Collective Investment Funds

Transaction Risk

When administering a CIF, a bank may process a significant volume of transactions and must produce a variety of reports. For example, a bank administering a CIF will generally be required to:

• Account for admissions to and withdrawals from the CIF;

• Execute and account for the purchase and sale of investments;

• Account for the receipt and distribution of investment income (dividends, interest, and capital gains distributions);

• Prepare asset valuations at least every three months for readily marketable assets and at least yearly for assets that are not readily marketable. Many banks, however, choose to value assets on a daily or weekly basis in order to provide current valuations to plan participants;

• Prepare a financial report each 12-month period; and

• Execute contracts with third-party vendors and oversee their performance.

Depending upon the number and variety of CIFs administered by a bank, portfolio investments may include both liquid and illiquid assets from domestic and foreign markets. For banks with CIFs with investment variety and complexity, sophisticated information systems are required. If a bank fails to properly safeguard a CIF’s assets or process its transactions (failures that may violate the law), the CIF’s losses can lead to client litigation, significant financial losses for the bank, and severe reputation damage. Financial losses have the potential to be large in relation to a bank’s earnings and capital, and a damaged reputation can significantly harm a bank’s ability to compete.

Previous: Compliance Risk Next: Strategic Risk