<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Can a Madoff-like scandal happen here?
</TR><!-- headline one : end --><TR>Strict asset, base capital requirements and audit controls minimise risks </TR><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Gabriel Chen
</TD></TR><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->THE short answer is, yes, a Madoff mega scandal could happen in the fund management industry here, but strict oversight minimises risk, say industry watchers.
Yet, while safeguards can be tight and regulators vigilant, the unthinkable can still happen when it comes to fraud.
Wall Street money manager Bernard Madoff's business was under the purview of the United States Securities and Exchange Commission - yet the country's top watchdog appeared to have no clue that one of history's greatest Ponzi schemes was under way.
Such schemes involve investors being paid with investments of newer clients.
And scams do happen in Singapore.
In the widely publicised Gemini Chit Fund scandal in the 1970s, over 40,000 people - members of the chit fund - lost an estimated $50 million after being promised high returns on their investments.
Today, Singapore's Securities and Futures Act calls for a single Capital Markets Services licence that covers various regulated activities like stock and futures trading, and fund management.
Certain requirements must be fulfilled before a fund management firm gets the okay, including a stipulated minimum assets under management, a minimum base capital requirement that varies according to the activity dealt with, as well as a proven track record.
For instance, applicants hoping to carry out the regulated activity of fund management - other than those in the boutique category - need global funds under management of at least $1 billion.
Even boutique fund managers must have at least $100 million in funds under management, in Singapore or elsewhere. Also, the boutique firm must employ at least two fund managers, at least one of whom must be a substantial shareholder.
While it is hard to compare regulations across different jurisdictions, Singapore's strict asset and capital base requirements for fund managers mean it is generally harder to launch a retail fund here than in the US or Hong Kong, a hedge fund manager said. There are other checks and balances in place to ensure no one man can run as massive a scam as the one Madoff pulled off for so many years.
'The (Monetary Authority of Singapore) conducts on-site inspections. We also have internal and external auditors,' a local fund manager said.
Meanwhile, if you have unit trusts managed by asset management firms, there are safeguards to ensure the funds do not just disappear overnight.
The assets are held on behalf of unit-holders by custodians, such as BNY Mellon Asset Servicing. This means even if the custodian banks go bust, the assets still belong to unit-holders.
The regulatory set-up also includes trustees, like banks, that have a 'policing' role. They check if fund managers are valuing the assets correctly and examine what they are investing in.
Some industry watchers think firms under the Exempt Investment Adviser (IA) scheme may be more prone to a Madoff incident, as they are not licensed. Exempt IAs are restricted to providing advisory services (including fund management) to high net worth investors, whether corporations or wealthy individuals.
Such investors are presumed to know enough about financial investments to entrust funds to unlicensed fund managers.
The argument goes that the level of transparency may be less apparent for such firms as they do not need to satisfy MAS requirements for paid-up capital, assets under management and track record, compared with licensed fund managers.
A private equity manager, whose firm is an exempt IA, disagrees. He said when it comes to fraud, a Madoff could happen to even licensed fund managers here.
An MAS spokesman said: '(We) continue to closely monitor international developments and will consider changes as appropriate to our regulatory approach in consultation with market participants.'
Fund managers say the lesson from the Madoff scandal is that investors should not be complacent, even in Singapore.
Time-tested principles - diversification, not investing in something you do not understand and knowing there is no such thing as a free lunch - still apply.
[email protected]
<HR width="50%" SIZE=1>
EXERCISE CAUTION
'Due diligence and streetwiseness are the only two ways to prevent being cheated. Regulation is to prevent systematic failure and no amount of regulation can prevent fraud.' An investment manager
</TR><!-- headline one : end --><TR>Strict asset, base capital requirements and audit controls minimise risks </TR><!-- Author --><TR><TD class="padlrt8 georgia11 darkgrey bold" colSpan=2>By Gabriel Chen
</TD></TR><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->THE short answer is, yes, a Madoff mega scandal could happen in the fund management industry here, but strict oversight minimises risk, say industry watchers.
Yet, while safeguards can be tight and regulators vigilant, the unthinkable can still happen when it comes to fraud.
Wall Street money manager Bernard Madoff's business was under the purview of the United States Securities and Exchange Commission - yet the country's top watchdog appeared to have no clue that one of history's greatest Ponzi schemes was under way.
Such schemes involve investors being paid with investments of newer clients.
And scams do happen in Singapore.
In the widely publicised Gemini Chit Fund scandal in the 1970s, over 40,000 people - members of the chit fund - lost an estimated $50 million after being promised high returns on their investments.
Today, Singapore's Securities and Futures Act calls for a single Capital Markets Services licence that covers various regulated activities like stock and futures trading, and fund management.
Certain requirements must be fulfilled before a fund management firm gets the okay, including a stipulated minimum assets under management, a minimum base capital requirement that varies according to the activity dealt with, as well as a proven track record.
For instance, applicants hoping to carry out the regulated activity of fund management - other than those in the boutique category - need global funds under management of at least $1 billion.
Even boutique fund managers must have at least $100 million in funds under management, in Singapore or elsewhere. Also, the boutique firm must employ at least two fund managers, at least one of whom must be a substantial shareholder.
While it is hard to compare regulations across different jurisdictions, Singapore's strict asset and capital base requirements for fund managers mean it is generally harder to launch a retail fund here than in the US or Hong Kong, a hedge fund manager said. There are other checks and balances in place to ensure no one man can run as massive a scam as the one Madoff pulled off for so many years.
'The (Monetary Authority of Singapore) conducts on-site inspections. We also have internal and external auditors,' a local fund manager said.
Meanwhile, if you have unit trusts managed by asset management firms, there are safeguards to ensure the funds do not just disappear overnight.
The assets are held on behalf of unit-holders by custodians, such as BNY Mellon Asset Servicing. This means even if the custodian banks go bust, the assets still belong to unit-holders.
The regulatory set-up also includes trustees, like banks, that have a 'policing' role. They check if fund managers are valuing the assets correctly and examine what they are investing in.
Some industry watchers think firms under the Exempt Investment Adviser (IA) scheme may be more prone to a Madoff incident, as they are not licensed. Exempt IAs are restricted to providing advisory services (including fund management) to high net worth investors, whether corporations or wealthy individuals.
Such investors are presumed to know enough about financial investments to entrust funds to unlicensed fund managers.
The argument goes that the level of transparency may be less apparent for such firms as they do not need to satisfy MAS requirements for paid-up capital, assets under management and track record, compared with licensed fund managers.
A private equity manager, whose firm is an exempt IA, disagrees. He said when it comes to fraud, a Madoff could happen to even licensed fund managers here.
An MAS spokesman said: '(We) continue to closely monitor international developments and will consider changes as appropriate to our regulatory approach in consultation with market participants.'
Fund managers say the lesson from the Madoff scandal is that investors should not be complacent, even in Singapore.
Time-tested principles - diversification, not investing in something you do not understand and knowing there is no such thing as a free lunch - still apply.
[email protected]
<HR width="50%" SIZE=1>
EXERCISE CAUTION
'Due diligence and streetwiseness are the only two ways to prevent being cheated. Regulation is to prevent systematic failure and no amount of regulation can prevent fraud.' An investment manager
