Collective Investment Funds

Reputation Risk

Success in administering a CIF depends on a bank’s ability to effectively manage transaction, compliance, and strategic risks and its ability to properly manage the financial risks associated with a CIF. Both personal trust and employee benefit clients are demanding in terms of expected investment performance, product selection, information reporting, service levels, and the use of advanced technology.

Competition is strong for clients whose assets may be invested in a CIF, and negative publicity, whether deserved or not, can damage a bank’s ability to compete. In particular, disputes with account beneficiaries can increase reputation risk. Litigation, regulatory action, criminal activity, inadequate products and services, below-average investment performance, poor service quality, or weak strategic initiatives and planning can lead to a diminished reputation and, consequently, an inability to compete and be successful.

Ineffective investment strategies, concentrations of assets that are not readily marketable, or fraud may lead to underperformance or losses in a CIF. A bank must ensure that its CIFs have sufficient liquidity to meet both anticipated and unanticipated events.

While a bank is under no statutory requirement to provide financial support to a CIF, a bank may determine, in order to avoid reputation risk or to mitigate liability, to support a CIF. However, as detailed in OCC Bulletin 2004-2, “Banks/Thrifts Providing Financial Support to Funds Advised by the Banking Organization or its Affiliates,” a bank should avoid engaging in the unsafe or unsound practice of inappropriately placing its resources and reputation at risk solely for the benefit of fund participants. A bank’s failure to properly manage a CIF could expose the bank’s earnings, liquidity, and capital if the bank either provides support to the CIF or if the bank loses business as a result of a poorly managed or underperforming fund.

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