1. SEC Charges Merrill Lynch for Misusing Customer Order Information and Charging Undisclosed Trading Fees; 2011-22; Jan. 25, 2011
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SEC Charges Merrill Lynch for Misusing Customer Order
Information and Charging Undisclosed Trading Fees
FOR IMMEDIATE RELEASE
2011-22
Washington, D.C., Jan. 25, 2011 — The Securities and Exchange
Commission today charged Merrill Lynch, Pierce, Fenner & Smith
Incorporated with securities fraud for misusing customer order information
to place proprietary trades for the firm and for charging customers
undisclosed trading fees.
To settle the SEC's charges, Merrill has agreed to pay a $10 million penalty
and consent to a cease-and-desist order.
Additional Materials
SEC Order Against Merrill Lynch, Pierce, Fenner & Smith Incorporated
"Investors have the right to expect that their brokers won't misuse their
order information," said Scott W. Friestad, Associate Director in the SEC's
Division of Enforcement. "The conduct here was clearly inappropriate.
Merrill's proprietary traders had improper access to information about the
firm's customer orders, and misused it to place trades on the firm's behalf."
The SEC's order found that Merrill operated a proprietary trading desk
between 2003 and 2005 that was known as the Equity Strategy Desk
(ESD), which traded securities solely for the firm's own benefit and had no
role in executing customer orders. The ESD was located on Merrill's main
equity trading floor in New York City, where traders on Merrill's market
making desk received and executed customer orders. While Merrill
represented to customers that their order information would be maintained
on a strict need-to-know basis, the firm's ESD traders obtained information
about institutional customer orders from traders on the market making
desk. They then used it to place trades on Merrill's behalf after executing
the customers' trades. In doing so, Merrill misused this information and
acted contrary to its representations to customers.
The SEC's order also found that, between 2002 and 2007, Merrill had
agreements with certain institutional and high net worth customers that
Merrill would only charge a commission equivalent for executing riskless
principal trades. However, in some instances, Merrill also charged customers
undisclosed mark-ups and mark-downs by filling customer orders at prices
less favorable to the customer than the prices at which Merrill purchased or
sold the securities in the market.
"Charging these undisclosed mark-ups and mark-downs was improper and
contrary to Merrill's agreements with its customers," said Robert B. Kaplan,
Co-Chief of the SEC's Asset Management Unit. "Brokers must act honestly
and transparently when charging fees to their customers. There is no place
in our markets for charging investors undisclosed trading fees."
Without admitting or denying the SEC's findings, Merrill consented to the
entry of a Commission order that censures Merrill, requires it to cease-and-
http://www.sec.gov/news/press/2011/2011-22.htm[28-12-2011 20:11:41]

2. SEC Charges Merrill Lynch for Misusing Customer Order Information and Charging Undisclosed Trading Fees; 2011-22; Jan. 25, 2011
desist from committing or causing any violations and any future violations
of Sections 15(c)(1)(A), 15(g), and 17(a) of the Securities Exchange Act of
1934 and Rule 17a-3(a)(6) thereunder, and orders it to pay a penalty of
$10 million.
In determining to accept Merrill's offer, the Commission considered certain
remedial actions undertaken by Merrill after it was acquired by Bank of
America.
Brian O. Quinn and Antony Richard Petrilla in the SEC's Division of
Enforcement conducted the investigation in this matter with the assistance
of John W. Guidroz and Rina R. Hussain of the SEC's Office of Compliance
Inspections and Examinations.
# # #
For more information about this enforcement action, contact:
Scott W. Friestad
Associate Director, SEC Division of Enforcement
(202) 551-4962
Robert B. Kaplan
Co-Chief, Asset Management Unit, SEC Division of Enforcement
(202) 551-4969
Brian O. Quinn
Assistant Director, SEC Division of Enforcement
(202) 551-4982
http://www.sec.gov/news/press/2011/2011-22.htm
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