Merrill Lynch Agrees to Pay $9.5 Million to Settle SEC Charges of Failing to Disclose Foreign Exchange Fees to Clients
On April 3 the U.S. Securities & Exchange Commission (SEC) announced that Merrill Lynch, Pierce, Fenner & Smith Inc. had agreed to settle charges made by the SEC that the company was negligent in failing to disclose foreign exchange fees for transfers to and from certain advisory client accounts.1
Without admitting or denying the SEC’s charges, Merrill Lynch agreed to a cease-and-desist order, a censure, and to paying disgorgement of $4.1 million, prejudgment interest of $760,000 and a civil penalty of $4.8 million which will be distributed to harmed advisory clients by Merrill Lynch.2
The SEC claimed that from May 2016 through June 2020, certain Merrill Lynch advisory clients were offered wrap fee programs.
These wrap fee programs required clients to pay Merrill a program fee based on a percentage of assets under management in exchange for a range of investment advisory services, including foreign currency exchanges. In Advisory Agreements and accompanying brochures given to clients Merrill Lynch disclosed additional fees and charges that were not covered as part of the wrap fee program. Merrill Lynch did state in these documents that it charges a markup or markdown on Foreign Currency Exchange transactions, but the company did not disclose that it charged an additional fee, called a production credit.
The production credit for over 80 percent of the foreign currency transactions in question was equal to or greater than the markup or markdown. On 15,000 separate Foreign Currency Exchanges in nearly 5,000 advisory client accounts during the period stated Merrill Lynch charged its clients over $4 million in production credits. Financial advisors were then compensated with a percentage of those production credits. In internal documents this compensation was referred to as a commission.
The SEC also found that Merrill Lynch was negligent in not adopting and implementing written policies and procedures reasonably designed to prevent violations of the Advisers Act related to these charges. Section 206(2) of the Advisers Act “prohibits an investment adviser from engaging in any transaction, practice or course of business that operates as a fraud or deceit upon a client or prospective client.”3
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1, 2 SEC Press Release: SEC Charges Merrill Lynch for Failing to Disclose Foreign Exchange Fees to Clients, 4/3/2023
Link: https://www.sec.gov/news/press-release/2023-73
3 SEC Order Administrative Proceeding File No. 3-21356 in the Matter of Merrill Lynch Pierce Fenner and Smith, Inc., 4/3/2023
Link: https://www.sec.gov/litigation/admin/2023/34-97242.pdf