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June 24, 2016

SEC: Merrill Lynch to pay $415M for misusing customer cash

The Securities and Exchange Commission on Thursday announced that Merrill Lynch will pay $415 million and admit wrongdoing for misusing customer cash for profit and failing to safeguard customer securities from the claims of its creditors.

The SEC found that Merrill Lynch violated the commission's Customer Protection Rule by misusing customer cash that should have been deposited in a reserve account. The firm engaged in complex options trades that artificially reduced the required deposit of customer cash in the reserve account. The maneuver, SEC said, freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities. Had a misstep occurred in the midst of these trades, customers would have been exposed to a massive shortfall.

The firm also violated the Customer Protection Rule by failing to follow the requirements that fully paid-for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse.

"Simultaneous with today's action, SEC staff will begin a coordinated effort across divisions to find potential violations by other firms through a targeted sweep and by encouraging firms to self-report any potential violations of the Customer Protection Rule," said Michael J. Osnato, chief of the SEC Enforcement Division's Complex Financial Instruments Unit in yesterday's statement.

Merrill Lynch agreed to pay $57 million in disgorgement and interest plus a $358 million penalty, and publicly acknowledged violations of the federal securities laws.