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SEC Charges Bank of America With Securities Laws Violations in Connection With Regulatory Capital Overstatements


Washington D.C., Sept. 29, 2014 —

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.  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. “This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.”

Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added, “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.  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.”

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 Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC’s investigation was conducted by Tony Frouge and supervised by Michael Osnato, Reid Muoio, and Daniel Michael.  The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Public Company Accounting Oversight Board.


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