More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
AIJ Investment Advisors was temporarily shut down by Japanese regulators on Friday over fears that it may have concealed substantial losses in the $2.6 billion it manages, mostly for the pension plans of small- and medium-size corporations.
Reuters reported that the Financial Services Agency said it was still investigating the amount of losses, but cited an unidentified source that said the agency is concerned that the substantial losses it has found may be permanent. A BBC report said that regulators have been investigating AIJ since January and fear that most of the money is gone; if so, this would be one of the largest financial scandals of its kind.
The Tokyo-based AIJ, which has had its funds frozen and been ordered shut down for a month, operated like a hedge fund and pursued absolute returns regardless of market conditions. Corporate pension funds in Japan have been using hedge funds and other alternative investments since around 2005, looking for higher returns than near-zero interest rates and the weak outlook for Japanese stocks could provide long term.
AIJ's fund manager had claimed to prospects that it could provide cumulative returns of up to 240%. It began operations in 1989 and in the last 10 years expanded quickly thanks to its promises of a positive return despite down markets.
According to its filing with the industry association, its investment strategy was centered on shorting Nikkei 225 options and other equity and bond derivatives. In the filing it said, "We specialize in so-called alternative asset management, an alternative to the traditional investment assets of domestic stocks and bonds. That allows us to seek absolute and steady returns not tied to the direction of the markets."
Pension Fund Association data show that corporate pension funds have invested about 5% of their assets, some 60-70 trillion yen, in hedge funds. Should AIJ come up short, that trend could change. Mitsuhiro Arakawa, an executive consultant at Russell Investments, was quoted saying, "I don't think this will lead to a major withdrawal from hedge funds. But this may alarm many Japanese pension funds. I think they will do more thorough due diligence when adding a hedge fund to the portfolio."
The FSA, who said the company was unable to sufficiently account for the status of its
An unnamed FSA official was quoted saying at a news conference, "We have no information at this stage to raise doubts about any other asset manager. But we cannot just sit back and wait based on that assumption. We need to investigate everything all at once and as quickly as possible."
He added, "We believe AIJ's assets have lost some of their value. AIJ cannot explain its asset management situation. The size and cause of the losses are now under investigation."
As of the end of last March, according to a filing with the Japan Securities Investment Advisers Association, AIJ managed about 210 billion yen ($2.62 billion) across 123 contracts in Japan and elsewhere. The company is helmed by Kazuhiko Asakawa, a former employee of a securities firm.