Asset manager fined more than $3 million for 'closet tracking'

Company collected active management fees on North American funds it had switched to passive index-trackers

Asset manager fined more than $3 million for 'closet tracking'

An asset manager has been fined more than $3 million for charging investors an active management fee on funds it had stopped actively managing, according to a report by The Guardian.

North American and Japanese funds offered by London, UK-based Janus Henderson were transformed into passive index trackers in 2011. The firm failed to tell its nearly 5,000 “small saver” investors that it had ceased to actively manage those funds, and continued to charge them an active management fee, a practice called “closet tracking”. According to the Guardian, Henderson told nearly all its institutional investors about the change and offered to manage the funds free of charge for them.

The Financial Conduct Authority (FCA) estimated that between 2011 and 2016 Henderson took in an extra £1.8 million ($3 million) in fees from small clients that hadn’t been informed of the shift. The British watchdog handed Henderson a £1.9 million ($3.2 million) fine for this practice. The firm has since notified and compensated all its affected customers.

“For retail clients, the Japan and North American Funds were in effect operating as closet trackers as the fees charged to them were inappropriate given the diminished level of active management,” Mark Steward, the director of enforcement and market oversight at the FCA told The Guardian. “The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it.”

Janus Henderson told the Guardian that this instance of closet tracking took place before the company was restructured in a 2017 merger. They claim practices have since improved.