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Japan Ruling Party to Seek External Auditors for Asset Ma

AIJ Lured Nagano Pension Fund With Nomura Pedigree
A man walks past the building housing the AIJ Investment Advisors Co. headquarters in Tokyo. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japan’s ruling party is seeking to amend laws to require stricter oversight of asset management firms in a bid to avoid a recurrence of the AIJ Investment Advisors Co. case.

The Democratic Party of Japan set up a panel that met today to discuss measures including requiring external audits for privately owned asset management firms. It will also consider expanding responsibilities of trust banks and life insurers as custodians of fund assets, Tsutomu Okubo, a member of the subcommittee, said in an interview in Tokyo yesterday.

Japan’s financial regulator yesterday began its biggest investigation of asset managers following the Feb. 24 suspension of AIJ, which has failed to account for the more than $2 billion it oversaw for clients, including pension funds. The case has raised concern over the safety of retirement assets in Japan, where more than a fifth of the population is over 65.

“The AIJ issue affects 880,000 people and can’t be ignored,” Renho, a former government revitalization minister who is leading the panel, told reporters in Tokyo today after the meeting. “We’ll do what we can to ease public concern over their pension money,” said Renho, 44, who goes by one name.

The panel, made up of 10 politicians from Prime Minister Yoshihiko Noda’s DPJ, will also discuss whether the Financial Services Agency should hire inspectors with backgrounds in the hedge fund industry, said Okubo, a former Morgan Stanley executive.

May Be Insufficient

Expanding monitoring within Japan alone may be insufficient because asset managers often allocate clients’ money to funds offshore, said Toshiyuki Maeda, head of financial research division at NLI Research Institute. Custodians in Japan rely on statements forwarded by their counterparts abroad, he said.

“There would be a bottleneck or loophole even if Japan tightens regulations and local trust banks increase their oversight,” Maeda said. “Instead of tighter local regulation, alliances between countries may be needed as a decisive step.”

At least one of AIJ’s funds, AIM Millennium, was registered in the Cayman Islands, according to presentation materials provided to a pension fund that were obtained by Bloomberg News.

AIJ had 122 contracts with domestic corporate pensions and one with a foreign investor as of March 2011, according to filings with Japan Securities Investment Advisers Association. The Tokyo-based firm managed 185.3 billion yen ($2.3 billion) of clients’ assets as of that date, labor ministry figures show.

Amendment Bill

Regulators have determined that AIJ currently holds about 4 billion yen of cash and deposits and it’s unclear what happened to the remaining assets, the Nikkei newspaper reported today, citing securities investigators.

Okubo, 50, expects a bill to amend the Financial Instruments and Exchange Law will win Cabinet approval as early as mid-March and then be sent to the Diet. Under the current legislation, closely held asset management firms don’t need to hire external auditors to review their business reports.

“The social impact from the AIJ issue is huge, and we want to avoid a second or third case like this,” Okubo said. “We need a swift remedy to prevent a repeat of this.”

A total of 265 asset managers nationwide will submit status reports to the FSA by March 14, the agency said yesterday. The reports must contain details of a firm’s operations, contracts and their amounts, and any past complaints from customers.

Based on the responses, the regulator will compile a shortlist by late March of companies that may need extra investigation, a senior FSA official said at a press briefing on condition of anonymity because of the agency’s policy.

Financial Services Minister Shozaburo Jimi pledged this week to consider revamping the inspection and supervision of pension asset managers, saying his agency won’t rule out any step to prevent cases like AIJ’s.

AIJ hasn’t been accused of wrongdoing following its suspension. Any action against it depends on the findings by the Securities and Exchange Surveillance Commission, the financial watchdog under the agency, Jimi said on Feb. 28.

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