The US Securities and Exchange Commission (SEC) has charged Bank of America Corporation with violating 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 in 2008.
Bank of America agreed to pay a $7.65m penalty to settle the charges deriving from regulatory capital overstatements that it made due to internal accounting control deficiencies and books and records failures.
"The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary," said Michael J. Osnato, chief of the SEC Enforcement Division's complex financial instruments unit. "Bank of America violated these legal requirements, which are specifically geared to ensure the integrity and accuracy of information that eventually is disclosed to investors."
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, 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 realise losses on the notes as they matured because it redeemed the notes at par despite being required to deduct the realised losses as they occurred for the purpose of calculating and reporting its regulatory capital.
According to the SEC's order, by the time 90% of the notes had matured as of March 31, 2014, Bank of America had not deducted any of the realised losses from its regulatory capital, and with each passing fiscal quarter and fiscal year since 2009 as more notes matured, the bank overstated its regulatory capital by greater amounts in its regulatory filings, eventually reaching billions of dollars.
Bank of America internally discovered the regulatory capital overstatements in mid-April 2014, cooperated with SEC staff during the investigation and voluntarily took steps to address the insufficiencies in its internal controls and recordkeeping provisions.
In addition to the $7.65m penalty, the SEC's order requires Bank of America to cease and desist from committing or causing any violations or future violations of a number of sections of the Securities Exchange Act of 1934.