Merrill Lynch, Pierce, Fenner & Smith Incorporated has been charged by the Securities and Exchange Commission (SEC) for imposing undisclosed foreign exchange fees on advisory clients. According to the SEC, Merrill Lynch charged more than $4 million in fees for transfers to or from advisory clients’ accounts. Merrill Lynch offered programs to advisory clients from May 2016 to July 2020 in which clients paid a fee in exchange for a range of investment advisory services, including foreign currency exchanges. However, Merrill Lynch did not disclose an additional fee known as a production credit, which was equal to or greater than the disclosed markup or markdown. Merrill Lynch paid a percentage of these production credits to its financial advisors and referred to this charge as a commission in internal documents. The SEC found that Merrill Lynch failed to adopt and implement policies and procedures to prevent its disclosures from being misleading about the fees it charged on foreign currency exchanges.
To settle the charges, Merrill Lynch has agreed to pay more than $9.5 million in disgorgement, prejudgment interest, and a civil penalty. Merrill Lynch has also agreed to distribute funds to harmed clients. The SEC’s order finds that Merrill Lynch violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and related rules. Merrill Lynch has consented to the entry of the SEC’s order, a cease-and-desist order, and a censure, without admitting or denying the SEC’s findings.
Antonia M. Apps, Director of the SEC’s New York Regional Office, stated that investment advisers must ensure that they do not selectively disclose some fees but not others relating to a particular service. Merrill Lynch’s failure to disclose the production credit resulted in thousands of clients being unaware of the often larger fee charged on foreign currency exchanges, leading to millions of dollars in undisclosed fees charged to these clients. The SEC’s investigation was conducted by the New York Regional Office and supervised by Thomas P. Smith Jr.