BlackRock fined by FSA for failing to protect client deposits

Sep 12, 2012
<p>Second-largest penalty handed out by UK regulator in ring-fencing failure case</p>

BlackRock, the world’s largest asset manager, has been fined by the Financial Services Authority (FSA) for failing to adequately ring-fence its clients’ assets. During the past three years, £1.3 bn ($2.1 bn) worth of client deposits have been invested in money market funds along with the company’s own funds.

Under UK law, asset management firms must receive ‘trust letters’ from third-party banks ensuring client money is properly separated from their own, a protective measure for clients should the financial institution go bankrupt.

Merrill Lynch Investment Managers, which was bought by BlackRock in 2006, did not have the appropriate process in place and the faulty system had not been corrected since the takeover.

The FSA imposed a fine of £9.5 mn on BlackRock, the second-largest penalty ever levied in such a case and the seventh largest handed out by the UK regulator. In 2010, JPMorgan Chase was fined a record £33.5 mn for not separating £23 bn of client deposits from its own funds.

The UK regulator has handed out a number of high-profile penalties to investment management firms this year: asset management firm Martin Currie was fined £3.5 mn for failing to manage a conflict of interest between two clients. The company was concurrently fined $8.3 mn by the SEC.

US hedge fund Greenlight Capital’s manager David Einhorn, who shot to fame in 2008 by shorting Lehman Brothers shares before the bank collapsed, had to pay a penalty of £7.2 mn after being found guilty of insider dealing.

Tracey McDermott, director of enforcement and financial crime at the FSA, says in a statement: ‘This is not the first time we have seen the impact on client money overlooked as part of a reorganization. The fine imposed today should remind all firms of the critical importance we place on ensuring proper protection of client money at all times.’

The regulator reportedly granted BlackRock a 30 percent discount on its original fine after taking into account the fact that no client money had been lost and that the company had decided to settle early.

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