Merrill Lynch, Pierce, Fenner & Smith agreed to pay a $10 million fine to settle SEC charges it misused customer order info to place prop trades and for charging customers undisclosed trading fees. 

    Merrill's Alleged Violations.   Merrill operated the proprietary Equity Strategy Desk between 2003 and 2005, which traded securities solely for the firm's own benefit and had no role in executing customer orders. The NYC-based Desk was located on Merrill's main equity trading floor, which housed the firm's market making desk that received and executed customer orders. 

[C-I Note:  Merrill failed to physically separate or to establish so-called, Chinese walls between prop and customer trading desks.]

While Merrill represented to customers that their order information would be maintained on a strict need-to-know basis, the firm's prop Desk traders obtained information about institutional customer orders nearby traders making the markets.   After customer trades were executed, the prop traders used the information to place trades on Merrill's behalf.  In doing so, Merrill misused this information and acted contrary to its representations to customers.

[C-I Note:  Interesting to note that Merrill wasn't front-running, but traded after client order was executed.  On the one hand, it would seem improper for a BD's prop trader to use customer orders for their strategies - perhaps, somewhat akin to trading on insider information.  On the other hand, isn't this sort of thing done every day - firms trading on customers' info?]

Also, between 2002 and 2007, Merrill had agreements with certain institutional and high net worth customers that it would only charge a commission equivalent for executing riskless principal trades. However, at times, Merrill charged customers undisclosed mark-ups and mark-downs by filling customer orders at prices less favorable to the customer than the prices at which Merrill purchased or sold the securities in the market - i.e., did not provide best execution..

Cooperation, Remedial Actions Impact Size of Fines.   In determining to accept Merrill's offer, the Commission considered certain remedial actions undertaken by Merrill after it was acquired by Bank of America.   [SEC PR 11-22, 1/25]