The Securities and Exchange Commission today charged Bank of America Corporation with violating internal controls and recordkeeping provisions of the federal securities laws after it 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 settle the charges stemming from regulatory capital overstatements that it made due to its internal accounting control deficiencies and books and records failures.
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, 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. [SEC]