BofA, SEC in Settlement Talks -- WSJ
June 23 2016 - 03:02AM
Dow Jones News
By Jenny Strasburg
Bank of America Corp. has been in discussions with U.S.
regulators about paying $400 million to $450 million to settle
allegations it violated rules designed to safeguard client
accounts, according to people familiar with the matter.
The Securities and Exchange Commission has been investigating
whether Bank of America had proper controls for some customer
accounts and retail brokerage funds. One of the issues: whether the
bank used complicated trades and loans to free up billions of
dollars in cash for its own uses that it would usually have had to
set aside to meet regulatory requirements, people familiar with the
inquiry said. A settlement could be announced as soon as
Thursday.
A Bank of America spokesman declined to comment. A spokeswoman
for the SEC declined to comment.
A settlement of $400 million to $450 million would make the
accord one of the largest ever for the SEC. It would also be the
largest since a $616 million penalty paid by affiliates of SAC
Capital Advisors LP in 2013.
The Wall Street Journal first disclosed details of the SEC probe
in April 2015. In February, Bank of America said in a regulatory
filing that it was cooperating with the SEC on the matter and was
in discussions about a potential resolution. The settlement amount
under discussion hasn't been previously reported.
At issue is a rule aimed at ensuring that investment banks and
trading firms reserve enough cash and easy-to-sell securities so
that if they fail, they are readily able to repay what they owe
customers. The rule, called 15c3-3 -- part of the Securities
Exchange Act of 1934 -- requires financial firms to calculate at
least weekly what they owe to clients through liabilities such as
deposits, compared with what clients owe them, through assets such
as loans.
The more a bank owes clients, the more it is required to set
aside in segregated reserve funds, known as "lockup" accounts.
Minimizing the billions of dollars idling in lockup is attractive
to banks; that frees up money for activities such as trading.
The SEC investigation has focused broadly on the accuracy of
Bank of America's lockup calculations over the course of multiple
years, according to people familiar with the matter. One factor in
the probe has concerned the accuracy of the bank's statements to
the SEC about its lockup practices, The Journal has reported,
citing people familiar with the matter.
As The Journal previously reported, the SEC has looked at, among
other things, trades done through Bank of America's Merrill Lynch
unit since 2009 that helped the bank reduce what it held in lockup,
according to people familiar with the trades. In April 2015, Bank
of America said: "These transactions, which began at Merrill Lynch
before the acquisition by Bank of America, received extensive
review and approval. The firm fully complied with the rules
designed to safeguard client funds." Bank of America bought
brokerage firm Merrill Lynch in 2009.
One variety was internally called "leveraged conversion,"
according to people familiar with the trades. In that strategy, a
small team on Bank of America's New York equities desk arranged for
a handful of clients to put up token amounts of their own money to
receive loans of nearly 100 times those amounts, the people
said.
The bank would arrange large trades that suited other financing
needs it had, reducing its funding costs and the amount it set
aside in lockup reflecting what it owed clients, the people said.
The bank did billions of dollars' worth of such trades from 2009 to
2012, they said.
Some traders dubbed elements of the strategy "fugazi P&L" --
slang for phony profit-and-loss math, the Journal reported last
year.
--Christina Rexrode and Aruna Viswanatha contributed to this
article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com
(END) Dow Jones Newswires
June 23, 2016 02:47 ET (06:47 GMT)
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