According to recent reports, U.S. regulatory authorities including the Securities and Exchange Commission are investigating major brokeragesCharles Schwab and Bank of America-Merrill Lynch’s Merrill Edge for inadequate investigation of their customers’ identities.
 
These companies allegedly violated anti-money laundering laws by failing to identify the true beneficial owners of their accounts. Some of these accounts have been linked to fake addresses and identified as shell companies, which were possibly involved in funding illicit criminal activities in Mexico.

News on these alleged links comes at a bad time since brokerage firms such as of E*Trade, Charles Schwab and TD Ameritrade’s were already under scrutiny related to high-frequency trading, which led to a 10-12% decline in their stock prices back in April. More than directly impacting investment fees or transaction revenues, the news could impact investor sentiment and hurt these companies if it impacts their customer bases.

Charles Schwab is one of the largest brokerage firms in the U.S, with a market cap of about $33 billion and over 9 million brokerage accounts. We have aprice estimate of just over $25, which is in line with the current market price.

The SEC is looking into Charles Schwab and Merrill Lynch for violation of anti money laundering rules that mandate brokerages to know their customers’ identities before allowing them to trade or raise money through their platforms. For both Schwab and Lynch, certain accounts with unverified owner were allegedly linked to shell companies with fake addresses which were eventually linked with funding Mexican drug cartels. Most of the suspect Schwab account holders were located near the U.S.-Mexico border.