The Securities and Exchange Commission has charged Bank of America Corporation with violating the internal controls and recordkeeping provisions of the federal securities laws after the bank assumed a large portfolio of structured notes and other financial instruments as part of its acquisition of Merrill Lynch.
Bank of America agreed to pay a $7.65 million penalty to the SEC to settle the charges stemming from regulatory capital overstatements that it made due to its internal accounting control deficiencies and books and records failures.
Bank of America agreed to acquire Merrill Lynch in September 2008 for $50 billion as the financial crisis took on greater urgency. Federal officials feared that Merrill would collapse like Lehman Brothers and Bear Stearns as the venerable investment bank suffered from $52.2 billion in losses and write-downs stemming from the collapse of the subprime loan market, prompting its stock price to plunge over 80 percent from its highs in 2007.
Regulatory capital refers to the amount of capital that a bank must hold under applicable rules, and it is intended to provide a buffer against adverse market conditions. According to the SEC’s order instituting a settled administrative proceeding, at the time of its Merrill Lynch acquisition, Bank of America permissibly recorded the inherited notes at a discount to par. Bank of America was required to realize losses on the notes as they matured because it redeemed the notes at par. For the purposes of calculating and reporting its regulatory capital, the applicable rules required Bank of America to deduct the realized losses as they occurred.
However, according to the SEC’s order, by the time 90 percent of the notes had matured as of March 31, 2014, Bank of America had yet to deduct any of the realized losses from its regulatory capital. Therefore, with each passing fiscal quarter and fiscal year since 2009 as more and more notes matured, Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars.
Bank of America internally discovered the regulatory capital overstatements in mid-April 2014. After analyzing the issue, it disclosed the overstatements in a Form 8-K filing on April 28, 2014. Besides correcting its regulatory capital figures in its Form 8-K filing, Bank of America cooperated with SEC staff during the investigation and voluntarily took steps to remediate the insufficiencies that led to the regulatory capital overstatements.
“Bank of America self-reported its regulatory capital overstatements, remediated the issues quickly, and cooperated in our investigation,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in a statement. “This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.”
In addition to the $7.65 million penalty, the SEC’s order requires Bank of America to cease and desist from committing or causing any violations or future violations of the securities laws.
In August, Bank of America also agreed to pay a far steeper $16.65 billion penalty related to its acquisitions of Merrill Lynch and Countrywide Financial to resolve charges that it sold toxic mortgage-backed securities and other troubled financial products. The penalty, negotiated by federal and state officials at the SEC, the Justice Department, state attorneys general and other agencies, was the largest ever civil settlement for a single financial firm and included $9.65 billion in cash and $7 billion for consumer relief, such as for struggling homeowners. A portion of the compensatory payments are expected to be tax deductible.
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