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SEC Fines Merrill Over RMBS Traders Reaping Illegal Profits

Merrill Lynch has settled the SEC’s charges that its residential mortgage-backed securities traders illegally profited from excessive commissions.

Bank of America Corp.’s brokerage unit Merrill Lynch will pay more than $15 million to settle charges by the Securities Exchange Commission that its employees misled customers into overpaying for residential mortgage-backed securities.

Merrill agreed to repay more than $10.5 million to its customers, plus penalties of $5.2 million, according to an SEC statement Tuesday. The firm neither denied nor admitted to the regulator’s charges. 

Merrill traders and salespeople “illegally profited from excessive, undisclosed commissions,” mark-ups that in some cases were more than double what customers should have paid, according to the SEC. The firm had failed to put in place the surveillance procedures needed to prevent such misconduct, which included deceiving clients about how much the bank had paid for RMBS securities, the regulator found.

“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 the statement. “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.”

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The SEC’s charges related to RMBS trading from June 2009 through December 2012, according to its order Tuesday. 

“In some instances, Merrill traders made false or misleading statements directly to customers,” the SEC said in the order. “In other instances, traders made false or misleading statements to Merrill salespersons, and the salespersons then communicated the false or misleading information to customers.”

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