Merrill Lynch agreed to pay nearly $9.7 million as part of a settlement with the Securities and Exchange Commission (SEC) addressing allegations the firm charged more than $4 million in undisclosed fees to clients.
The SEC said Merrill Lynch charged its clients undisclosed foreign exchange fees for transfers to or from their accounts on more than 15,000 transactions from 2016 to 2020, according to the agency’s order released Monday.
Without admitting or denying the SEC’s findings, Merrill Lynch agreed to pay disgorgement of approximately $4.1 million, prejudgment interest of $760,000, and a civil penalty of $4.8 million. Merrill Lynch agreed to distribute funds to harmed advisory clients, the SEC said in a press release. The firm also consented to a cease-and-desist order and censure.
The details: Included in Merrill Lynch’s investment advisory services was foreign currency exchange, for which clients paid a fee. In client agreements and its brochure, Merrill Lynch disclosed it charged a markup or markdown on foreign currency exchanges but did not mention an additional fee, which it called a “production credit,” greater than the markup or markdown in approximately 80 percent of foreign currency transactions, the SEC said.
“Merrill Lynch paid a percentage of these production credits to its financial advisers and referred to this charge as a commission in internal documents,” the press release said. The production credit fee was charged to 4,874 advisory clients.
The SEC’s order found Merrill Lynch failed to adopt and implement policies and procedures reasonably designed to prevent its disclosures from being misleading about the fees it charged on foreign currency exchanges.
Compliance considerations: The SEC in 2019 passed a series of rules that enhanced protections and improved choices for retail investors, including Regulation Best Interest and amendments to required Form CRS (customer relationship summary) disclosures by broker-dealers and registered investment advisers.
In June 2020, as part of its compliance with the SEC’s new rules for Form CRS, Merrill Lynch disclosed in its explanation of fees for the first time the “maximum percentage amount that wrap fee clients could be charged for foreign currency exchanges, inclusive of both Merrill’s markup or markdown as well as the production credits that Merrill had been charging its wrap fee clients for these transactions,” the order said.
In March 2022, Merrill Lynch issued further disclosures on the program about how “the wrap program fee does not cover foreign currency exchanges,” with the company providing a link for a “detailed description of the fees,” per the order.
In June 2020, Merrill Lynch paid more than $7.2 million in restitution and interest to customers after overcharging them for unnecessary sales charges and excess fees on mutual fund transactions at the behest of the Financial Industry Regulatory Authority.
Merrill Lynch response: “As the order notes, we have updated our disclosures,” a firm spokesperson said in an emailed statement.