Compliance January 31, 2009

SEC Charges Merrill With Misleading Pension Clients

Just over a year after launching an investigation, the Securities and Exchange Commission (SEC) has charged Merrill Lynch and two of its former investment adviser representatives for misleading pension consulting clients.
Reported by
The SEC said that the firm misled pension consulting clients about its money manager identification process and failed to disclose conflicts of interest when recommending them to use two of the firm’s affiliated services. Merrill Lynch has agreed to settle the SEC’s charges and pay a $1 million penalty, according to a press release.
“There has been tremendous growth in the pension consulting business in recent years. This case is an important reminder to firms and their investment adviser representatives that, whenever they sit across the table from their advisory clients, they need to make sure that all material conflicts of interest are disclosed,” said Scott W. Friestad, Deputy Director of the SEC’s Division of Enforcement.
According to the SEC’s order, Merrill Lynch failed to disclose its conflicts of interest when recommending that clients use directed brokerage to pay hard dollar fees, whereby the clients directed their money managers to execute trades through Merrill Lynch. These clients received credit for a portion of the commissions generated by these trades against the hard dollar fee owed for the advisory services provided by Merrill Lynch Consulting Services. Consequently, Merrill Lynch and its investment adviser representatives “could and often did receive significantly higher revenue if clients chose to use Merrill Lynch directed brokerage services,’ according to the SEC.
The SEC’s order finds that Merrill Lynch also failed to disclose a similar conflict of interest in recommending that clients use Merrill Lynch’s transition management desk. In addition, the SEC finds that Merrill Lynch made misleading statements to the clients served by its Ponte Vedra South, Florida office regarding the process used to identify new money managers to present to its clients (see SEC Looks into Merrill’s Florida Pension Consultancy Practice).
The SEC also charged Michael Callaway and Jeffrey Swanson, who were formerly employed in Merrill Lynch’s Ponte Vedra South office (see Merrill Closing FL Consulting Practice as Result of Controversy).
In a settled enforcement action against Swanson, the SEC found that he made misleading statements to some of the firm’s pension consulting clients regarding the process by which Merrill Lynch assisted them in identifying new managers. As a result, the SEC charged Swanson with aiding and abetting and causing Merrill Lynch’s violation of the Investment Advisers Act of 1940. Without admitting or denying the SEC’s allegations, Swanson has agreed to a censure, and to cease and desist from committing or causing violations of Section 206(2) of the Advisers Act, according to the announcement.
In the contested enforcement action against Callaway, the SEC’s Division of Enforcement alleges that Callaway breached his fiduciary duty in making misrepresentations about the manager identification process used by the Ponte Vedra South office and his compensation in connection with transition management services. The Division of Enforcement further alleged that Callaway was a cause of Merrill Lynch’s violation of the Advisers Act because he failed to ensure that Merrill Lynch disclosed to clients the conflicts of interest in recommending that clients enter into a directed brokerage relationship with Merrill Lynch and in recommending that they use Merrill Lynch for transition management services. The Division of Enforcement charged that, by this conduct, Callaway willfully aided and abetted and caused Merrill Lynch’s violations of Section 206(2) of the Advisers Act.
The SEC charged Merrill Lynch with violations of an anti-fraud provision of the Advisers Act, which does not require a showing of scienter (knowledge of the nature of one’s act or omission), according to the announcement. The SEC also charged Merrill Lynch with failing to maintain certain records and failing to supervise its investment adviser representatives in the Ponte Vedra South office. Without admitting or denying the SEC’s allegations, Merrill Lynch has agreed to a censure, to cease and desist from committing or causing violations of Sections 204 and 206(2) of the Advisers Act, and to pay a $1 million penalty.
More information is available online at http://www.sec.gov/news/press/2009/2009-13.htm
The Markets January 30, 2009

Employer Accounts Pumping Up IRAs

Nearly half of Americans own an individual retirement account (IRA), though the odds are that those accounts were funded by an employer-sponsored retirement account.
Reported by
In a new report, the Investment Company Institute (ICI) says that the most recent available data show that households transferred more than $200 billion from employer-sponsored retirement plans to IRAs in 2004. In fact, the ICI notes that in 2008, nearly 20 million U.S. households – 52% of all U.S. households owning traditional IRAs – had traditional IRAs that included rollover assets.
In “The Role of IRAs in U.S. Households’ Saving for Retirement, 2008,” the ICI notes that with their most recent rollovers, the vast majority of these households (85%) transferred their entire retirement plan balances into traditional IRAs.
When money was withdrawn from those traditional IRAs, it was typically taken to fulfill the imposition of required minimum distributions, or RMDs. Those Traditional IRA–owning households that took a withdrawal in tax-year 2007 usually consulted an outside source to determine the amount of the withdrawal, with nearly six in 10 consulting a professional financial adviser to determine the amount to withdraw in tax-year 2007, while a third consulted IRS rules or publications.
Rollover Trends
Among households with rollovers in their traditional IRAs, nearly half (43%) only had rollover IRAs (having never made traditional IRA contributions), and, not surprisingly, households with rollover assets in their IRAs tended to have higher IRA balances, compared with IRAs funded purely by individual contributions, according to the report. Median traditional IRA holdings that include rollovers were $75,000 in 2008, compared with median traditional IRA holdings of $40,000 for balances that did not include rollovers.
The ICI report noted that most U.S. households do not contribute to IRAs. In fact, in tax-year 2007, only 14% of all U.S. households made contributions to an IRA, and only about one-in-four of those contributing to employer-sponsored IRAs in tax-year 2007, with 17% only contributing to employer-sponsored IRAs.
Few households withdraw money from their IRAs in any given year, and most of those are retirement related, according to the report. Just over one-in-five (22%) of households still owning traditional IRAs in 2008 reported taking withdrawals from these IRAs in tax-year 2007, and among those, 82% reported someone in the household was retired from their lifetime occupation. Nevertheless, among retired households owning traditional IRAs in 2008, nearly three out of five did not take a withdrawal in tax-year 2007, according to the report.
Moreover, those traditional IRA–owning households who made withdrawals generally took modest-sized amounts, according to the ICI; 29% took less than $2,500 from their IRAs. And, while some withdrawals in dollar amounts appear large, a median of just 6% of the account balance was typically withdrawn, according to the report.
“The Role of IRAs in U.S. Households’ Saving for Retirement, 2008’ is online at http://www.ici.org/pdf/fm-v18n1.pdf

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