June 9, 2006
Financial Services Agency
Government of Japan
Administrative action on Merrill Lynch Investment Managers Co.,Ltd.
1. The Securities and Exchange Surveillance Commission (SESC) conducted an inspection on Merrill Lynch Investment Managers Co.,Ltd. (hereinafter referred as ''MLIM''), and found the following violations of the Law Concerning Invest Trusts and Investment Corporations. (hereinafter referred to as ''LITIC''.) The SESC recommended on May 31, 2006, to the Commissioner of the Financial Services Agency (FSA) to take disciplinary action on MLIM.
(1)Instructions to conduct reciprocal transactions between investment assets
(a)From April 14, 2003 to August 31,2005, while managing investment assets, MLIM instructed the trustee company to execute six reciprocal transactions between the investment trust assets that are managed by MLIM in order to adjust the ratios of stocks incorporated in the investment trust assets.
(b)From April 14, 2003 to August 31, 2005, while managing investment assets and assets under discretionary investment agreements, MLIM conducted 38 reciprocal transactions between assets under the separate discretionary investment agreements, or between the investment trust assets and assets under the discretionary investment agreement, in order to adjust the ratios of stocks incorporated in the assets, without disclosing the adjustments to its clients and obtaining their written consent with respect to the adjustments.
The act described in (a) constitutes a breach of Item 2, Paragraph 1 of Article 15 of the LITIC. Among the acts described in (b), instructing the reciprocal transactions between the separate assets under separate discretionary investment agreements conducted without disclosing to its clients and obtaining their written consent constitutes a breach of Article 5.a. of the Decision by the Executive Board of the Japan Securities Investment Advisors Association ''Standard for management of the business (the ''Standards'').'' Among the acts described in (b), instructing the reciprocal transactions between the investment trust assets and the assets under discretionary investment agreements without disclosing to its clients and obtaining their written consent constitutes a breach of Article 5.b. of the Standards.
(2)Noncompliance with the duty of the care of a good manager
On March 25, 2004, MLIM, in managing assets under the discretionary investment agreement (Asset A), assumed that MLIM instructed the execution of sell orders of stocks incorporated in the assets by conducting a reciprocal transaction between Asset A and another asset under a different discretionary investment agreement (Asset B); however on March 29, 2004, MLIM became aware that the transaction was executed between Asset A and an entirely different investment trust asset (Asset C) by error order. On March 30, 2004, it therefore amended the error by conducting a corresponding transaction between the sell order of Asset A and the buy order of Asset C.
The error order was placed without sufficient examination of the account that the sell order was supposed to be placed. This lack of the sufficient examination resulted in the error transaction; however, MLIM conducted an amendment of the error transaction mentioned above without conducting a proper analysis of the effect of the transaction on Asset C. MLIM made the beneficiaries of Asset C bear the loss originating from the amendment deal, which must be borne by MLIM itself primarily. In addition, MLIM failed to provide the beneficiaries of Asset C with explanations about the occurrence of the error transaction and the amendment deal.
The above mentioned business status of MILM constitutes the breach of Paragraph 2 of Article 14 of the LITIC.
2. Administrative action on the Company
On the basis of these violations above, the FSA today issued these following business improvement orders to the Company based on Paragraph 1 of Article 40 of the LITIC:
- Business Improvement Order
(1)Clarifying the issues of actual management conditions and investment management criteria, based on the fact that reciprocal transactions with the possibility of the conflict of interest between investment assets were executed and structuring an effective system to prevent the conflict of interest.
(2)Taking measures to secure fair and proper business management and strengthening the compliance system, based on the fact that improper correction of errors processing (crossing trading between investment assets) were overlooked.
(3)Improving the management system, and clarifying the locus of responsibility.
The report to the FSA for the implementation of those above measures must be submitted by July 7, 2006.
- Business Improvement Order
Financial Services Agency, Government of Japan
Tel +81-(0)3-3506-6000 (main)
Securities Business Division, Supervisory Bureau (ext. 3353, 3360)
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