Merrill Lynch, Pierce, Fenner & Smith Incorporated has settled with the Securities and Exchange Commission (SEC) for charging more than $4 million in undisclosed foreign exchange fees to its advisory clients for transfers to or from their accounts. The company has agreed to pay disgorgement, prejudgment interest, and a civil penalty of more than $9.5 million and distribute the funds to the affected clients.
Merrill Lynch’s failure to disclose additional fees to clients
Between May 2016 and July 2020, Merrill Lynch offered investment advisory services to its clients, where the clients paid a fee in exchange for a range of services, including foreign currency exchanges. Although Merrill Lynch disclosed that it charged a markup or markdown on foreign currency exchanges, it did not disclose an additional fee called a production credit, which was equal to or greater than the disclosed markup or markdown in more than 80 percent of the transactions. Merrill Lynch paid a percentage of these production credits to its financial advisors and called this charge a commission in internal documents.
Merrill Lynch’s violation of the Investment Advisers Act of 1940
The SEC found that Merrill Lynch violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and related rules. Merrill Lynch has consented to the SEC’s order and agreed to a cease-and-desist order, a censure, and to pay disgorgement of around $4.1 million, prejudgment interest of $760,000, and a civil penalty of $4.8 million. Merrill Lynch has also agreed to distribute funds to harmed advisory clients.
The SEC’s Director of the New York Regional Office, Antonia M. Apps, said that investment advisers must ensure that they do not selectively disclose some fees but not others relating to a particular service. Merrill Lynch’s clients were left in the dark about the often larger fee charged on foreign currency exchanges, and they were charged millions of dollars in undisclosed fees.
SEC’s settlement with Merrill Lynch
Merrill Lynch’s failure to adopt and implement policies and procedures that were reasonably designed to prevent its disclosures from being misleading about the fees it charged on foreign currency exchanges is a violation of the Investment Advisers Act of 1940. Merrill Lynch has agreed to the SEC’s findings without admitting or denying them.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
