Massachusetts Secretary of State Fines Merill Lynch For Securities Violations

The Boston Herald recently reported that Merrill Lynch & Co. was fined $250,000 by Massachusetts Secretary of State William Galvin following its sale of over $39,000,000 in unregistered securities to two Massachusetts cooperative banks. As USA Today notes, the sale involved auction-rate securities, which, according to Galvin, Merill Lynch brokers assured investors that any cash put into these securities could be redeemed with ease – despite what some believe were warning signs to the contrary. The auction-rate securities market allows investors to purchase long-term bonds with the assurance of the access to their cash by selling at weekly or monthly auctions where investment banks act as market-makers.

Galvin accused Merill Lynch of manipulating research reports that failed to position auction rate securities in a positive light. In addition to the $250,000 fine, Galvin also wants Merill Lynch to make investors who invested whole, as their cash is now tied up in long-term bonds.

Merrill Lynch released the following statement: "We are disappointed that Massachusetts filed this action because it ignores the only reason our advisers sold auction-rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return. … Our research reflected the honest belief that (ARS) offered higher returns in exchange for less liquidity and noted that market changes had begun to occur."

Auction-rate securities have been in the headlines in recent years. Since at least 2008, the SEC has been involved in various enforcement actions and the like related to auction-rate securities.

 

 

 

 

 

 

 

 

 

Increasing Compliance Costs Hit Financial Industry In Maine

Regulations in the financial services industry have steadily increased in number and extent over the past ten years. Since 2008 alone, 120 regulatory changes have been announced by 15 federal agencies for credit unions and a whopping 921 compliance changes for Banks.  This, according to a recent article from MaineBiz which highlights just how far-reaching the effects of these regulations are. Not surprisingly, the impetus behind much of these regulations is the recent mortgage and lending crisis and resulting economic recession. This, of course, led to the Dodd-Frank Wall Street Reform and Consumer Protection Act, one of the most comprehensive financial reform acts in history.

 Perhaps most concerning is the uncertainty surrounding the costs of regulations. One source notes that the FDIC is unsure of what compliance with these financial regulations actually costs the financial services industry. Here is what we know:  compliance costs account for 12% of total operating expenses ($50 billion) across the country’s banking industry. Maine is no exception to the trend. A regional survey in Maine reveals that compliance costs on average have increased nearly 19% since 2009.

 On the brighter side, much of the oversight under the new rules issued by the Consumer Financial Protection Bureau (the regulatory agency established under Dodd-Frank) only applies to banks and non-bank financial service providers with assets over $10 billion. Those with assets under $10 billion (which includes all such institutions in Maine) are regulated by separate authorities. However, as Chris Pinkham, Maine Bankers Association President warns, such rules can set a precedent that regulators find difficult to ignore.

Time will tell the full effect and costs of regulations on the financial industry, in and outside of Maine.

 

 

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S&P Credit Rating Litigation in Maine Short-Lived?

Odds are, yes.  Maine is among the nearly twenty states that have sued Standard & Poor's Financial Services, LLC and McGraw-Hill Companies, Inc. for alleged unfair trade practices in violation of state law, but that litigation is now in federal court and subject to a motion to transfer pending before the U.S. Judicial Panel on Multidistrict Litigation, according to the National Law Journal. 

Preti Flaherty attorneys Sigmund D. Schutz and Michael S. Smith serve as Maine counsel for Standard & Poors and McGraw-Hill in coordination with Cahill Gordon in New York City.