Institute of Actuaries of India Conflict in Sale and Purchase Vichitra Malhotra Ishwar Gopashetti Gopal Kumar Guide: Mayur Ankolekar Indian Actuarial Profession Serving the Cause of Public Interest

Agenda Introduction Background Situation at hand Key Issues Key Considerations Likely mistakes made? How to deal with the situation? Professional Standards to consider Professional Issues Key Professional Issues Areas for exercising caution Summary www.actuariesindia.org

Introduction: Background Investment Consultant, a qualified actuary, has two clients Client A Existing Client: Trustees of Pension Fund of Company A Scheme Actuary different from Investment Consultant Client B New Client: Trustees of Pension Fund of Company B Company B to be formed from Management buyout* of Company A Finance Director of Company A to be CEO and Chairman of Trustees of Company B *Management buyout involves purchasing a controlling stake in Company by its executive directors and managers Actuary agrees to be investment consultant of Company B’s trustees Does not envisage being potentially involved in buyout process in any way Begins advising Client B on appropriate arrangements for new scheme / fund; everything agreed for new scheme except bulk transfer value from old scheme www.actuariesindia.org

Introduction: Situation at hand Receives letter Stating the bulk transfer value has been agreed Asking him to make arrangements to transfer the money Finds Sale Purchase Agreement to be Ambiguous especially wordings on cash and alternative investments Open to interpretations Potential for advising Client A and Client B differently Receives Letter and Sale Purchase Agreement from Client B www.actuariesindia.org

Introduction: Key Issues Faces two key issues In hindsight, he may realize he did not consider potential for future conflict of interest in this assignment by Being involved in buyout process By being privy to key information of two clients when the buyout has not been completed He faces a key issue of how to advice his two clients on the Sale Purchase agreement given its ambiguity 1 2 www.actuariesindia.org

Key Considerations Issue: Did not realize potential for future conflict of interest to arise in the assignment 1 Likely mistakes made….. 2 Dealing with the situation …… 3 Professional Standards to consider….. Should have Disclosed the assignment to both clients Discussed with both clients and agree on areas of non involvement (such as buyout process) Should Make immediate disclosure to both clients Discuss any concern areas where he should not be involved till buyout is completed PCS (Section 5.2 and 5.3) prescribes “If there is or might appear to be a conflict of interest between two or more clients………, the actuary must consider the nature and extent of the conflict ……………….. In the event of any such conflict or apparent conflict of interest, the client or clients involved must be notified at the earliest opportunity…….” www.actuariesindia.org

Key Considerations Issue: How to advice his two clients on Sale Purchase Agreement? 1 Likely mistakes made….. 2 Dealing with the situation…… 3 Professional Standards to consider ….. Notify both clients of the situation Advice both clients that agreement is ambiguous And Companies advisors should sort it out Once ambiguity sorted, he will consider transfer arrangements Only an apparent conflict of Interest. PCS (Section 5.3) prescribes “In the event of any such conflict or apparent conflict of interest, the client or clients involved must be notified at the earliest opportunity…….” His clients are two trustees Neither party to agreement Only an apparent conflict of interest www.actuariesindia.org

Key Professional Issues Situation 1: Commenting on ambiguity of Sale Purchase Agreement Be wary of criticizing role of other actuary Understanding of both parties may be clear even if wordings are ambiguous Work of number of professional and actuary may not be involved in sections of concern Role of other actuary may be considered provided Two Companies disagree on intended meaning Acknowledge that other actuary may hold different opinion Acknowledge specific circumstances may exist of which he is not aware Things to Consider whilst Commenting PCS Section 8.1 and 8.3 prescribe “Members must avoid any action that would unfairly injure the professional reputation of any other member. Criticism of one member’s work by another member is acceptable, provided that the criticism is properly reasoned and believed to be justified. Where criticism of another member’s work is made in the context of ……….., care must be taken to acknowledge that other members may quite properly hold different professional opinions and that special circumstances may exist in any particular case.” Applicable PCS www.actuariesindia.org

Key Professional Issues Situation 2: Carrying out Transfer of Money Ensure he has relevant knowledge and experience to carry out transfer Ensure he has been delegated discretionary authority by trustees and approved by relevant authority to mange investments If not, should share his recommendations on transfer, rationale and risk associated with the deal Things to Consider PCS (Section 3.1 and 3.2) prescribes “An actuary is expected to use best judgement in giving advice, whilst paying proper regard to any relevant professional guidance or other guidance. He must keep himself abreast with updated professional guidance and adhere to that. As per 3.2 Actuaries must not give advice, unless: a) satisfied of personal competence in the relevant matters, or b) acting in co-operation with, or with the guidance of, someone (not necessarily an actuary) with the requisite knowledge and experience.” Applicable PCS www.actuariesindia.org

Areas for exercising caution PCS to consider Confidentiality Actuary privy to following information (deemed confidential) Past investment information of Company A Sale and Purchase document During buyout process or otherwise, Actuary may be called upon to share specific information of Company A. Must consult his client and exercise caution in sharing any such information. PCS (Section 2.5.1) prescribes “As a matter of law, information acquired by an actuary in the course of professional work is frequently confidential to the actuary’s client or the actuary’s firm. As such, it should not normally be disclosed unless consent has been obtained from the actuary’s client or the actuary’s firm, as the case may be.” Financial Interest Appointment to new scheme made by Finance director of Company A . Ensure that this does not influence the advice to trustees of Company A and B Fees and the remuneration should be specified at the outset Financial rewards if any, should not influence the quality of advice provided and be excluded from the purview of the advice PCS (Section 6.1) prescribes “An actuary must make full and timely disclosure to the client of any financial interest, which the actuary or the actuary’s firm may have in any assignment that the member undertakes for that client or in its outcome. Financial interest includes direct remuneration, direct and indirect benefits, commission and introductory fees paid by or to the actuary or the actuary’s firm.” www.actuariesindia.org

Summary www.actuariesindia.org Situation Mistakes made How to deal now / Professional Issues to Consider PCS Guidance Accepting Client B’s offer Did not anticipate future conflict of interest Did not disclose and discuss with clients Disclose immediately and agree on areas of non involvement PCS section 5.2 and 5.3 advising on conflict of interest to be considered Advising both clients on sale purchase agreement Client are trustees who are not party to agreement Only Apparent conflict of interest Highlight agreement is ambiguous and refer to Company’s advisors to sort PCS section 5.3 advising on conflict of interest to be considered Commenting on sale Purchase Agreement NA Wary of criticizing role of another actuary PCS Section 8.1 and 8.3 to be considered Carrying out transfer of money Ensure he has expertise and is authorized to carry out transfer Give recommendations on transfer PCS Section 3.1 and 3.2 to consider Areas of caution Confidentiality and Financial Interest PCS Section 2.5.1 and 6.1 to consider www.actuariesindia.org

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