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SEC: Merrill Lynch to Pay $8.9 Million for Undisclosed Conflict in Advisory Decision

Merrill Lynch, Pierce, Fenner & Smith has agreed to pay an approximately $8.9 million settlement to the Securities and Exchange Commission for failing to disclose to investors a conflict of interest the firm had in offering products managed by an unnamed U.S. subsidiary of a foreign bank.

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Merrill Lynch, Pierce, Fenner & Smith has agreed to pay an approximately $8.9 million settlement to the Securities and Exchange Commission for failing to disclose to investors a conflict of interest the firm had in offering products managed by an unnamed U.S. subsidiary of a foreign bank.

In December 2012, a unit of Merrill Lynch’s Global Wealth & Retirement Solutions recommended terminating certain products that 1,500 Merrill’s retail advisory clients had invested approximately $575 million.

According to the SEC order, Merrill put new investments into these products on hold while its governance committee planned to vote on terminating the products and offering alternatives to investors. The product manager attempted to prevent termination and contacted senior Merrill executives, including making an appeal to consider the companies’ broader business relationship.

Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new Merrill accounts. The SEC’s order found that Merrill failed to disclose to its clients the conflicts of interest in Merrill’s decision-making process.

“By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,” said Marc Berger, director of the SEC’s New York regional office. “Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.”

Without admitting or denying the findings, Merrill consented to the SEC’s order, which finds that the firm was negligent in violating the antifraud and policies and procedures provisions of the Investment Advisers Act of 1940.

Merrill agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.

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