CFTC Revokes Registrations Allianz Global Investors: The Importance of Advanced Compliance Systems and Controls

Following a string of scandals within financial services (Silvergate, SVB, Credit Suisse), yesterday the Commodity Futures Trading Commission (CFTC) announced that it has filed a Notice of Intent to Revoke the Registrations of Allianz Global Investors US (AGI US). This comes as the final conclusion of the investigation that resulted in a $6bn fine Allianz received in May last year, this is a clear demonstration that when the markets are thriving, risk controls and gaps are sometimes deprioritized and underfunded. But in times of intense market pressure and regulatory scrutiny, gaps and cracks appear everywhere.

So what exactly happened?

• The SEC found that AGI US, with the involvement of three portfolio managers, conducted a fraudulent scheme where they deliberately provided false information and withheld crucial details from institutional investors of funds that utilized a complex securities options trading strategy named Structured Alpha.
• Specifically, the SEC discovered that AGI US deceived investors by misrepresenting the actual performance and significant downside risks of the Structured Alpha funds.
• As per the SEC order, the market volatility caused by the COVID-19 pandemic in 2020 exposed AGI US’s fraudulent activities and resulted in billions of dollars in losses for the Structured Alpha funds and their investors.
• The CFTC has issued an order disqualifying AGI US from registration with the CFTC, in accordance with CEA Section 8a(2)(E)(i) and revoking AGI US’s registrations as per the terms stated in the order.

Question: How is it possible that three portfolio managers within a highly regulated and sophisticated organization got away with years of fraudulent representations to their investors? 

Perhaps the answer lies in looking at the legacy technology firms are content with to monitor communications data of their employees. Furthermore, the answer may lie in the advent of newer communications channels such as MS Teams, WhatsApp, WeChat, and others. Perhaps even in the continuing gap in effective programs to capture, integrate and monitor voice communications for such risks. 

What is clear though is that the past few weeks have reminded us of what many already know: that investing in sound and technologically advanced compliance systems and controls is a significantly more cost-effective approach compared to facing regulatory consequences for non-compliance. The failure of AGI serves as a prime example of this phenomenon.