What is Commingling?

In financial circles, commingling is the practice of mixing together customer account securities with the account securities that are the property of the bank, realtor, or brokerage. The process of commingling makes it difficult to determine which assets are the property of the client, and which securities belong to the entity managing the client assets. In most areas of the financial world, commingling is considered to be both unethical and a breach of trust. Depending on the jurisdiction, the practice may also be illegal.

The practice of commingling should not be confused with the practice of placing customer securities into a common trust account. Combining the assets of two or more customers in a common trust is a strategy that is often employed to maximize the return on investments made on the behalf of the clients involved. Within this scenario, there is no doubt as to the amount of assets contributed by each client, so the process of allocating gains or losses is very simple.

By contrast, unethical commingling can often blur the lines between the service provider and the client to the point that it is impossible to determine how much gain or loss should be assigned to each party. In the worst examples of commingling, the managing entity will divide all losses between the clients who are involved in the commingled account, but will not necessarily assign an equitable portion of profit realized to the customers. In situations where the courts intervene in situations of this nature, it is common for the authorities to determine that any profit realized will be assigned to the clients.

Many financial entities impose strict fines or worse if evidence of commingling is discovered. For example, a realtor may lose his or her operating license if it is determined that he or she has engaged in commingling activity. Brokerages may be barred from trading on certain markets, and banks may face still penalties. In general, commingling is a practice that any reputable investment entity will choose to avoid.