Updated from 3:43 p.m. EST
Securities and Exchange Commission
is investigating whether a manager at
Bank of America
traded stocks based on advance knowledge of ratings changes at its brokerage unit, a source familiar with the probe said.
The inquiry into research "front-running" is one part of an investigation that led to Bank of America
receiving a so-called Wells notice from the agency last week. The company described the SEC's concerns on Friday as centering on improper records storage and handling, but the agency's concerns appear to be more substantive.
Federal regulators are looking into allegations that at least one former manager in the bank's securities division -- and possibly other top managers -- were involved with "front-running" research reports issued by the firm's analysts, the source told
Eloise Hale, a Bank of America spokeswoman, without responding directly to the front-running allegation, said the bank has looked into the trading activity about which the SEC is inquiring and found nothing wrong. She said, "the company has looked at the circumstances and has not found any violation of law."
Trading stocks in advance of the release of a research report is frowned upon by regulators and in some cases could be illegal because it puts some investors and traders at a disadvantage to others. It wouldn't be the first time SEC investigators have shown interest in the practice: it was at the
center of a now-aborted probe involving former top
analyst Holly Becker and her husband, a hedge fund executive, last year.
The nation's third-largest bank said Friday the SEC attorneys conducting the investigation believe the bank violated "book and records retention laws" by improperly storing the documents and not producing them in a timely fashion. The bank said the allegations stemmed from an "inquiry that began more than two years ago into certain trading activities in the firm's San Francisco office."
The bank's statement, however, did not describe the nature of the activities under scrutiny.
An SEC spokesman declined to comment.
Over the past two years there has been a lot of turnover in the top ranks of the bank's securities division, with many analyst supervisors and associate directors of stock research leaving the firm.
The news of the front-running investigation comes at an awkward time for BofA, which is trying to close a $47 billion deal to buy Boston-based
. The transaction would transform the Charlotte-based financial services firm into the nation's second-largest bank, behind
But the front-running probe is just one of several bearing down on the bank's brokerage arm.
BofA is still dealing with the fallout from its role in thefast-expanding mutual fund trading scandal. A former BofA securities broker has been criminally charged with helping
Canary Capital Partners
, a New Jersey hedge fund, make illegal late trades in shares of some mutual funds. Several other executives in the unit have been dismissed. Sources familiar with the mutual fund inquiry said the bank and regulators have begun talking about a monetary settlement in the matter.
Additionally, the NASD and the SEC are looking into allegations that investment bankers at BofA pressured research analysts to maintain positive ratings on stocks in order to secure investment banking work from corporate clients.
Last month, the brokerage industry's largest self-regulatory organization suspended and fined former BofA telecommunications analyst Andrew Hamerling for issuing misleading research reports that touted stocks he was simultaneously advising hedge funds to sell short. The NASD action against Hamerling is the first time regulators have alleged that a BofA stock analyst issued misleading research.
BofA was not a party to the $1.4 billion tainted-research settlement that securities regulators signed with 10 Wall Street firms, and many believed the bank had emerged unscathed from last year's investigations into conflicts of interest among stock analysts.
But the NASD, in a press release announcing the settlement, said it is continuing its investigation of "research and supervision issues" at the bank. A source said the SEC also is looking into the role some BofA supervisors had in the release of misleading research reports.