Compliance February 3, 2011

SEC Charges AXA Rosenberg Units with Securities Fraud

The Securities and Exchange Commission (SEC) has charged three AXA Rosenberg entities with securities fraud that led to $217 million in investor losses. 
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The SEC accused AXA Rosenberg for concealing a significant error in the computer code of the quantitative investment model used to manage client assets.

AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) have agreed to settle the SEC’s charges by paying $217 million to harmed clients plus a $25 million penalty, and hiring an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel, the SEC said.

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The SEC’s order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model’s code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time, the SEC alleged.

“To protect trade secrets, quantitative investment managers often isolate their complex computer models from the firm’s compliance and risk management functions and leave oversight to a few sophisticated programmers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in the news release. “The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors.”

The SEC additionally charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.

According to the SEC’s order, ARG is the holding company of BRRC and ARIM, which are Orinda, California-based investment advisers registered with the SEC. BRRC developed and maintains the computer code for the quantitative investment model and ARIM uses the model to manage client portfolios.

The SEC’s order further found that ARG, BRRC, and ARIM made material misrepresentations and omissions about the error to ARIM’s clients. The firms failed to disclose the error and its impact on client performance, attributed the model’s underperformance to market volatility rather than the error, and misrepresented the model’s ability to control risks. BRRC did not have reasonable compliance procedures in place to ensure that the model would assess certain risk factors as intended. The coding process for the model represented a serious compliance risk for BRRC and its clients because accurate coding is required for the model to function properly and in the manner represented to clients, the agency said.

Products February 3, 2011

ING Expands Fiduciary Service Program

ING’s U.S. Retirement Services business is expanding its program for researching, selecting, and monitoring plan investments to support more types of employers.
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The program, Portfolio Blueprint, powered by Morningstar Associates, is currently offered to ING’s ERISA 401(a) and 401(k) corporate plan sponsor customers. Now, ING will also make Portfolio Blueprint available to health care, education, and not-for-profit employers sponsoring qualified 401(a), 401(k) and 403(b) retirement plans.    

Through Portfolio Blueprint, ING plan sponsor clients can elect to receive: 

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  • Professional and objective fund analysis from an independent third party
  • A fully diversified menu of investment options designed to meet the needs and profile of the sponsor’s workforce 
  • A professionally drafted Investment Policy Statement (IPS) 
  • Quarterly monitoring reports and memos outlining fund changes
  • Acknowledgement of fiduciary responsibility by Morningstar Associates for their investment advisory services under section 3(21)(A)(ii) of ERISA 

The announcement said ING offers a wide selection of proprietary and non-proprietary funds under the program.  Plan sponsors select from a list of eligible investments recommended by Morningstar Associates. Portfolio Blueprint then allows sponsors and their financial professionals the flexibility to choose which investment options best suit the needs of their workforce.  

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