SEC Fines Merrill Lynch for Using FX to Boost Advisory Fees

The subject of fees charged for FX transactions is back in the headlines after the US Securities & Exchange Commission announced a fine of $9.5 million on Merrill Lynch Pierce Fenner & Smith for failing to disclose additional fees to clients.

The SEC says between May 2016 and July 2020, Merrill Lynch offered programmes to advisory clients in which the clients paid Merrill a fee in exchange for a range of investment advisory services, including currency exchanges. In the programme’s client agreements and brochures, Merrill disclosed that it charged a markup FX trades, but it did not disclose an additional fee it referred to as a production credit.

The SEC says that in more than 80% of the transactions, this “credit” was equal to or greater than the disclosed markup. Merrill Lynch paid a percentage of these production credits to its financial advisors and referred to this charge as a commission in internal documents.

The SEC’s order also finds that Merrill Lynch failed to adopt and implement policies and procedures reasonably designed to prevent its disclosures from being misleading about the fees it charged on currency exchanges.

“Investment advisers must ensure that they do not selectively disclose some fees but not others relating to a particular service,” says Antonia Apps, director of the SEC’s New York regional office. “While Merrill Lynch disclosed the markups or markdowns charged on foreign currency exchanges, thousands of clients were left in the dark as to an often larger fee charged on these transactions and were charged millions of dollars in undisclosed fees.”