Merrill Lynch will pay $7.03 million in fines and restitution to settle charges brought by Finra for inadequacies in overseeing customers' use of leverage in the wirehouse's brokerage accounts.
In addition to a $6.25 million fine, Merrill Lynch will pay $780,000 in restitution to 22 clients who were leveraged and had a high percentage of their assets invested in Puerto Rico securities. Those securities have been under extreme valuation pressure the past few years as the island commonwealth attempts to skirt widespread default on tens of billions of dollars of municipal bonds.
According to the Financial Industry Regulatory Authority Inc., Merrill Lynch loan management accounts, or LMAs, “are lines of credit that allow the firm's customers to borrow money from (
Bank of America, the owner of Merrill Lynch,) using the securities held in their brokerage accounts as collateral.”
Merrill Lynch did not adequately train its brokers about LMAs as well as educate them about the different types of uses for the loan accounts, according to Finra. Merrill Lynch brokers were not compensated for opening LMAs but could earn compensation if customers used the account, according to Finra.
From January 2010 through November 2014, Merrill lacked adequate supervisory systems and procedures regarding its customers' use of proceeds from these LMAs, according to Finra. Merrill Lynch opened more than 121,000 LMAs over that period with more than $85 billion in aggregate credit extended by
Bank of America, according to the Finra settlement.
Both Merrill Lynch policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, but the firm's supervisory systems and procedures were not reasonably designed to detect or prevent such use, according to Finra.
“On thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds,” according to Finra.
Separately, from January 2010 through July 2013, “Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers' holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin,” according to Finra. Those clients, some of whom have already received restitution, suffered aggregate losses of nearly $1.2 million as a result of liquidating those securities to meet margin calls, Finra noted.
"Following a comprehensive internal review of our loan management accounts, we reported issues to Finra, cooperated fully with their inquiry and have strengthened our controls and procedures," said Merrill Lynch spokesman William Halldin.
Over the past few months, regulators have been taking banks and wirehouses to task over cross-selling, or selling a different product to an existing customer.
In September,
Wells Fargo & Co. was fined $185 million for opening checking and credit card accounts that customers never approved or knew about. Massachusetts in October charged Morgan Stanley with conducting an unethical, high-pressure sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. The contest was run despite an internal firm prohibition on such initiatives.
