NEW YORK (Reuters) - Bank of America Corp's Merrill Lynch unit will pay US$415 million (S$556.34 million) in the largest customer protection settlement in the United States Securities and Exchange Commission's history and admit to wrongdoing to settle charges that it misused customer cash, the US regulator said on Thursday.
An SEC investigation found that Merrill Lynch violated the an SEC rule in place for protecting customers' assets by holding up to US$58 billion a day in a clearing account that should have been deposited in a reserve account, said Andrew Ceresney, SEC enforcement director in a call with reporters.
The maneuver, which occurred between 2009 to 2015, freed up billions of dollars per week for Merrill, which financed the firm's trading activities for part of that time, the SEC said.
But if Merrill Lynch's business failed during those trades, customers would have been exposed to a massive shortfall in the reserve account, the SEC said.
At issue is an industry rule requiring securities for which customers have fully paid to be held in accounts that are not subject to liens.
The measure shields customers from claims by third parties should a firm collapse, the SEC said.
The clearing account in which Merrill held the customers'funds was subject to a general lien, Ceresney said.
Some Merrill employees were aware of the lien as early as 2009 but the firm did not take steps to fix the issue until the SEC brought it to attention, Ceresney said.
"While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes," said Merrill Lynch spokesman William Halldin, in a statement.
"The issues related to our procedures and controls have been corrected. We have cooperated fully with the SEC staff throughout this investigation," Halldin said.
The SEC is also suing Merrill's former head of regulatory reporting, William Tirrell, who held the position when Merrill was misusing customers' cash. Tirrell was responsible for determining how much in assets to reserve for customers' benefit if Merrill's business failed, the SEC said.
Tirrell failed to adequately monitor the trades and provide specific information to Merrill's regulators about the trades, the SEC said.
"While we are disappointed that the SEC filed this action, Mr. Tirrell looks forward to the opportunity to vindicate himself," said Steven Witzel, Tirrell's New York-based lawyer, defending Tirrell's "distinguished career" in the securities industry for 35 years.
Merrill Lynch also violated an SEC rule by using language in severance agreements to stop employees from coming forward to the SEC with information, the SEC said.
The company has since revised the agreements and launched a whistleblower training program for employees.
The case came to light after multiple former Bank of American executives reported the company's misconduct to the SEC, said Jordan Thomas, the whistleblowers' New York lawyer.