Merrill Fined $42 Million for Hiding Where It Sent Client Orders

(Bloomberg) -- Bank of America Corp.’s Merrill Lynch unit agreed to pay a $42 million penalty to settle a U.S. regulator’s allegations that it routed millions of customer orders to outside brokers, while telling them it had executed the transactions internally.

From 2008 to 2013, Merrill hid that the fact that client requests to buy and sell stock were being handled by proprietary trading firms and other outside entities, the Securities and Exchange Commission said in a Tuesday order. Merrill did so after some customers specifically asked that their orders not be executed externally because they were concerned about “information leakage,” the SEC said.

“By misleading customers about where their trades were executed, Merrill Lynch deprived them of the ability to make informed decisions regarding their orders and broker-dealer relationships,” said Stephanie Avakian, co-director of the SEC’s enforcement division. “Merrill Lynch, which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

Regulators have been taking a close look at what factors influence where Wall Street routes client orders. Dark pools, private-trading venues that rely on brokers to send them business, have drawn particular scrutiny. Large institutional investors, including some pension funds and mutual funds, have expressed concern about high-frequency traders getting an advanced look at their orders and transacting before them.

During the five-year period, Merrill executed more than 15.8 million orders externally with a notional value of more than $141 billion, the SEC said. The firm “falsely reported to customers that all of these transactions occurred at Merrill Lynch,” according to the regulator. In settling the case, Merrill admitted wrongdoing, the SEC said.

In March, Bank of America agreed to pay $42 million to settle similar claims made by New York’s attorney general. Client orders were secretly sent to firms including Citadel Securities, Knight Capital and Two Sigma Securities, according to the state’s complaint.

Bank of America spokesman Bill Halldin said both the SEC and New York attorney general allegations involve conduct that occurred as much as ten years ago, and that the firm at all times fulfilled its obligation to provide clients the best prices on stock orders.

--With assistance from Annie Massa.

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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