Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, January 25, 2011

SEC Settles with Merrill Over Misusing Customer Order Information for Proprietary Trading

The SEC today charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with misusing customer order information to place proprietary trades for the firm and for charging customers undisclosed trading fees.  To settle the SEC's charges, Merrill has agreed to pay a $10 million penalty and consent to a cease-and-desist order.  The SEC stated that, In determining to accept Merrill's offer, it considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America.

The SEC's order found that Merrill operated a proprietary trading desk between 2003 and 2005 that was known as the Equity Strategy Desk (ESD), which traded securities solely for the firm's own benefit and had no role in executing customer orders. The ESD was located on Merrill's main equity trading floor in New York City, where traders on Merrill's market making desk received and executed customer orders. While Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, the firm's ESD traders obtained information about institutional customer orders from traders on the market making desk. They then used it to place trades on Merrill's behalf after executing the customers' trades. In doing so, Merrill misused this information and acted contrary to its representations to customers.

The SEC's order also found that, between 2002 and 2007, Merrill had agreements with certain institutional and high net worth customers that Merrill would only charge a commission equivalent for executing riskless principal trades. However, in some instances, Merrill also charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market.

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