US regulators have launched a crackdown on finance companies that mix client money with their own as the watchdog issued its second biggest Wall Street penalty, to Merrill Lynch for misusing customer cash.
Merrill, Bank of America's broker-dealer arm, agreed to pay $415 million and admitted wrongdoing to settle Securities and Exchange Commission charges that it failed to safeguard about $60 billion of customer assets – and profited from the practice.
The SEC said its discovery of serious misconduct at Merrill had prompted a wider “sweep” of the industry for other breaches of rules that require banks and brokers to ringfence client assets.
Had BofA collapsed between 2009 and 2012, customers would have been in danger of not getting their assets, the SEC found.
Client assets
The threat by regulators of further action and move to improve standards comes after UK counterparts pushed to get financial companies to protect client assets better after the 2008 collapse of
Lehman Brothers
.
London’s watchdog strengthened investor protection rules four years ago after it found JPMorgan failed to keep customer money separate. The case led it to slap a then-record £33 million fine on the bank.
Previously, the US had been seen as having a stronger client protection regime. After derivatives broker MF Global failed in 2011, its former customers complained that the UK took much longer to return their assets than the US.
However, the Merrill case highlights problems in the US. By failing to deposit customer cash in a reserve account, Merrill freed up $5 billion from 2009 to 2012 that it used to finance its own trading activities. It also held as much as $58 billion a day of customer securities in a clearing account that could have been exposed to claims from the institution’s creditors if Merrill failed.
Andrew Ceresney, SEC's director of enforcement, said officials would give the industry until November to self-report breaches of the protection rules in exchange for a reduced penalty.
“Forthcoming”
“We want to encourage firms to be forthcoming with us in a way that, in this case, Merrill Lynch was not,” he said. This would come on top of the “sweep” of an unspecified number of other broker dealers. “It is really a twofold attempt to try to uncover any additional customer protection violations.”
SEC officials acted in the case after they received tip-offs from former Bank of America executives, according to Labaton Sucharow, a law firm that said it represented the whistleblowers.
Mr Ceresney said that “generally, the whistleblower programme has been a significant success”.
The SEC said its discovery of serious misconduct at the unit had prompted a sweep of the industry. It said it would conduct examinations of certain firms and ask the industry to proactively report potential violations. – Copyright The Financial Times Limited 2016
