Regulators investigate AM over traded policy fund debacle

TheAustralian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have launched an investigation into AM Corporation’s (AM) conduct over the winding down of its troubled Diversified Traded Policies (DTP) fund.

A spokesperson for APRA confirmed toMoney Managementlast week that the prudential regulator was investigating the matter, but was unwilling to comment further.

A spokesperson for ASIC did not confirm it was involved in the review of AM’s conduct, butMoney Managementunderstands the watchdog is working together with APRA on the investigation.

Money Managementrevealed in June that AM had decided to restructure the DTP fund and wind it down over a five-year period. The decision followed a tumultuous nine months in which the group was forced to shut the fund off from its investors to avoid a potentially lethal run on its assets.

AM managing director Trevor Howell said last week he was completely supportive of the regulators’ investigation into the group’s handling of the fund.

“The regulators worked with us through the restructure [of the fund] and now that we have finished, APRA wants to reflect on the events that led to the fund being closed,” Howell says.

AM’s troubles began after a series of devaluations of the underlying insurance policies in the DTP fund by life insurance companies.

The first devaluation occurred directly after September 11 and saw the fund being reduced in value by six to eight per cent. The value was actually increased in December 2001 by four per cent, but has subsequently been devalued in April by 2.7 per cent, in June by 2.4 per cent and in July by four per cent.

According to Howell, this frequent revaluation of insurance policies is a complete change in the way life insurance companies operate and has “changed fundamentally the nature of traded policies as an asset class”.

According to Howell, APRA and ASIC became involved after AMdecided to close off the fund to prevent a run on its assets.

In winding down the fund, AM gave investors the opportunity to exit their investments, but said those wishing to exit faced the prospect of a 10 to 15 per cent discount on the value of the fund.

In the initial exit window in June, the DTP fund experienced outflows of $23 million. A further $29 million was expected to exit the fund asMoney Managementwent to print.