Broker-Dealer Settles SEC Charges of Misleading Customers

A broker-dealer agreed to settle SEC charges related to the undisclosed routing of customer orders to external liquidity providers and partners (collectively, "ELPs") for execution.

According to the SEC Order, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") reprogrammed its systems, altered reports and invoices, and inaccurately responded to customer communications concerning the execution venue of certain customer orders. The SEC Order states that between 2008 and 2013, Merrill Lynch engaged in a practice referred to as "masking," in which it did not disclose to customers that their orders were being executed at ELPs and not at Merrill Lynch. The practice ended in May 2013 on a prospective basis. The Order states that Merrill Lynch did not disclose the prior practices to its customers but continued to use its systems to conceal the earlier wrongdoing.

The SEC concluded that by this masking practice, the broker-dealer deprived customers of useful information or were contrary to customer direction. Specifically, certain customers had requested that their orders not be sent to ELPs, and others expressed concern that the practice made them susceptible to information leaks. Other customers purportedly made choices about their broker-dealer relationships and routing decisions based on the false execution venue information.

Merrill Lynch admitted wrongdoing and agreed to pay a $42 million penalty.