Merrill Lynch Expands Client Disclosures on Crypto and AI Risks
From the desk of Jim Eccleston at Eccleston Law
Merrill Lynch updated its required client disclosure brochure to address, for the first time, the evolving risks tied to cryptocurrency-linked investments and the firm’s expanding use of Artificial Intelligence tools. According to AdvisorHub, Merrill filed the brochure the same day it began permitting advisors to recommend crypto-linked exchange-traded products to clients.
Regulators require the brochure at least annually, and it outlines fees, services, conflicts, and material risks. In the updated version, Merrill highlighted what it described as “significant” risks associated with “Crypto Investment Vehicles,” including exchange-traded funds, as reported by AdvisorHub.
Merrill warned that crypto assets are not registered under the Investment Company Act of 1940 and remain subject to a developing regulatory framework. According to AdvisorHub, the firm characterized crypto assets as highly speculative and relatively new, noting that much of the demand comes from investors seeking short-term profits. Merrill cautioned that media coverage, social media posts, and influencer commentary can significantly affect performance because of the speculative nature of the market.
According to AdvisorHub, the brochure emphasized the historical volatility of crypto markets and warned that prices can decline rapidly, resulting in the complete loss of an investment. It also flagged risks tied to concentrated ownership, explaining that large holders may trigger sudden price drops by selling or transferring assets without notice.
Merrill further disclosed that legal and regulatory developments could negatively affect crypto values and impair the operation of crypto investment vehicles. The firm pointed to uncertainty in tax treatment and the absence of standardized valuation or pricing models. AdvisorHub adds that the brochure also warned that certain crypto exchanges have suffered service failures due to fraud, Ponzi schemes, pump-and-dump activity, security breaches, operational issues, or business collapse, and noted that some platforms do not face the same regulatory oversight as national securities exchanges.
AdvisorHub reports that the disclosure followed broader industry movement. Morgan Stanley, which also offers crypto products through advisors, filed for Bitcoin and Solana exchange-traded funds and similarly warned clients in its Form ADV that risks related to digital assets are significant.
Merrill’s brochure also devoted substantial attention to Artificial Intelligence (AI). According to AdvisorHub, the firm cautioned that the legal and regulatory framework governing AI remains uncertain and rapidly evolving, which could require swift policy changes and raise compliance costs. AdvisorHub reports that Merrill acknowledged that it may have limited visibility into third-party AI tools and that the reliability of AI outputs depends on the integrity of underlying data sources, which could become compromised.
According to the brochure, AI tools are complex and may contain flaws, hallucinate, reflect embedded biases, or otherwise generate harmful outputs, requiring ongoing supervision and oversight. Merrill also warned that AI use may heighten cybersecurity risks, including more automated, targeted, and coordinated attacks, given vulnerabilities in AI technology.
Industry observers continue to echo those concerns. AdvisorHub adds that professional and technology groups have cautioned that, while AI promises efficiency gains, its rapid adoption has increased data loss and compliance risks and exposed weaknesses in traditional security frameworks.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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