SEC Charges Merrill Lynch for Failure to Supervise RMBS Traders

Merrill Lynch, Pierce, Fenner & Smith Inc. has agreed to pay $15.7 million to settle SEC charges that its employees misled customers into overpaying for residential mortgage-backed securities (RMBS).

The SEC said that Merrill Lynch traders and salespersons convinced its customers to overpay for RMBS by lying about the price Merrill Lynch paid to acquire the securities. Merrill was a broker-dealer engaged in secondary market trading of non-agency RMBS, according to the SEC.

In trading non-agency RMBS, Merrill purchased the securities for its own account and then sold them from its own account to its customers. Merrill didn’t charge a commission on the trades, but instead profited from the difference between the price of the securities it sold, and the price at which it had purchased them.

“The false or misleading statements led customers to accept less, or pay more, for securities than they otherwise might have accepted or paid,” said the SEC in its charges. “Merrill personnel, directly and indirectly, made false or misleading statements to Merrill customers.”

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The SEC also said Merrill Lynch’s RMBS traders and salespersons illegally profited from “excessive, undisclosed commissions,” which in some cases were more than twice the amount the customers should have paid. The SEC’s order said Merrill Lynch failed to have compliance and surveillance procedures in place to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions “to the detriment of its customers.”

In one instance, Merrill purchased more than $15.6 million original face amount of a bond at a price of $1.86. Later that day, one of its traders, through a salesperson, sold the bond to a Merrill customer at a price of $4.00, which represented an intra-day mark-up of 115.1%, and profits to Merrill of approximately $334,289, according to the SEC.

Merrill traders made false or misleading statements directly to customers in some cases, said the SEC, and in other instances, traders made false or misleading statements to Merrill salespersons, who then communicated the bad information to customers. It also said some Merrill salespersons made their own false or misleading statements to customers.

Although the firm neither admitted nor denied the SEC’s charges, Merrill Lynch agreed to be censured, pay disgorgement and interest of more than $10.5 million to its customers, and pay a penalty of approximately $5.2 million.

“In opaque RMBS markets, lying to customers about the acquisition price can deprive investors of important information,” Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in a release. “Merrill Lynch failed in its obligation to supervise traders who allegedly used their access to market information to take advantage of the bank’s own customers.”

Tags: Fenner & Smith, Merrill Lynch, Pierce, RMBS, SEC

A club of the largest private equity investors has grown in 2018, with allocations accounting for 52% of the total industry assets in the space.

Similar to its hedge fund counterpart, the “Billion Dollar Club” for private equity consists of 359 members that invest $1 billion or more to the asset class. Its top ranks include the Canada Pension Plan Investment Board (CPPIB) and Kuwait Investment Authority, which allocate more than $50 billion to the sector.

The titanic asset club holds a whopping $1.54 trillion in total private equity investments, reports data firm Preqin. The entire industry commits $2.97 trillion to private equity.

Increasing private equity interest has expanded the club by more than 50 members in the past year. In 2017, the billion-dollar club had only 315 members and $1.24 trillion in combined private equity assets.

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Christopher Elvin, Preqin’s head of private equity products, said that while the group’s industrial influence is wide, it is “striking that in 2018 just 350 investors account for more than half of total AUM of the asset class.” He added that the club’s near-50-member growth from 2017 indicates “the growing importance that private equity investments are having for institutions with demanding returns objectives.”

The top investors are public pension funds, which represent one-third of the group’s members. Sovereign wealth funds are the club’s second-largest investors, despite occupying only 4% of its members.

Most billion-dollar club members are North American (54%). Nearly one-third of affiliates are European (28%). The rest of the world comprises the last 12%.

Elvin called the consortium “a mark of confidence” in the private equity industry, but said that it creates challenges for smaller investors and fund managers alike. “Club members may make it more difficult for other investors to access vehicles that are already in high demand, and the size of their commitments mean that even though they are more likely to consider first-time funds than other investors, they may be difficult to accommodate for many fund managers,” he said.

Tags: Billion Dollar Club, Christopher Elvin, Preqin, Private Equity