Merrill Lynch will pay $9.7 million in penalties after settling charges by the Securities and Exchange Commission that it failed to disclose foreign currency exchange fees to customers, the agency announced.

New York-headquartered Merrill Lynch disclosed to clients in its wrap-fee program that it charged a fee for converting foreign currencies to dollars, but failed to disclose that a component of that fee was considered a commission by the firm and paid out to advisors, the SEC said.

Under the order, the SEC censured Merrill Lynch, ordered it to cease and desist and called for disgorgement of $4,134,610, prejudgment interest of $760,104 and a civil penalty of $4,800,000.

Officials at Merrill Lynch did not respond to a request for comment by the time this story was filed.

Between May 2016 and June 2020, advisory wrap-fee clients could hold only U.S. dollars in their accounts, and clients who needed to convert other currencies into dollars were charged for the conversion through a fee that was not covered by the wrap fee, the SEC said.

Merrill Lynch’s financial advisors were the ones who facilitated these exchanges, and they received the currency exchange rate from the firm. The rate, a maximum of 2%, included two fees, a markup or markdown on the exchange and what was called a “production credit,” which was often equal to or greater than the markup or markdown, the SEC said.

“Furthermore, Merrill’s internal processing documents for foreign currency exchanges addressed each fee separately and referred to the production credit as a commission,” the SEC stated, adding that the trade confirmation given to the client folded the fees into the foreign exchange price the client received, so there was no way for the client to know about the commission.

During the time of the violations, Merrill Lynch charged the production credit on more than 80% of the nearly 16,000 foreign currency exchanges the firm processed for its wrap-fee clients, the SEC said. And for 95% of those transactions, the undisclosed production credit was either equal to or larger than the exchange fee, the agency said.

“For example, on January 23, 2020, Merrill processed an outgoing international wire transfer of $19,342,946.07 involving an exchange from U.S. dollars to British pounds,” the SEC said. “For this exchange, Merrill charged the wrap fee client a total fee of $105,798.45, consisting of a markup of $9,524.79 and a production credit of $96,273.66.”

In total, the SEC said, Merrill Lynch charged its wrap-fee clients $4,134,610 in undisclosed production credits during this period.

In June 2020 and March 2022, however, the firm updated its disclosures to clarify that the wrap-fee program doesn’t cover foreign currency exchanges and what the fees are, including the production credit, the SEC said.