Japan insider trading: government calls for market advice on tougher rules

Author: | Published: 14 Jun 2012
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Japan's government will begin market consultations on Friday to determine how best to strengthen insider trading rules, a ruling party lawmaker has said.

Insider trading ahead of public share offerings has emerged as a widespread problem in Japan in recent months. Since March, Japan's Securities and Exchange Surveillance Commission (SESC) has fined three investment firms in a total of four insider trading cases as part of a wider probe into the practice.

In the latest case, revealed last week, the SESC issued its harshest penalty yet against US broker-dealer First New York Securities with a $185,000 fine.

But the Democratic Party's Shinsuke Amiya told IFLR the punishments were still too gentle.

"Recent events have shown that this not a problem limited to Japanese companies but US ones also," he said.

"It has highlighted that our sanctions have been too light," he said. "That's why this kind of scandal is happening repeatedly. Insider trading laws have been amended in the past but clearly not enough."

Understanding the scale of the problem had to be the first priority, he said.

To that end, weekly meetings would be held from Friday with securities companies, fund managers and investment banks in Japan, said Amiya, who is also a member of a working group formed to look at strengthening insider trading regulations and a former vice chairman of Merrill Lynch Japan.

It is hoped such consultations will help determine what exactly is going on and what sanctions need to be instigated in order to stamp out the practice.

Market participants including investors, underwriters and international institutions would be consulted with first, he said.

"We'd like to hear their opinion on how we should react to this," he said.

He wanted rules that would strip offenders of their operating licenses to be considered and the establishment of a new fining system to complement to the modest one already in place.

"If a person is making money by using insider information they face a fine and other penalties," he said. "However those not making money face no real penalities. That's not right."

The fines have also been too small because they have been based on the estimated commission from investors in those funds and not on the profit made.

Baker & McKenzie's Tokyo-based litigation and dispute resolution group co-chair, Haig Oghigian, agreed the regulator had to sharpen his pencil.

"This is part of the SESC joining the mainstream of other regulators' vigilance," he said. "I'm hopeful that the tighter regulations and robust fines are focused on financial institutions across the board (including Japanese ones)."

Market consultations are expected to be completed, and opinions finalised, in two months.