SEC Charges Merrill Lynch with Securities Violations
Legal Topics | 2009/02/02 17:56
The Securities and Exchange Commission today charged Merrill Lynch, Pierce, Fenner & Smith, Inc. and two of its former investment adviser representatives with securities laws violations for misleading pension consulting clients about its money manager identification process and failing to disclose conflicts of interest when recommending them to use two of the firm’s affiliated services. Merrill Lynch has agreed to settle the SEC’s charges and pay a $1 million penalty.

“There has been tremendous growth in the pension consulting business in recent years. This case is an important reminder to firms and their investment adviser representatives that, whenever they sit across the table from their advisory clients, they need to make sure that all material conflicts of interest are disclosed,” said Scott W. Friestad, Deputy Director of the SEC’s Division of Enforcement.

According to the SEC’s order, Merrill Lynch failed to disclose its conflicts of interest when recommending that clients use directed brokerage to pay hard dollar fees, whereby the clients directed their money managers to execute trades through Merrill Lynch. These clients received credit for a portion of the commissions generated by these trades against the hard dollar fee owed for the advisory services provided by Merrill Lynch Consulting Services. Consequently, Merrill Lynch and its investment adviser representatives could and often did receive significantly higher revenue if clients chose to use Merrill Lynch directed brokerage services. The SEC’s order finds that Merrill Lynch also failed to disclose a similar conflict of interest in recommending that clients use Merrill Lynch’s transition management desk. In addition, the SEC finds that Merrill Lynch made misleading statements to the clients served by its Ponte Vedra South, Fla. office regarding the process used to identify new money managers to present to its clients.

The SEC also charged Michael Callaway and Jeffrey Swanson, who were formerly employed in Merrill Lynch’s Ponte Vedra South office.

In a settled enforcement action against Swanson, the SEC finds that he made misleading statements to some of the firm’s pension consulting clients regarding the process by which Merrill Lynch assisted them in identifying new managers. As a result, the SEC charged Swanson with aiding and abetting and causing Merrill Lynch’s violation of the Investment Advisers Act of 1940. Without admitting or denying the SEC’s allegations, Swanson has agreed to a censure, and to cease and desist from committing or causing violations of Section 206(2) of the Advisers Act.

In the contested enforcement action against Callaway, the SEC’s Division of Enforcement alleges that Callaway breached his fiduciary duty in making misrepresentations about the manager identification process used by the Ponte Vedra South office and his compensation in connection with transition management services. The Division of Enforcement further alleges that Callaway was a cause of Merrill Lynch’s violation of the Advisers Act because he failed to ensure that Merrill Lynch disclosed to clients the conflicts of interest in recommending that clients enter into a directed brokerage relationship with Merrill Lynch and in recommending that they use Merrill Lynch for transition management services. The Division of Enforcement charges that, by this conduct, Callaway willfully aided and abetted and caused Merrill Lynch’s violations of Section 206(2) of the Advisers Act.

The SEC charged Merrill Lynch with violations of an anti-fraud provision of the Advisers Act, which does not require a showing of scienter. The SEC also charged Merrill Lynch with failing to maintain certain records and failing to supervise its investment adviser representatives in the Ponte Vedra South office. Without admitting or denying the SEC’s allegations, Merrill Lynch has agreed to a censure, to cease and desist from committing or causing violations of Sections 204 and 206(2) of the Advisers Act, and to pay a $1 million penalty.


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