Firm sanctioned for closet indexing

Regulators in the U.K. have sanctioned an asset manager for engaging in closet indexing, ruling that it violated its duty to retail investors by failing to disclose that it curbed its active management efforts in a pair of funds.

The U.K.’s Financial Conduct Authority (FCA) levied a £1.9 million fine against Henderson Investment Funds Ltd. for failing to treat investors in two of its funds fairly.

The FCA found that, in November 2011, the funds’ investment manager decided to reduce the level of active management in its Japan and North American sector funds.

It said that the firm informed institutional investors about the change and offered not to charge them management fees, but did not disclose the change to retail investors or revise their fees.

“The FCA requires firms to treat all its customers fairly, not just some customers. In this case, retail investors paid fees for active investment management they did not receive,” said Mark Steward, executive director of enforcement and market oversight at the FCA.

“For retail clients, the Japan and North American Funds were in effect operating as ‘closet trackers’ as the fees charged to them were inappropriate given the diminished level of active management. The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it,” Steward added.

The FCA said that retail investors were overcharged by almost £1.8 million. The firm has now compensated affected clients, the FCA noted.

“The situation revealed serious weaknesses in HIFL’s systems and controls in relation to the management, oversight and governance of an area of its business which included the Japan and North American Funds,” the FCA said.

By settling the case early, the firm qualified for a 30% discount on its fine, which would otherwise have been £2.7 million.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.