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Claims against fund managers on the rise, says

Marsh
By LYNETTE KHOO

THERE has been a spike in claims of mis-selling and negligence against fund managers as
more investors turn to lawsuits when they see their asset values plunge.

Capital Market Services (CMS) licence-exempt fund managers should check their
professional liability coverage to insure against these claims, says Marsh, a global insurance
broker and risk adviser.

Gary Chua, Marsh's financial and professional risks practice leader for Asean, told BT that
some insurers are reporting a 200 per cent increase in claims reported by fund managers over
the past 12 months.

'Previously, they'd hardly see any claims reported but because of the current crisis, they are
seeing a noticeable trend of increasing reported claims involving their policy holders,' Mr
Chua said.

Premiums for such insurance have also gone up as a result of higher underwriting fees.

CMS-licensed fund managers are required to purchase professional indemnity insurance as


part of licensing requirements of the Monetary Authority of Singapore. There are over 500
CMS licence-exempt fund managers, including hedge funds and those managers with 30 or
fewer clients, who are not required to buy such insurance.

But being exempt from CMS licensing requirements does not exempt the fund manager from
potential liability arising from investor lawsuits or regulatory action, Mr Chua cautioned.
'Clients are asking more questions on what is happening to their investment portfolios. This
cuts across the entire fund management industry.'

Smaller fund managers may be more exposed as they are less able to withstand the shock of a
major lawsuit or regulatory action.

Recently, a former fund manager, Lee Chong Min, and his boutique fund management firm,
CMIA Capital Partners, were sued by CMIA China Fund II over an investment in the
insolvent steel coil-maker FerroChina.

The fund is seeking unspecified damages but the losses which it suffered could possibly run
into hundreds of millions of dollars.

In the United States, the problem appears even more pronounced, with investor suits against
fund managers, asset managers and banks that placed money or advised clients to invest
directly or indirectly in the Bernie Madoff Ponzi scheme multiplying.

A professional indemnity insurance protects the fund manager from claims for the financial
loss arising from an act, error or omission in the course of providing investment management
advice.

Substantial defence and legal representation costs incurred in a lawsuit or a civil charge can
be covered by professional indemnity policies. Regulatory fines are not insurable.

'We have seen a five-fold increase in queries from CMS licence-exempt fund managers,
driven by the intense focus on risk management within the financial services industry - no
matter the company size,' Mr Chua said.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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