Rein in investment advising firms

The Securities and Exchange Surveillance Commission on March 23 raided the head office of AIJ Investment Advisors Co. over the loss of nearly all the ¥145.8 billion entrusted to it by corporate pension funds. The SESC must do its best to uncover in detail the entire scope of AIJ’s alleged wrongdoings. The Financial Services Agency and other government authorities concerned also should review guidelines for investment advising firms and strengthen their oversight of them.

The SESC said that 84 corporate pension funds had entrusted ¥145.8 billion to AIJ, and that the latter incurred ¥109.2 billion in investment losses. It added that AIJ now has only ¥8.1 billion in cash and deposits, and also has ¥2.1 billion in investments outstanding in overseas funds.

Many problems have surfaced with the AIJ incident. Of the 84 corporate pension funds that had entrusted their assets to AIJ, 73 have been set up by medium-size and small enterprises. It is feared that some of these firms will go bankrupt because they do not have enough funds to make up for the losses caused by AIJ.

After Japan’s economic bubble burst in the early 1990s, interest rates went down and stock prices stagnated at low levels. Against this backdrop, AIJ lured corporate pension funds — most of which lack the ability to examine the activities of investment advising firms — by promising high investment returns. AIJ is suspected of having violated the Financial Instruments and Exchange Law by falsifying its investment performance data and making it appear as if it was generating high returns to lure corporate pension funds to sign discretionary investment contracts with it.

It also turns out that many former officials of the now-defunct Social Insurance Agency landed jobs at 47 corporate pension funds. These funds entrusted their assets to AIJ because these former bureaucrats recommended that they do so.

Although the FSA had received tipoffs alleging problematic operations by AIJ from 2005 onward, it did not act until January when the SESC carried out an inspection of AIJ.

Since 2007, investment advising firms have not been required to have licenses. Outside audits are not mandatory and these firms are not required to include numerical data to prove the health of their operations in their reports to the FSA. The government must listen to criticism that it has committed omission. It must carry out necessary reforms to improve the operations of investment advising firms.