Investing

SEC Settles Charges With Merrill Lynch for Misleading Investors on Structured Notes

The U.S. Securities and Exchange Commission (SEC) recently announced that Merrill Lynch has agreed to pay a $10 million penalty to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.

According to the investigation, the offering materials emphasized that the notes were subject to a 2% sales commission and 0.75% annual fee. Due to the impact of these costs over the five-year term of the notes, the volatility index would need to increase by 5.93% from its starting value in order for investors to earn back their original investment on the maturity date.

However, the offering materials failed to adequately disclose a third cost included in the volatility index known as the “execution factor” that imposed a cost of 1.5% of the index value each quarter.

The notes were issued by Merrill Lynch’s parent company, Bank of America Corp. (NYSE: BAC), and Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements. The SEC’s order found that Merrill Lynch did not have in place effective policies or procedures to ensure its personnel drafted and approved disclosures that adequately disclosed the impact of the execution factor.

This is the agency’s second case involving misleading statements by a seller of structured notes. In October 2015, UBS Group A.G. (NYSE: UBS) agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy.

Andrew J. Ceresney, director of the SEC Enforcement Division, commented:

This case continues our focus on disclosures relating to retail investments in structured notes and other complex financial products.  Offering materials for such products must be accurate and complete, and firms must implement systems and policies to ensure investors receive all material facts.