2Programme4:30pm Registration5:00pm Welcome address from Andrea Sorani, Deputy Chairman of AIMA Singapore5:10pm Liability trends affecting the fund management industry- lessons learnt. Speaker – Arati Varma, Underwriting Manager for South East Asia, India and Middle East, Chubb Specialty Insurance5:30pm Selection, appointment, monitoring and risk management of local custodians around the globe. Speaker - Paul Hedges, APAC Head of Network Management and Market Intelligence, HSBC Securities Services5:50pm Break for Tea and Coffee6:05pm International regulatory and litigation risk in the alternative asset management sector Speaker - Lorraine Adlam, Group Chairman and Financial Institutions Practice Lead, Howden Insurance Brokers6:25pm Challenges you may face as a fund manager in Singapore Speaker - Ho Han Ming, Partner, Clifford Chance and Chairman of AIMA Singapore6:45pm Wrap up and Q&A7pm Networking drinks
3Speaker Profiles Arati Varma, BA (Econs), MBA (Banking and finance) Regional Manager, Southeast Asia Chubb Specialty Insurance Arati is the Underwriting Manager for South East Asia, India and Middle East for Chubb’s Specialty Insurance (CSI), a division within Federal Insurance Company, Singapore (part of the Chubb Corporation – a Fortune 500 Company listed on the NYSE). The division is responsible for structuring specialty financial and liability insurance solutions such as Directors and Officers Liability Insurance, Professional Liability, Fidelity risks, Bankers Blanket Bonds for financial institutions, Non Profit Organisation Management Liability, Commercial Crime and Kidnap and Ransom in the South East Asia region, India, Middle East and Mauritius. She specialises in the asset management class of business, which includes venture capital, private equity, unit trusts, hedge funds, real estate funds and investment companies’ asset protection. Arati joined Chubb in 2004. In her previous role in Strategic Marketing, she has worked on a host of strategic issues across Chubb’s markets in the Asia Pacific region including China, India, Japan and Australia. Her experience prior to joining Chubb has been in auditing, consulting and banking in India and Malaysia.
4Speaker Profiles Paul D. Hedges. Chartered FCSI Head of APAC Network Management & Market Intelligence HSBC CISI Regional President, ASEAN, CISI (UK) Main Board Director An experienced securities industry professional, Paul is a regular conference speaker, panelist and frequent contributor to the industry media. Based in Singapore since 2005, Paul is currently responsible for HSBC’s APAC Securities & Cash Network Management & Market Intelligence function, covering Group businesses for Global Banking & Markets, Global Transaction Bank, Global Private Bank and Global Asset Management. Prior to this, Paul was the Asia Regional President of the Chartered Institute for Securities & Investment (CISI). Paul also has experience as COO of a boutique alternative investment firm after having been Regional Sub- Custody Product Head for JPMorgan Chase Bank N.A. where he was developing an Asia Pacific business from Singapore. Paul moved to Asia in 2003 as the Global Head, Securities Services with Standard Chartered Bank, where he was responsible for the end to end product and business segment, overall strategic direction, leadership and development of Asian Regional Securities Services, with its customer base extending to North America, Europe, Middle East and Asia. Paul spent his early career in a number of roles including Director, Worldwide Agent Network with Royal Trust / Royal Bank of Canada, Associate Director with Continental Bank N.A and a full range of international banking roles with Lloyds Bank PLC, London. Paul is a Chartered Fellow of the Chartered Institute for Securities & Investment, a main Board Director, he sits on the Membership and International Committees and was a Director of the Hong Kong Securities Institute in years 2003 and 2004. His personal interests include travel, languages, DIY, gardening, and music.
5Speaker Profiles Lorraine Adlam Chairman and Head of Financial Institutions Practice Howden Insurance Brokers Ltd Lorraine has over 30 years experience in the London insurance market as both a broker and underwriter, specialising in professional/management liability and crime insurance for financial institutions. She started her career on the Sedgwick (now Marsh) graduate training scheme and has held senior positions within Aon, the Corporation of Lloyd’s, and Novae PLC. Lorraine is Chairman of Howden Insurance Brokers Limited and Financial Lines Practice Leader for their global operations, working closely with their specialist asset management team. She is a recognised market authority on financial institution policy wordings and a frequent speaker on Directors’ and Officers’ Liability insurance for investment funds. More recently Lorraine provided advice on asset manager professional indemnity insurance to the BVCA, EVCA and AIMA as part of their response to “ESMA’s draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive in relation to supervision and third countries”. The Consultation is part of the European Securities and Markets Authority’s (ESMA) work on providing technical advice to the European Commission on the detailed implementing measures (Level 2) that should form part of the AIFMD framework
6Speaker Profiles Han Ming Ho Partner Clifford Chance • Han Ming Ho has experience in fund formation matters. He regularly advises fund managers on the establishment of companies in Singapore as well as the establishment, structuring and registration of their funds in Singapore and various offshore jurisdictions. In addition, Han Mings on regulatory expertise includes advising compliance and licensing issues relating to Singapore securities and financial advisory law as well as, liaising regularly with the Singapore regulators. Chairman of AIMA (Alternative Investment Management Association), Singapore National Group Member of the Regulatory Committee of IMAS (Investment Management Association of Singapore) Director of RICE (Returns Invested in Children and Education), a charity that provides financial assistance to grassroots level, cause-oriented groups that otherwise have difficulty finding funding
Alternative Asset Management ForumLiability Trends in Today’s Market … Lessons Learned Arati Varma 17 November 2011
Today’s Objective• Impact of the Global Financial Crisis• Key Litigation Trends What events lead to lawsuits Who is getting sued Who is suing & why• Exposures and Claims 8
Alternative Asset Management ForumThe views, information and content expressedherein are those of the author and do notnecessarily represent the views of any of theinsurers of The Chubb Group of InsuranceCompanies. Chubb did not participate in andtakes no position on the nature, quality oraccuracy of such content. The informationprovided should not be relied on as legaladvice or a definitive statement of the law inany jurisdiction. For such advice, an applicant,insured, listener or reader should consult theirown legal counsel. 9
Impact of the Global Financial Crisis• Increased regulation• Pressure on fees• Smaller funds struggling, while larger funds are attracting more capital• Increased demands and scrutiny by investors• Flight to Quality / Survival of the Fittest 10
What events Lead to Law Suits Everyday activities, such as… • Back-office support functions • Communications with third parties • Spending your time wisely 11
Trends: Who is Getting Sued? Everyone / Everything • Fund • Firm individuals as PC directors • Firm individuals • Management company • Fund management entity 12
Trends: Who is Suing & Why?• Clients and fund investors/shareholders• Employees and former employees• Companies invested in and their other stakeholders • Management • Shareholders • Creditors• Other: Competitors, Service Providers• Regulators 13
Trends: Who is Suing & Why?Typical Allegations• Breach of fiduciary duties• Fraud• Breach of contract• Misrepresentation 14
Investor Claims• Most investor claims follow poor investment results.• Investor actions don’t just occur when a fund has a major blow up. Other potential scenarios include misrepresentations, disputes over redemptions, valuation and pricing, fees, and undisclosed conflicts of interest.• Typical claims are individual written demands, arbitrations and sometimes, lawsuits.• Operational errors are a common claim trigger.• Most frequent claimants are individual investors and public pension funds, along with fund of funds or family offices in the hedge funds sector.• Most investor claims are settled. 16
Regulatory Claims• Most policies cover formal investigations by regulators against both entities and persons.• Its not just the domestic regulator, but also any securities exchange, self regulatory organizations, and foreign regulators.• Insider trading witch hunt.• You don’t have to do anything wrong to be investigated.• Legal expenses for investigations are very costly. 17
Key Issues to Consider• Market externalities• Allegations are free to make• Defense costs• Knock-on effects by other stakeholders• Consequences of wrongful acts, negligence, or even fraud by a third party• Growing pressure from regulators and a rapidly changing regulatory environment• Personal assets of the leadership team at risk• Insurance as a risk management tool 18
20 Sub-custody NetworkPaul D. HedgesHead of Asia Pacific NetworkManagement & Market Intelligence
21 Structure: Network Management & Market Intelligence (N2MI) Global Head of Network Management a Market Intelligence (N2MI) Market Intelligence & Network Network Network Market Strategy Management Management Management Information and Asia Pacific Americas EMEA Support Market Infrastructure Core network management functions Market Information Support analysis Analysis (MIA) Due diligence and RFP management Industry Initiative Analysis Agent risk & performance management Agent Fees Management Project Risk Analysis – Management Sub-custodians, Futures brokers, Collateral managers, MIS & Reporting Precious metals vaults Co-ordination External Relations Operational Efficiency Office Infrastructure Risk Management A/C Opening and Closure Management – Depositories, Clearing Houses, Central Counterparties Due Diligence Support Financial Legal documentation facilitation Management Market summaries, profiles Troubleshooting and escalation and news
22 Sub-Custodian Selection1. Identify suitable providers: Main Criteria I. Quality of Agent Bank (capital, credit standing and liquidity) & Service, Management and Staff II. Commitment to Custody Business III. Pricing IV. Best in each market approach V. Group vs Non-Group VI. Approved Banks as defined by FSA (no brokers or investment banks)2. RFP questionnaire – over 200 questions3. Scoring process On-site due diligence visit4. Re-score5. Risk Assessment: All new appointments go through a rigorous selection, risk assessment & approval process via the Agent Risk Assessment Team with final approval by the Global Head of Credit & Risk: I. Credit risk assessment – using HSBC internal Credit Risk Rating (CRR) system (approved by UK regulator, FSA) II. Operational risk assessment from due diligence (people, processes, systems, external suppliers) III. Country risk: using HSBC country classification IV. Market infrastructure risk: based on local legal opinions obtained V. Legal risk: based on legal contracts in place VI. Overall risk rating given which determines whether appointment can be made6. Approval Process: Final approval provided by the N2MI Governance Panel, formed of senior executives from Compliance, Credit & Risk, Legal, GTB (HSS + PCM), PB and GBMThe Policy is to select the most appropriate provider that meets all requirements. Group or non-Group.
23 Ongoing Sub-Custodian Performance Monitoring1. Biennial on-site due diligence visit – Risk based approach for Group & non-Group suppliers – Agreed and Monitored by Compliance, Agent Risk Assessment Team & Governance Panel2. Service Level Agreements: setting out agreed performance standards3. Ongoing financial health checks: undertaken by HSBC Credit & Risk using CRR system4. Annual reports: reviewed by Global Relationship Managers and Group Credit & Risk5. Annual external audit reports6. Active Performance through Quarterly Agent Bank scorecards – Monthly Agent Bank Issues Meeting – feedback from all global business lines7. League tables – external benchmarking to industry performance surveys
24 Legal Opinions External legal opinion obtained for each market on a biennial basis – An annual exercise is undertaken with 50% of markets being covered in one year and the remaining 50% in the following year – Baker & McKenzie appointed for the legal opinion exercise Standard questions and topics determined by HSBC: Main Criteria – 17f-5 and 17f-7 eligibility – Recognition of Trust and Nominee concept – The optimum registration and account structure that a sub custodian could adopt in the local market – The level of protection afforded to HSBC’s clients’ assets in the event of insolvency of the local CSD, sub custodian or HSBC Segregation of assets (HSBC & sub-custodian) – Any controls and/or regulation that would affect the of ability of HSBC to recover it’s clients’ assets – Improvements that could be made to HSBC’s current approach Supplementary market specific questions and topics determined by HSBC: Potential Reasons – Regulatory or legal changes – Operational or market practice changes Foundation Memorandum drafted by HSBC Legal Department and issued to Baker & McKenzie – Full instruction letter submitted by HSBC Legal department
25 Agent Bank Network HSBC Securities Services (HSS) covers the full range ofinstruments in 95 markets worldwide through a network of sub-custody agents. The full Network incorporates 42 HSBC entities and 53 non-HSBC entities.
Asset Management Sector Specialists• Fund Manager clients in Asia, Middle East, N America, Continental Europe, UK• Fund clients in Cayman, Mauritius, Dublin, Channel Islands, Luxembourg, UK• Our credentials in the UK 700+ Investment fund and manager clients 30% of the Top 50 European Hedge Fund Managers (Hedge Fund Journal) 48% of UK Investment Trusts with AIC membership 36% of London Private Equity/Venture Capitalist market 25% of the directly regulated IFA market Asset management claims experience: 121 open claims 248 closed claims
Asset Management Claims experience Analysis of Hedge Fund claims 2010 Claimant types Nature of allegation Employee Investee 4% Company Other 7% 16% Regulator Other 14% Regulatory 5% 16% Breach ofLiquidator Fiduciary Duty 2% Investor 55% 68% Fraud 9% Employment Practices Matter 4%
32Corporate Governance in Hedge Fund InvestorsSurvey 2011 (Conducted by Carne Global Financial Services)• Top 100 allocators globally were approached.• Responses received from allocators accounting for US$600 billion in allocations, approx. 30% of all hedge fund AUM PENSION FUNDS 6% CONSULTANTS W EALTH MANAGERS 10% 24% INSURANCE COMPANIES 6% INVESTMENT BANKS FUNDS OF FUNDS 10% 44%
Corporate Governance in Hedge Funds “91% agreed poor governance would deter them from investing, even if other operational and performance criteria were met” “76% have already decided against investing on at least one occasion due to governance concerns” “Allocators are more content with governance levels on fund boards promoted by European fund managers than by n American or Asia Pacific managers “ Carne Global Financial Services survey 2011
Corporate Governance in Hedge Funds -Asia Specific issues for Asian managers are: “Lack of transparency and willingness to provide information” “Lack of independent directors on boards with directors lacking the requisite skills and experience or holding too many directorships” Carne Global Financial Services survey 2011
UK FSA fines against regulated firms 2008 £4.4m 2009 £27.3m 2010 £33.6m 2011 £96.7m 12 months to 31st March
Mitigation of litigation and regulatory risk through insuranceRisk Insurance SolutionRegulatory investigations Covered under PI and D&O policiesLitigation risk PI and D&O policies protect fund management entities against allegations of wrongful acts in the provision of investment services and manager and fund directors against claims for breach of directorial duties. POSI policies cover allegations of misstatement in prospectusesInvestment risk Transactional liability insurance can cover claims for breach of representation or warranty arising out of a corporate transaction