In a settlement with the Securities and Exchange Commission, Bank of America has agreed to pay a $7.65 million penalty to settle charges stemming from regulatory capital overstatements that it made due to internal accounting control deficiencies and books and records failures.
Regulatory capital refers to the amount of capital that a bank must hold under applicable rules as a buffer against adverse market conditions. According to the SEC’s order instituting a settled administrative proceeding, when Bank of America acquired Merrill Lynch in 2008 for $50 billion it assumed a large portfolio of structured notes and other financial instruments and was required to realize losses on these notes as they matured because they were redeemed at face value. For the purposes of calculating and reporting its regulatory capital, Bank of America was required to deduct the realized losses as they occurred.
However, according to the SEC, by the time 90 percent of the notes had matured in March, Bank of America had yet to deduct any of the realized losses from its regulatory capital. With each passing fiscal quarter and fiscal year since 2009 as more and more notes matured, Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars.
Bank of America internally discovered the overstatements and disclosed them in a Form 8-K filing in April. Beyond correcting its regulatory capital figures, Bank of America cooperated with SEC staff during the investigation and voluntarily took steps to remediate the insufficiencies that led to the regulatory capital overstatements, the order says. The resulting penalty reflects credit for that cooperation.
“The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary,” Michael Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a statement. “Bank of America violated these legal requirements, which are specifically geared to ensure the integrity and accuracy of information that eventually is disclosed to investors.”