The Securities and Exchange Commission (SEC) has charged Merrill Lynch, Pierce, Fenner & Smith Incorporated for charging advisory clients over $4 million in undisclosed foreign exchange fees for transfers to or from their accounts.
Merrill Lynch has agreed to pay disgorgement, prejudgement interest and a civil penalty to settle the charges – totalling over $9.5 million – alongside agreeing to distribute funds to harmed clients.
The SEC’s order finds that between the period of May 2016 and July 2020, Merrill Lynch offered advisory clients programmes in which they paid Merrill Lynch a fee in exchange for a range of investment advisory services including foreign currency exchanges.
According to the SEC, in the programme’s client agreements and brochures, Merrill Lynch disclosed that it charged a markup or markdown on foreign currency exchanges, however, it did not disclose an additional fee it referred to as production credit, which allegedly, in more than 80% of the transactions, was equal to or more than the disclosed markup or markdown.
A percentage of these production credits was paid by Merrill Lynch to its financial advisors, referring to this charge as a commission in internal documents.
In addition, the SEC found that Merrill Lynch failed to adopt and implement policies and procedures that were reasonably designed to prevent its disclosures from being misleading about the fees it charged on foreign currency exchanges.
“Investment advisers must ensure that they do not selectively disclose some fees but not others relating to a particular service,” said Antonia M. Apps, director of the SEC’s New York regional office.
“While Merrill Lynch disclosed the markups or markdowns charged on foreign currency exchanges, thousands of clients were left in the dark as to an often larger fee charged on these transactions and were charged millions of dollars in undisclosed fees.”
Merrill Lynch, without admitting or denying the SEC’s findings, agreed to a cease-and desist order, a censure, and to pay disgorgement of approximately $4.1 million, prejudgment interest thereon of $760,000 and a civil penalty of $4.8 million.