Bank of America Fined For Regulatory Capital Issues, Cooperates With SEC

Bonds that were not accounted for on a marked-to-the-market basis impacted 'buffer' capital requirements

Bank of America Corp ( NYSE:BAC) appears to have had marked-to-the-market accounting issues and was fined by the U.S. Securities and Exchange Commission $7.65 million for overstating regulatory capital to the tune of 'billions of dollars.' The bank noticed the oversight, however, and informed regulators and cooperated in the investigation, the SEC said.

SEC charges Bank of America with violating internal controls

In a statement today, the SEC said it charged Bank of America Corp ( NYSE:BAC) with violating internal controls and record-keeping provisions 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 was required to post losses on the notes as they matured in real time. 'Applicable rules required Bank of America to deduct the realized losses as they occurred,' an SEC statement said. '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 permissibly recorded the inherited notes

Regulatory capital requirements are in place to serve as 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.

Issues with brokerage firms not properly accounting for marked-to-the-market bond losses have been contentious issues. MF Global, for instance, was known to have issues with its accounting regarding sovereign bond exposure. While the sovereign bond position the brokerage firm held ultimately turned out to be positive, it was the intra-trade swings, the marked-to-the-market liquidity requirements the brokerage faced, the ultimate marked the firm's gravestone.

For its part, Bank of America Corp ( NYSE:BAC) had internally recognized the deficiency and reported it to regulators in April, disclosing it in the firm's 8-K regulatory filing.

'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.'

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