Are Your Managers Insured against the SEC?

Insurers are bolstering coverage for asset managers against the US regulator’s clampdown on the sector.

Insurers are updating coverage for the fund management industry prompted by new investigative approaches from the Securities & Exchange Commission (SEC)—and more firms being caught out.

In setting out the SEC’s aims for the fiscal year 2016, Chair Mary Jo White said in May that the agency would ramp up its attention on the fund management sector—in part to keep up with the growth in assets and managers.

“A 10% rate of adviser examination coverage presents a high risk to the investing public.” —Mary Jo White, SECFollowing this declaration, Zurich North America has announced a new product for its clients “that can help address the increased litigation exposure from investors and limited partners, as well as increased regulatory risk”.

The company said it had updated its offerings after a bumper year of activity by the SEC in 2014. It said the US regulator filed a record 755 enforcement actions, obtained orders totaling $4.16 billion in disgorgement and penalties, and saw its first infraction of the “pay-to-play” rule for investment advisers.

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The SEC also increased activity in its whistleblower program, Zurich said, from which about $35 million in awards were handed out. Additionally, it leveraged initiatives like the Aberrational Performance Inquiry, which uses data analytics to look for unusual performance return postings from hedge fund advisers.

Fellow insurer, The Hartford, said managers were operating in an increasingly complex investment and regulatory environment, which created a previously unconsidered array of liabilities and risks.

In May, White said the SEC had increased the number of investment adviser examinations approximately 20% from 2013, but was still only able to examine 10% of registered investment advisers in 2014.

“A rate of adviser examination coverage at that level presents a high risk to the investing public,” she said.

Under the 2016 request for funds, White said top priority would be to hire 225 additional examiners, primarily to conduct additional examinations of investment advisers. Once fully on-board and trained, the investment adviser examiners would assist the agency’s National Examinations Program in increasing its examination coverage of advisers to an anticipated rate of approximately 14% per year.

For 2016, the SEC requested 93 new positions for the Division of Enforcement in three areas: staff proficient in conducting intelligence processing and analysis; investigative staff to permit the agency to more swiftly and effectively identify and respond to the high volume of securities-related misconduct; and litigation staff to address the growing number of contested enforcement matters nationwide.

Home > News > Asset Allocation > The Benchmark Causing Headaches for High Yield Investors

Asset Allocation August 13, 2015

The Benchmark Causing Headaches for High Yield Investors

Indexes focused on downgraded emerging market corporates could cause high yield bond investors problems, a manager has warned.

Investors in high yield fixed income could face added complexity when selecting funds and benchmarks following a recent index review, a fund manager has warned.

Andrew Wilmont, European high yield portfolio manager at Neuberger Berman, said investors could see “elevated risk” in some markets for “many months” as bond issuers and buyers adapt to a new set of indexes to be launched later this year by Bank of America Merrill Lynch (BoAML).

“Portfolio managers and their clients have a big decision to make regarding their choice of index.” —Andrew Wilmont, Neuberger BermanBoAML updated its high yield indexes at the end of last month, introducing a new category that only contains issuers “with a developed markets country of risk”.

The decision followed downgrades of a number of large issuers based in emerging markets, such as Brazilian oil and gas giant Petrobras and Russian gas company Gazprom. The companies were subsequently moved from investment grade to high yield indexes, where the size of their debt in circulation meant they dominated the benchmarks.

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BoAML’s new indexes mean investors can chose global high yield benchmarks in which emerging market companies do not feature, but they are not forced to exclude emerging market securities. BoAML previously opted to exclude Latin American companies from US high yield indexes in 2010 and 2011.

However, Neuberger Berman’s Wilmont said the move still created a “major new headache” for investors.

“While not all of the world’s BoAML-benchmarked high yield money is about to dump emerging market bonds, at least some of it will likely migrate to the new indexes,” Wilmont said. “Portfolio managers and their clients have a big decision to make regarding their choice of index.”

He said the benchmarks, while initially similar in construction, could diverge “possibly quite rapidly”, as the emerging market names in the legacy indexes make up a large proportion of issuance and create additional volatility. He cited the example of Petrobras, which he said was “about to try to auction off its offshore oilfields”, while Russian companies are focused on buying back bonds.

“Before this compromise, many portfolio managers expected to face an uncomfortable few weeks of elevated risk between the announcement that emerging markets would be excluded from BoAML’s high yield indexes and the actual implementation in October,” Wilmont said. “Now, having been given a choice over which benchmark to use, they arguably face similar uncertainty for many months more.

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