In re Merrill Lynch, Pierce, Fenner & Smith: Failure to Supervise Allegations Result in $2.5M Fine

In In re Merrill Lynch, Pierce, Fenner, & Smith, Mass. Sec. Div., Docket No. E-2014-0002 (March 23, 2015), the Massachusetts Securities Division (“Division”) entered into a Consent Order (“Order”) with Merrill Lynch arising out of an investigation into its compliance policies and procedures required under the Investment Advisers Act of 1940 (“the Act”). On March 22, 2015, Merrill Lynch submitted an Offer of Settlement (“Offer”) to the Division for the purpose of disposing the allegations set forth in the Offer. 

According to the consent order (in which the facts are neither admitted nor denied), Merrill Lynch in 2010 created an Optimal Practice Model Team (“OPM Team”) that focused on developing a framework to assist financial advisors in delivering more consistent customer service. This team would, among other things, create internal presentations to train financial advisors. Merrill Lynch’s policies and procedures required its compliance department to provide prior approval of internal-use materials. As a result, the presentations were to be reviewed by a separate compliance team and then approved by a registered principle. 

The OPM Team developed an OPM Tools Presentation (“OPM Presentation”) focusing on suitability obligations and fiduciary standards for financial advisors. In late 2012, the OPM Team presented the OPM Presentation two times in Boston without any Merrill Lynch compliance approval. 

According to Merrill Lynch’s records, the OPM Team did not submit any version of the OPM Presentation for review until February 4, 2013. The Internal-Use Compliance team at Merrill Lynch did not approve any version of the presentation until shortly thereafter, nearly a month after the first Boston OPM Presentation. Upon review, it was determined that a required disclosure slide was not included in the Boston OPM Presentation. 

The Order indicated that the version of the OPM Presentation submitted to the Compliance team for review included different content than that what had been used during the Boston OPM Presentation. First, the version submitted for review contained the title “Optimal Practice Model: Tools,” which was much broader than the version used in Boston (which was titled “OPM Tools Overview, Optimal Book Management Tool and Business Calculator.”). Second, the version submitted for review did not include all of the slides presented during the Boston OPM Presentation, slides that were not part of the Boston presentation, and slides with content different from the Boston Forum.” 

The Division alleged that Merrill Lynch, by failing to comply with its internal-use policies and procedures, failed to observe equitable principles of trade in the conduct of its business, resulting in a violation of Section 204(a)(2)(B) of the Act. 

The Division also alleged that based on the reasons described, Merrill Lynch failed to reasonably supervise its OPM Team in connection with the Boston Forum, constituting a violation of Mass. Gen. Laws ch. 110A §204(a)(2)(J). 

As a result, Merrill Lynch agreed to the following undertakings as part of the Order. First, Merrill Lynch agreed to permanently cease and desist from conduct in violation of the Act and Regulations in the Commonwealth of Massachusetts. Second, Merrill Lynch agreed to pay a $2,500,000 administrative fine. 

Also, Merrill Lynch’s Chief Compliance Officer was required to provide a report to the Division within 120 days of the Order. This report must (1) certify a review of policies and procedures has been conducted, and (2) identify any changes or enhancements to Merrill Lynch Wealth Management practices, policies, and procedures that have been, or will be made. 


The primary materials for this Consent Order can be found at the DU Corporate Governance Website

Mark Proust