The Securities and Exchange Commission today announcedthat Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it failed to disclose a conflictof interest arising out of its own business interests in deciding whether to continue to offer clients products managed by an outside third-party advisory firm.
The SECs order finds that the conflict of interest arose in Merrill Lynchs handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrills retail advisory accounts had invested approximately $575 million. According to the order, Merrill put new investments into these products on hold due to pending management changes at the thirdparty, and Merrills governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SECs order found that Merrill failed to disclose to its clients the conflicts of interest in Merrills decision-making process.
By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice, said Marc P. Berger, Director of the SECs New York Regional Office.Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.
Without admitting or denying the findings, Merrill consented to the SECs order, which finds that the firm was negligent in violating the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940. Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.
The SECs investigation was conducted in New York by Megan R. Genet, Jennifer K. Vakiener, David Stoelting, and Steven G. Rawlings, and supervised by Lara Shalov Mehraban.