- Adviser Sanctioned for Manager Selection Advice
- March 20, 2009
- Law Firm: Ropes & Gray LLP - Boston Office
On January 30, 2009, the SEC issued an order (Order) imposing remedial sanctions and a cease-and-desist order against Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch) pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act). In the Order, the SEC found that, from approximately 2002 through 2005, Merrill Lynch employees in its Pension Consulting Services Advisory Program (Program) made material misrepresentations and failed to disclose conflicts of interest to various high net worth and institutional clients. As part of its pension consulting services, Merrill Lynch assisted its clients in crafting investment policies and determining asset allocations. Additionally, Merrill Lynch examined its clients’ existing money managers to determine whether the managers’ performances met the clients’ investment objectives. Merrill Lynch also recommended new money managers to its clients to handle the management of their discretionary accounts.
During the relevant time period, Merrill Lynch’s office in South Florida provided clients with materials that described an extensive research and evaluation process it followed when selecting managers for clients. Specifically, these materials stated that the South Florida office would review a client’s investment questionnaire detailing his or her investment objectives, compare these objectives with a vast database of money managers and apply various criteria to produce a preliminary list of potential managers. These materials further stated that the consulting services headquarters in New Jersey would review the preliminary list and provide the client with a customized booklet detailing the refined list of appropriate money managers and their backgrounds.
In practice, the South Florida office did not follow this process and instead chose money managers from a pre-existing list of about 60 managers, and often would select managers without using client specific data. In addition, Merrill Lynch recommended money managers that had not been vetted and approved by Merrill Lynch Consulting Services. The reports generated by the Florida office were not reviewed by the headquarters in New Jersey.
The SEC also found that during the relevant time period, Merrill Lynch charged clients in the Program advisory fees on a fixed-fee basis that clients could pay in cash (i.e., “hard dollars”) or through a directed brokerage arrangement that generated soft dollar credits for trades executed by Merrill Lynch’s brokerage division. Merrill Lynch failed to disclose the following conflicts of interest to Program clients: (i) that they would likely pay less in fees if they did not elect the directed brokerage option and instead executed trades elsewhere and paid only the hard dollar annual fee, (ii) that Merrill Lynch Consulting Services and its investment adviser representatives might have a financial incentive to recommend that its clients enter into a directed brokerage relationship, and (iii) that its Global Wealth Management Group and its investment adviser representatives had a direct financial incentive to recommend that clients use Merrill Lynch for transition management services.
In connection with these violations, the SEC also found that Merrill Lynch failed to adequately supervise its investment adviser representatives with a view to preventing violations of federal securities laws and that Merrill Lynch did not maintain adequate records in willful violation of Section 204 of the Advisers Act and Rule 204-2(a)(14) by failing to maintain a record of the disclosure material that it provided to Program clients. The SEC has censured Merrill Lynch, issued a cease-and-desist order and fined Merrill Lynch in the amount of $1 million for these violations.