BlackRock Faces $15M Fine by FSA

BlackRock Investment Management Ltd (BIM) – a London-based wing of BlackRock, Inc. ( BLK - Analyst Report ) – was fined £9.5 million or $15.2 million by the UK Financial Services Authority (FSA) for mishandling clients’ money from 2006-2010. This is one of the largest penalties ever charged by the FSA.

The FSA pointed out that BlackRock had put the clients’ money in short-term money-market deposits without obtaining trust letters. Trust letters would have confirmed that the receiving banks are aware that they are holding assets of customers rather than that of BlackRock. This could have resulted in a long drawn legal hassle for the clients to get back their money if the company went bankrupt during that time.

The failure to issue trust letters stemmed from the re-organization efforts following the acquisition of the BIM, previously known as Merrill Lynch Investment Managers Limited. The error affected nearly £1.36 billion of client money on a daily basis between October 2006 and March 2010. However, the FSA as well as BlackRock clarified that despite erroneous handling of customers’ money, none of the clients suffered a monetary loss.

BlackRock had reported this error to FSA after an internal review of its activities. Further, the company was allowed a discount on the fine to be paid as it decided for an early settlement. The original fine to be levied was nearly £13.6 million.

The crackdown on such unwarranted activities of the banks by the regulatory authority comes in the wake of the collapse of Lehman Brothers Holding Inc. The collapse left customers reeling under substantial losses since Lehman failed to separate client funds from its own accounts, leaving customers with competing claims that resulted in years of litigation. Therefore, the FSA intensified its vigilance to ensure proper protection of the clients’ money.

BlackRock is not the only company to face the ire of the FSA. Earlier in 2010, the FSA penalized JPMorgan Chase & Co. ( JPM - Analyst Report ) . The firm was fined £33.32 million or $49 million, the largest penalty ever, for failing to effectively protect client money in the range of $1.9–$23 billion between November 2002 and July 2009. The average amount of money left unprotected was $8.55 billion.

BlackRock should be acknowledged for standing up and taking responsibility for its misconduct. However, being one of the largest asset managers in the world, failure to protect the customers’ money does not send out good signals either to the investors or the customers.

BlackRock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.