Merrill Lynch to pay $15m for failure to supervise RMBS traders

by Francis Monfort13 Jun 2018

Security broker and dealer Merrill Lynch Pierce Fenner & Smith has entered an agreement with the SEC to resolve charges that its traders and salespersons misled customers into overpaying for RMBS.

Under the deal, Merrill Lynch agreed to be censured and pay a penalty of approximately $5.2 million. The company will also pay disgorgement and interest of more than $10.5 million to its customers that were parties to the transactions that are the subject of the order.

The settlement follows SEC findings that the company’s employees violated antifraud provisions of the federal securities laws in purchasing and selling RMBS. The company’s traders and salespersons convinced Merrill Lynch customers to overpay for RMBS by deceiving them about the price the company paid to acquire the securities. The SEC also found that employees illegally profited from excessive, undisclosed commissions called “mark-ups.” In some cases, these were more than twice the amount the customers should have paid.

The SEC also found that Merrill Lynch failed to reasonably supervise its employees. The company did not have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions to the detriment of its customers.

“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “The commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”

Merrill Lynch entered the agreement without admitting or denying the SEC’s findings.


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