SEC Charges Merrill Lynch for Failing to Supervise RMBS Traders

The Securities and Exchange Commission (SEC) has announced that Merrill Lynch, Pierce, Fenner & Smith will pay more than $15 million to settle charges that its employees misled customers into overpaying for residential mortgage-backed securities (RMBSs). Merrill Lynch will repay customers more than $10.5 million and pay penalties of $5.2 million.

The charges say that Merrill Lynch traders and salespeople convinced customers to overpay for RMBSs by deceiving them about the price the firm paid to acquire the securities. Further, the SEC says, Merrill Lynch traders and salespeople illegally profited from excessive, undisclosed commissions. In some cases, the SEC says, these commissions were twice what customers should have paid. In addition, the SEC says, the firm’s traders and salespeople violated anti-fraud provisions of the federal securities laws in purchasing RMBSs.

Had Merrill Lynch had compliance and surveillance procedures in place, these egregious acts could have been prevented, the SEC says.

“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” says Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “The commission found that Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”