Comment letter ahead of BofA’s $8M Fine

September 30, 2014

Yesterday, the SEC announced a $7.65m fine for Bank of America Corp. related to internal controls deficiencies and regulatory capital misstatements related to complex securities it bought as part of its acquisition of Merrill Lynch in 2009. What’s surprising is that a comment letter that was made public earlier this month previewed this.

In that letter, the SEC said it was concerned with the company’s disclosure about revisions to regulatory capital amounts and ratios in its first-quarter report, which we flagged for footnotedPro subscribers on May 1.

We thought it was interesting to highlight this not just because of yesterday’s news, but because it’s rare to see that sort of quick cause and effect when it comes to comment letters.

Now, obviously an $8m fine is pocket-change — or maybe the annual Diet Coke budget — to a company like BofA. But just last month, the company agreed to pay $245 million to settle SEC allegations that it failed to provide sufficient information about risks tied to loans and increasing mortgage losses.

The SEC’s latest concerns were sparked after the company disclosed it found errors in the calculations used to value complex securities it had acquired when it bought out Merrill Lynch.  As a consequence, the company was forced to resubmit its stress-test disclosure to the Federal Reserve.

The stress test, formally known as the Comprehensive Capital Analysis and Review capital plan, is an annual exercise by the Federal Reserve to evaluate whether the largest bank-holding companies in the U.S. have sufficient capital to continue operations in times of economic and financial stress.

Following the error related to the “treatment of certain structured notes” in the Merrill Lynch acquisition, the company announced on April 28 that it revised downward the regulatory capital ratio, while disclosing it suspended plans to boost its quarterly dividend to 5 cents a share from 1 cent, and called off its $4 billion stock-buyback plan.

That news, which sent the stock down more than 6% on April 28, was well-covered. See here and here for example. Still, the company subsequently sought to play down the impact of the downward revision of the regulatory capital ratio, saying the move won’t have any impact on its previously filed financial statements.

But the SEC, which sent its comment letter, on July 2, shows that there were questions about “the existence of one or more material weaknesses in internal control over financial reporting (ICFR), and, if so, whether any such material weaknesses also would have existed as of December 31, 2013.”

Just another reminder on why it’s important to read comment letters.

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