The SEC and BAC/Merrill: Round 32?

September 22, 2009

Late yesterday, the SEC put out a brief statement to let everyone know that despite what you may have read recently from Judge Jed Rakoff’s unhappiness with the SEC’s offer to wipe away the Merrill bonus disclosure problem with a $33 million fine, it planned to “vigorously pursue” its case against Bank of America (BAC). You can download the case management plan here and you can read about yesterday’s events here.

So imagine my surprise when I was reviewing yesterday’s crop of comment letters — the SEC released over 220 yesterday and one of the first to pop up was a series of newly public letters between the SEC and Merrill Lynch. Over the past few months, the SEC and Merrill made for quite the pen pals. We particularly liked this one from back in June which drilled into 19 different points in Merrill’s most recent 10-K and the 10-Q it filed in April. Come to think of it, I’m not even sure why Merrill is even still required to file quarterly reports, given that it was acquired by Bank of America on Jan. 1.

This particular letter raises questions about Blackrock (BLK) and how Merrill’s 50% stake in the company turned into a 4.9% stake. Merrill’s response is definitely worth reading here:

As of December 26, 2008, Merrill Lynch owned an approximate 50% economic interest in BlackRock, consisting of a 44.2% voting common stock interest and a 5.3% non-voting preferred stock interest. After the exchange of common stock for non-voting preferred stock (the —exchange), we retained an approximate 50% economic interest in BlackRock consisting of a 4.9% voting common stock interest and a 44.6% non-voting participating preferred stock interest which is accounted for as in-substance common stock as per the guidance in EITF Issue No. 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock. The preferred stock has subordination characteristics that are substantially the same as the common stock, substantially the same risk and reward characteristics as the common stock (e.g., the preferred stock participates equally in earnings and dividends) and does not have any feature where substantive value is transferred to the preferred stockholder that is not available to common stockholders. Both before and after the exchange, we had an approximate 50% economic interest in BlackRock. As noted in the response to comment 2 below, subsequent to the exchange, we are accounting for our interest in BlackRock under the equity method of accounting. Therefore, we still record our approximate 50% economic share of BlackRock’s net earnings. As a result, the exchange did not affect comparability of Merrill Lynch’s earnings before and after the transaction and therefore disclosure of the exchange as a subsequent event was not deemed to be material.

There’s lots more in the letter to make any lawyer proud and it’s definitely worth a careful read.

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