Bank of America nears SEC settlement in client accounts probe

Bank of America has been in discussions with US 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.

A Bank of America branch sign


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 June 23.

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 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. Minimising 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.

Write to Jenny Strasburg at

Christina Rexrode and Aruna Viswanatha contributed to this article, which was published by The Wall Street Journal

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