ConvergEx, SEC Nearing Settlement Over Transition Management Scandal

The broker is in advanced talks with regulators as they prepare charges over its alleged fleecing of transition management clients, according to the FT.

(October 17, 2013) – ConvergEx, once a major player in transition management, is deep into settlement negotiations with US regulators regarding its alleged overcharging of clients, according to the Financial Times.

The US Securities and Exchange Commission (SEC) and Department of Justice are preparing civil and criminal cases against the New York-based firm, the report said, citing unnamed sources.

A civil settlement may or may not include an admission of wrongdoing on the part of ConvergEx, which was a leading service provider to public pension funds and other institutional asset owners.

ConvergEx publically disclosed the investigations in December, 2011. A spokesperson for the firm had no comment on their status, but said in a statement that the firm continues to "cooperate fully with authorities" and is "hopeful that they will be concluded shortly so that we can put these legacy matters behind us."

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aiCIO reported in July that the firm had closed its non-US transition management business. This came after JPMorgan began “winding down” its division in June, a spokesperson confirmed at the time. Likewise, Credit Suisse stopped bidding on American transitions in May in order to shutter its US operations.

ConvergEx is alleged to have presented itself as an agent—as opposed to a principal—in marketing its transition services.

However, as aiCIO reported in February, 2012, through a complicated structure that seemingly fractured its business units into different legal entities, ConvergEx as a whole was charging both a commission and a spread on transitions, among other transactions, when dealing with pension plans.

"These legacy matters center on certain high-touch global program trading and global transition management orders routed through the former Bermuda trading desk of CGM, a ConvergEx subsidiary, which was effectively shut down in late 2011," the firm's statement sent to aiCIO on October 16, 2013 said. "ConvergEx discontinued this activity almost two years ago."

The Bermuda division was set to be taken over by CVC Capital Partners in July 2011. However, the following December ConvergEx announced that the agreement had been terminated at least in part due to parallel investigations by the SEC and Department of Justice.

"Significantly, the investigations do not involve any of our US program and sales trading, options services, prime services, ATSs, commission management and recapture services, clearing, or technology businesses," the firm noted. "Nor do they involve orders executed through ConvergEx’s electronic direct market access platform. ConvergEx is in a strong financial position, with no debt, significant cash flow and substantial cash on hand.”

The SEC declined to comment on the situation, and the Department of Justice was closed due to the federal government shutdown.

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(October 16, 2013) — A group of UK-based pensions have joined forces to create a method of monitoring good fund governance.

Royal Mail Pension Plan, Telent, and Saul have linked with consulting firms Russell Investments and Spence Johnson to create the Russell Pensions Governance Index, an annual survey of how UK pension schemes organise their governance arrangements.

“The idea for the survey came from a desire to better understand the governance structures of others, as a context for decision making and formulating ideas,” said Chris Hogg, chief executive of the Royal Mail Pension Plan. “There is a spectrum of approaches out there with a lot of excellent governance structures. We wanted to dig down and capture some of this then share our findings so schemes can benchmark themselves. We hope it will be a catalyst for more industry-wide debate around governance issues.”

The index examines the governance of 90 UK schemes with a total of £243 billon of pension assets held on behalf of three million members. It analyses the characteristics of these schemes according to six measures around the extent to which they delegate, the costs they incur, and the nature of their trustees.

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The consortium found that changing governance structures is high on the agenda for many schemes. Some 70% of large and 69% of mid-sized pension funds reported they were in “a process of change to improve the governance” of their fund.

They also found there are clear economies of scale in governance. The consortium said: “As a proportion of assets, large schemes face a cost that is less than half that of smaller schemes in our survey. The average cost for large schemes is 5.4 basis points, for mid-sized ones 9.7bps and for small schemes 13.0bps. For small schemes achieving scale to make their aspirations affordable is a key challenge.”

Sorca Kelly-Scholte, managing director for client strategy and research at Russell Investments, added: “Schemes are facing many different challenges, with mid-sized schemes for example facing a squeeze as they aspire to ambitious investment strategies but do not necessarily have the resources to adopt them. We hope that this index will be a useful addition to the body of resources available to schemes as they decide which model of governance is most appropriate for them.”

Join aiCIO at the WorldPensionSummit in Amsterdam on November 13-14 to discuss how the largest—and most innovative—pension funds are tackling the issue of governance.

For more information, click here and for a 20% discount on admission, quote MEDIA2013WPS20.

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