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The Actuary The magazine of the Institute & Faculty of Actuaries
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Fair treatment of mutual fund customers

Last month saw the dramatic emergence into public view of an issue which will be familiar to actuaries with experience of unit-linked business, and which may represent an opportunity for actuaries.

Giants of the US mutual fund (unit trust) industry have been accused of unfair treatment of the majority of their customers. The state attorneys general of New York and Massachusetts, with the apparently belated support of the Securities and Exchange Commission, allege that managers variously allowed or encouraged dealing at retrospective prices. In one egregious case, it is alleged that fund manager personnel were involved in such dealings. Most unit-linked company actuaries will have some knowledge of situations where customers or intermediaries have sought to transact based on historic prices, and the potential for one group of customers to prosper at the expense of another is well understood.

Based on news stories, the principal issue in the US appears to have related mainly to taking advantage of knowledge of developments in open international markets after the striking of the daily price (so that an intermediary with knowledge of how Tokyo had performed after the pricing calculation could have a free option). This issue, which is being taken extremely seriously by the enforcement agencies, seems likely to lead perhaps to continuous pricing and also to strengthened governance arrangements for the mutual funds themselves.

Parallel inquiries have been initiated by the Financial Services Authority and other European regulators. Might this be an opportunity for the UK actuarial profession to emulate its Irish counterpart by making explicit professional guidance on fund-pricing?