Model Risk Costs One Asset Manager $242 Million
According to a February 3, 2011 document released by the U.S. Securities and Exchange Commission ("SEC"), AXA Rosenberg Group ("AXA") and various related entities have settled a matter relating to model risk for $242 million in economic damages and penalties. In a company letter dated April 15, 2010, several AXA executives describe an error with an investment model as having been "discovered in late June 2009" and "corrected between September and mid-November." While there are issues about the disclosure of said problems, the official message to investors at that time was a continued commitment to risk management.
Investor fallout has occurred nevertheless with various press accounts reporting the withdrawal of monies from AXA by pension plans such as the School Employees' Retirement System of Ohio, Los Angeles Fire and Police Pensions, the City of Fresno Retirement System, Florida State Board of Administration, the Marin County Employees' Retirement Association and the Montana Board of Investments.
As I've written before, valuation (and by extension, model risk assessment) is a key element of the due diligence of asset managers. For a list of some of the "must ask" questions about model reviews, click to read "Asset Valuation: Not a Trivial Pursuit" by Susan Mangiero, PhD, CFA, FRM (FSA Times, The Institute of Internal Auditors, Q1-2004).
Email contact@fiduciaryleadership.com if you want to further discuss model review best practices.
