According to Harvey’s Web announcement of the pact, the settlement agreement deals with allegations that three Fort Lee, New Jersey advisors allowed hedge fund Millennium Partners to market time funds. Harvey said Millennium was a prior client of the three employees and that they continued market timing for Millennium at Merrill Lynch. Over a third of the trades involved mutual funds held as sub-accounts of variable annuity contracts purchased for Millennium, the Garden State official said.
The three financial advisors, and a fourth who was involved to a lesser degree, placed 12,457 trades for Millennium in at least 521 mutual funds and 63 mutual fund sub-accounts of at least 40 variable annuities, according to Harvey. Millennium made profits in over half of the funds and fund sub-accounts. In those funds where Millennium made profits, its gains totaled about $60 million, the official said.Reuters reported that Merrill Lynch said it had fired three financial advisers who market timed and sanctioned three supervisors over the matter.
“Merrill Lynch failed to reasonably supervise these financial advisers, whose market timing siphoned short-term profits out of mutual funds and harmed long-term investors,” Harvey said in the announcement. “To resolve these securities issues, Merrill Lynch has agreed to implement reforms to enhance supervision of its financial advisers, particularly in the area of annuities, where trading in annuity sub-accounts has been done under the radar, without records. This is an industry-wide issue, and the recordkeeping and supervision requirements in this agreement should set a new standard.”
In addition to the fine, Merrill and its affiliate Merrill Lynch Insurance Group Inc. committed in the settlement agreement to implement new procedures to maintain the required “book and record” under New Jersey and federal securities laws – records of all client reallocation requests made through a Merrill Lynch employee that involve mutual funds held as sub-accounts of variable annuity products of outside insurance carriers. Neither firm recorded those requests in the past. Harvey said in the statement that by properly treating such transactions as subject to the requirement that financial advisers record every request by a client for a trade of a security, Merrill Lynch will be able to give such transactions proper oversight, Harvey said.
More generally, Harvey said, Merrill Lynch will put into place a new policy and procedure addressing how advisors should deal with instructions from clients to trade mutual funds in accounts held outside of Merrill Lynch. Merrill Lynch also will issue a global compliance alert to all of its financial advisors, supervisors and compliance personnel reinforcing its policies and procedures mandating retention and review of correspondence with clients.
Merrill Lynch said in a statement it resolved regulatory inquiries of New Jersey, Connecticut and the New York Stock Exchange (NYSE) into activities of financial advisors in connection with the short-term trading.