Merrill to Pay $8.9 Million Over Retail Product Platform Conflict
The Securities and Exchange Commission on Monday announced an $8.9 million settlement agreement with Merrill Lynch that highlights how far-reaching business relationships can influence the investment management products that brokerage firms sell to retail clients.
The settlement arose from a decision that the due diligence unit of Merrill’s Global Wealth & Retirement Solutions business made in January 2013 to remove products managed by the U.S. advisory subsidiary of a foreign multinational bank.
More than 1,500 retail customers had invested about $575 million with the money manager, but Merrill decided to freeze new investments after learning that the long-time portfolio manager for the separately managed account products was moving and being replaced by a team in a different location that had worked with institutional investors.
The decision propelled the fund manager into a “plan of action” that included appealing to a “Merrill Senior Executive,” the SEC’s consent order said. Discussions went beyond addressing the merits of the decision and of the asset manager change to “an appeal to the broader business relationship between the companies,” according to the order. Merrill Lynch is owned by Bank of America Corp.
“The Senior Executive was aware that the U.S. Subsidiary [of the foreign bank] and various of its affiliates were large clients of BoA,” the order says. “Within the preceding six months, the Senior Executive had participated in a relationship-building meeting with a senior officer of the U.S. Subsidiary… and the Head of BoA’s Global Financial Institutions Group, who was one of the ‘deal captains’ for the [BofA] team seeking an active bookrunner role in a registered offering associated with the U.S. Subsidiary.”
The unnamed Merrill executive “expressed concern that there had been a rush to judgment on the part of Due Diligence, a lack of on-site due diligence with the new team [of asset managers], and that Due Diligence’s efforts did not show the firm in good light with regard to other commercial opportunities,” according to the order, which quoted the representative of the asset manager.
On the same day that the salesman completed his “pitch” to reverse the product freeze, the Merrill executive told him the products would not be terminated. Six days later Merrill’s governance committee postponed discussion of the proposed termination at a regularly scheduled meeting, contravening standard procedure, according to the SEC’s order.
At one point in the proceedings, according to the order, a due diligence employee e-mailed another Merrill senior executive, saying: “Here is a first. An external manager telling an internal product staffer what can go on an internal governance agenda” to which the recipient responded, “[A]stonishing.”
The SEC did not disclose the names of individuals involved nor the name of the foreign bank or its U.S. subsidiary.
Andrew Sieg, the head of Merrill Lynch wealth management, was head of the firm’s Global Wealth & Retirement Solutions at the time of the alleged discussions about the SMA products in 2013, according to his firm biography.
Merrill Lynch spokesman William Halldin declined to identify the executive or say whether any official had been sanctioned for the alleged violations.
“We promptly enhanced our policies and procedures to ensure the confidentiality of recommendations in the future,” Halldin wrote in an e-mailed statement.
Merrill’s failure to disclose the conflict of interest in its decision-making process to retail investors violated the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940, according to the SEC.
Merrill, which accepted the consent order without admitting or denying the facts, agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest and a penalty of more than $4 million. It also agreed to a censure and to cease and desist from further violations.
–Mason Braswell contributed to this story.