrill failed to disclose that in addition to the markup, it levied a so-called production fee, which was not covered by the wrap fee and was equal to or greater than the markup in 80% of transactions, according to Monday’s SEC order.

Merrill charged its advisory clients approximately $4,134,610 in undisclosed production credits on more 15,000 separate foreign currency exchanges in approximately 4,874 advisory client accounts. Merrill allocated a portion of the production credits to its financial advisors and referred to the charge as a commission in internal documents.

Merrill, which is owned by Bank of America, agreed to pay $4,134,610 in disgorgement and $760,104 in prejudgment interest as well as a civil penalty of $4.8 million. The firm also agreed to distribute funds to harmed clients.

The enforcement action against Merrill Lynch was another example of the SEC’s increased scrutiny of wrap-fee programs.

“Investment advisers must ensure that they do not selectively disclose some fees but not others relating to a particular service,” Antonia Apps, director of the SEC’s New York office, said in a statement. “While Merrill Lynch disclosed the markups or markdowns charged on foreign currency exchanges, thousands of clients were left in the dark as to an often-larger fee charged on these transactions and were charged millions of dollars in undisclosed fees.”

Merrill did not admit or deny the SEC’s findings.

“As the order notes, we have updated our disclosures,” Merrill spokesperson Bill Halldin wrote in an email.

As part of its initial Form CRS filing on June 30, 2020, the brokerage for the first time disclosed to wrap-fee clients the maximum percentage amount they could be charged on foreign currency exchanges, including both markups or markdowns and production, according to the SEC order. In March 2022, the firm added to its wrap-fee disclosure that the fee does not cover foreign currency exchanges.