SEC Censures & Fines Merrill Lynch for Conflict of Interest
According to a press announcement, the Securities and Exchange Commission today announced that Merrill Lynch, Pierce, Fenner & Smith has agreed to pay approximately $8.9 million to settle charges that it “failed to disclose a conflict of 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 conflict of interest reportedly arose in Merrill Lynch’s handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of Merrill’s retail advisory accounts had invested approximately $575 million, says the SEC’s order.
The firm allegedly put new investments into these products on hold due to pending management changes at the third party, and Merrill’s 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 tried to prevent termination and contacted senior Merrill executives, making an appeal to consider the companies’ broader business relationship.
The governance committee did not vote and chose to wait to take action on termination following those communications. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts.
The SEC alleges that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process.
Merrill Lynch 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.
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