December 14, 2018

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SEC Settles Charges for Failure to Disclose Conflicts of Interest

On August 20, 2018, the SEC announced that it had settled an enforcement action against Merrill Lynch, Pierce, Fenner & Smith for failing to disclose a conflict of interest relating to a decision to continue to offer its clients investment products managed by a third-party advisory firm.

The SEC order stated that Merrill Lynch’s due diligence team had recommended that a third-party adviser’s investment products be removed from Merrill Lynch’s investment platforms in light of portfolio manager changes
at the adviser, and that recommendations to invest in these products were put on hold pending a vote by Merrill Lynch’s governance committee to remove the products from the platforms. The SEC alleged that, upon learning
of this development, representatives of the adviser contacted senior Merrill Lynch executives to request that the
vote be delayed while invoking broader business relationships between the companies, including that a Merrill Lynch affiliate was seeking an active bookrunner role in a registered offering associated with the adviser. The SEC alleged that, thereafter, Merrill Lynch stated that it would conduct further due diligence on the adviser and that the governance committee vote would be delayed. According to the order, Merrill Lynch’s governance committee ultimately did not vote on the proposal, and the third-party adviser’s products remained on Merrill Lynch’s platforms. The SEC alleged that Merrill Lynch did not disclose to its clients the conflicts of interest involved in deciding to continue to recommend investment products managed by this adviser.

Without admitting or denying the foregoing, in settlement of the allegations, Merrill Lynch agreed to be censured, to cease and desist from violating the relevant provisions of the Investment Advisers Act of 1940 and to pay approximately $8.9 million in disgorgement, civil monetary penalties and prejudgment interest.

The SEC order is available here.

© 2018 Vedder Price

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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