According to The Wall Street Journal, the U.S. Securities and Exchange Commission is investigating Bank of America Corp. (BAC) and its Merrill Lynch unit to find out if the lender broke rules established to protect customers accounts. According to sources in the know, over a three-year period, Merrill Lynch used different kinds of big, complex trades and loans to save on funding expenses and free up billions of dollars in money and securities for trading that it otherwise would have needed to keep off-limits.
Bank of America put a halt to the trades in 2012 in the wake of internal dialogue over possible risks involved. The trades involved strategies that existed when the bank purchased Merrill Lynch in 2009.
Now, the SEC wants to know if the strategies violated the protection rules and if regulators were misled about the bank’s actions. It also is trying to determine if retail brokerage funds were placed at risk for the purpose of making more money.
The SEC probe involves looking at whether Bank of America complied with a rule. Established in 1972, the Securities Exchange Act of 1934’s Rule 15c3-3 is intended to make sure that trading firms and investment banks put aside enough funds and securities that are easy to sell so that if a failure were to arise the financial institution would be able to easily pay back whatever customers are owed.
Financial firms that deal with customer trades must calculate their net liability to clients at least once a week. This figure is how much more banks owe clients, through funds such as deposits. The greater the total net that the bank owes, the more funds a firm would have to put aside in reserve in “lockup” accounts for emergency purposes when paying customers would be warranted. These funds must be kept separate from other accounts.
Sources say that Merrill Lynch executives came up with trades and loans to lower how much money needed to be in lockup. In one strategy, called leveraged conversion, the equities desk would recruit clients to place token amounts in their own funds in return for loans that were close to 100 times greater. Bank of America would then organize big trades, with the same customers taking the other side, doing so in a manner to fulfill some of its other financing needs. This would dramatically up how much these customers owed the bank, which would lower the net amount owed to clients and how much had to be kept in lockup.
SEC Investigating Whether Bank of America Broke Customer-Protection Rules, The Wall Street Journal, April 28, 2015
Bank of America Merrill Lynch being investigated by SEC, Investment News, April 28, 2015
More Blog Posts:
Bank of America’s Merrill Lynch to Pay $2.5M to Massachusetts Over Compliance Rule Relapse, Institutional Investor Securities Blog, March 23, 2015
FINRA Orders Merrill Lynch to Pay $2.4M in Fine, Restitution for Hundreds of Securities Transactions That Violated Fair Price Guidelines, Stockbroker Fraud Blog, December 16, 2014
Bank of America Used Subsidiary to Finance Trades, Helped Hedge Funds, Others, Avoid Taxes, Institutional Investor Securities Blog, February 11, 2015