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Merrill to pay over $400M for 'unprecedented violations'

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Regulators have piled on Merrill Lynch, hitting the wirehouse with a total of $430 million in sanctions from the SEC and FINRA for securities infractions.

In the largest of several actions reported by regulators this week, the SEC says that Merrill Lynch admitted to misusing clients' cash while failing to safeguard their securities, and agreed to pay $415 million.

Meanwhile, the SEC and FINRA sanctioned Merrill $10 million and $5 million respectively for allegedly failing to disclosure material facts to clients about structured notes products.

Separately, a hedge fund-operated trading firm sued Merrill Lynch for $10 million over what it claims was an unprofitable tax-arbitrage strategy.

In its major claim, the SEC said the wirehouse conducted complex option trades that artificially reduced required cash deposits in customer accounts, "[freeing] up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities." If any trade had not worked, the regulator said, Merrill's customers would've been exposed to massive reserve account shortfalls.

The wirehouse also disregarded securities rules for years by holding up to $58 billion per day of customer securities in clearing bank accounts that were not shielded from claims by third parties and subject to general liens, the SEC added.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement called the wirehouse's actions "unprecedented violations" of the customer protection rule.

"In this case, we believed that it was important for accountability that the firm admit to wrongdoing because of the significant risk that these violations posed to investors."

A spokesman for the wirehouse said Merrill has fully cooperated with the SEC's investigation.
"While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes. The issues related to our procedures and controls have been corrected," said the spokesman, who declined to comment further.

With regard to the SEC's findings on the notes, the wirehouse neither admitted nor denied the charges, but agreed to desist from committing any similar future violations and to pay the penalty.

The SEC and FINRA also took action against Merrill for not disclosing costs attached to the sale of five-year senior debt notes to retail customers. The wirehouse did not inform customers of an "execution factor" that totaled 1.5% per quarter.

"Instead, the firm emphasized that customers would be subject to a 2% sales commission and a 0.75% annual fee in connection with the notes," FINRA stated in a release. "Merrill Lynch's disclosures therefore made it appear as if the notes had relatively low fixed costs."

Regarding the separate sanction, Merrill neither admitted nor denied the allegations by the regulators, but consented to their findings.

The $10 million lawsuit filed against Merrill by Dubai-based trading firm Lycalopex, which is backed by Tudor Investment and Vulpes Investment Management, alleges the wirehouse promised profits of about $15 million from a French stock tax strategy, according to Bloomberg. Instead the strategy only yielded about $4.6 million before it was ended by Merrill.

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