Jurisdiction - Japan
Reports and Analysis
Japan – FSA’s Proposal To Prevent The Recurrence Of the AIJ Scandal And The Results Of Second Survey.

19 September, 2012

 

 

On September 4, 2012, the Financial Services Agency of Japan (“FSA”) published its proposal of measures to prevent the recurrence of the AIJ scandal while providing the opportunity to the public to provide their opinions regarding such measures by October 4, 2012. In addition to the foregoing, the FSA also published the interim results of the second survey that the FSA commenced this April regarding certain discretionary investment management companies (“DIMs”) selected by the FSA in accordance with the first survey.

 

 FSA’s Proposal to Prevent the Recurrence of the AIJ Scandal

 
Different from the normal protocol, the FSA published its proposals without a specific draft of the relevant regulations. The absence of this draft of the regulations may be due to the significant FSA concerns regarding the AIJ scandal and the FSA’s wish to consider as many ideas as possible prior to preparing a draft of the regulations. 
 
The FSA’s proposal consists of four parts: (1) establishing a system by which domestic trust banks can properly confirm the consistency of the fund NAV information provided by the administrator, the external auditor and the DIM; (2) improving the support system to assist clients (pension funds) to become aware of issues with respectto their investments; (3) revising the penalties and fines for certain illegal acts; and (4) reforming regulations governing the activities of DIMs generally.
 
(1) Establishment of a System by Which Domestic Trust Banks Can Properly Confirm the Consistency of the Fund NAV Information Provided by the Administrator, the External Auditor and the DIM
 
If a DIM enters into an investment management agreement with a pension
fund and also enters into a trust agreement with a domestic trust bank that
has a pension fund beneficiary, the DIM will be required to:
 
(a) Make the necessary arrangement so that domestic trust bank is able
to obtain the NAV of the fund directly from the fund administrator;
 
(b) Limit investments only into funds subject to external audits and make
the necessary arrangements so that the domestic trust bank is able to
obtain an authentic audit report; and
 
(c) Send the domestic trust bank the NAV information of the fund as indicated in the investment management reports delivered to clients.
 
Also, the domestic trust bank will be required to match the data prescribed in the three reports described in (a)~(c) above and report the result of such process to the pension fund clients.
 
(2) Improving the Support System to Assist Clients (Pension Funds) to Become Aware of Issues with Respect to Their Investments The FSA proposed the following four measures to support pension fund clients to become aware of relevant issues
with respect to investments:
 
(a) Increasing the information required to be described in the disclosure documents or the investment management reports that must be delivered to clients (such as information on the fund scheme, the calculation methodology of the NAV of the fund,
external audits, etc.);
 
(b) Requiring the delivery of the investment management reports more frequently (on at least a quarterly basis);
 
(c) Imposing tighter requirements for pension funds to meet the requirement to be a professional investor (tokutei toushika); and
 
(d) Requiring an investment manager (i) to notify its clients where there is a likelihood of a breach of its obligation to diversify investments, and (ii) to organize systems to explain risks to clients depending on their knowledge and experience.
 
(3) Revising the Penalties and Fines for Certain Illegal Acts More specifically, the FSA also proposed imposing heavier penalties on false statements or solicitations made by DIMs.
 
Acts Current Proposal
False statements
in the investment
management
reports
not more than
6 months penal
servitude or
not more than
JPY 0.5 million
penal fine
(for company:
not applicable)
not more than
3 years penal
servitude or
not more than
JPY 3 million penal
fine (for company:
JPY 300 million)
False statements
in the notice
with respect to
the solicitation
not more than
1 year penal
servitude or not
more than JPY 1
or 3 million penal
fine (for company:
not applicable or
JPY 200 million)
not more than
3 years penal
servitude or
not more than
JPY 3 million penal
fine (for company:
JPY 300 million)
The use of
fraudulent means
to execute an
investment
management
agreement
not more than
3 years penal
servitude or
not more than
JPY 3 million penal
fine (for company:
JPY 300 million)
not more than
5 years penal
servitude or
not more than
JPY 5 million penal
fine (for company:
JPY 500 million)

 

 (4) Reforming Regulations Governing the Activities

of DIMs 
 
The FSA considered reviewing and reforming the manner to regulate, supervise and inspect DIMs and proposed the following measures:
 
(a) Increasing the information required to be described in annual business reports (such as information on the fund scheme, the calculation methodology of the NAV of the fund, external audits, etc.);
 
(b) Strengthening the regulators’ supervision responsibilities for DIMs (such as revising the guidelines, implementing offsite monitoring corresponding to risks a DIM commonly takes, etc.);
 
(c) Implementing intensive inspections and setting up and utilizing the “Pension Investment Hotline”; and
 
(d) Reinforcing the system for inspection and supervision (such as information gathering, monitoring, staffing, etc.) of asset managers generally. 
 
In addition, on September 4, 2012, the Japan Investment Advisers Association (“JIAA”) published their plan to prevent recurrence of the AIJ scandal. The JIAA plan is consistent with the FSA’s proposal.
 
Results of Second Survey
 
The FSA also published an interim report regarding the results of the second survey of asset managers in Japan commenced in April of this year.
 
In the report, the FSA first explained the outline of the selected DIMs that were subject to the second survey. More than 90% of the selected DIMs have an AUM of less than JPY 500 billion and a half of the selected DIMs have an AUM of less than JPY 50 billion.
 
Of approximately 40% of the selected DIMs, more than 80% of their clients are pension funds. 36.3% of the selected DIM are subject to external audit and 93.1% of the DIMs are members of the JIAA. Second, the report outlines the extent of control that such DIMs had with respect to third parties particularly in circumstances where the selected DIMs incorporated foreignfunds into their portfolios. 26.5% of the selected DIMs are controlled by the investmentmanager that manages the foreign funds.
 
On the other hand, 96.1% of the selectedDIMs appoint an independent administrator to calculate the relevant fund’s NAV. 97.1% of the selected DIMs answered that their underlying client or trust bank is registered as the unit holder of the foreign fund (this suggests that the AIJ arrangement where the registered holder was the distributor securities firm is not so common in practice).
 
Lastly, the reports provided information on the status of investment management and strategies being employed. 21.6% of the selected DIMs incorporate collective investment scheme interests into their portfolios and only 9.8% of the selected DIMs incorporateportfolios containing un-listed stocks.
  

  

For further information, please contact:
 
Christopher Wells, Partner, White & Case
cwells@whitecase.com
 
Koichiro Ohashi, Partner, White & Case
kohashi@whitecase.com
 
Thomas LaMacchia, Partner, White & Case
tlamacchia@whitecase.com
 
Tomoko Fuminaga, Partner, White & Case
tfuminaga@whitecase.com
 
Norifusa Hashimoto, Partner, White & Case
nhashimoto@whitecase.com
 

 

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