June 23, 2016

Merrill Lynch will pay $10 million 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 SEC’s order, the offering materials emphasized that the notes were subject to a 2% sales commission and .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.  But the offering materials failed to adequately disclose a third cost included in the 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 Corporation and Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements.  The SEC’s order finds 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.  SEC

Tagged in: Misrepresentations, Securities Fraud,