Axa pays dearly for risk management blunder

In a major settlement with
the US Securities and Exchange Commission (SEC), Axa Rosenberg,
Axa’s US asset management unit, has agreed to pay $217m to clients
harmed by a serious flaw in its quantitative investment
model.

AXA Rosenberg will also pay a
$25m penalty and hire an independent quantitative investment
consultant who will review disclosures and enhance the role of
compliance personnel.

The unpleasant situation
dates back to 2009, when a material error in the model’s code that
disabled one of the key components for managing risk was
found.

Instead of disclosing and
fixing the error immediately, a senior Axa Rosenberg employee
directed others to keep quiet about the error and declined to fix
the error. The SEC found that the error was introduced into the
model in April 2007.

“Quant managers must be fully
forthcoming about the risks of their model-driven strategies,
especially when errors occur and the models don’t work as
predicted,” said Bruce Karpati, co-chief of the SEC’s Division of
Enforcement’s asset management unit.

Robert Khuzami, a director in
the unit, said to protect trade secrets, quantitative investment
managers often isolate computer models from compliance and risk
management functions and leave oversight to programmers.

In a curt statement, Axa said
it does not expect the settlement reached by Axa Rosenberg with the
SEC will have any additional material impact in its full year 2010
accounts based on reserves reflected in the 2010 interim
accounts.

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