Japan: The fair disclosure rule

Author: | Published: 24 Apr 2017
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Nagashima Ohno & Tsunematsu

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On March 3 2017, the bills for amending the Financial Instruments and Exchange Act (the Amendment Bills) were submitted to the Diet. They set out some basic rules surrounding the fair disclosure rule, the introduction of which is in line with an international trend – the US and EU have already introduced similar disclosure rules. The main purpose of the fair disclosure rule is to ensure that when a company provides inside information to a third party before its public disclosure, such information is also provided to other investors.

Under the Amendment Bills, when a listed company (including an investment corporation) or an asset management company of an investment corporation or their officers provide unannounced material information about operations, business, or assets of the listed company that would materially influence investors' investment decisions to (i) financial services providers etc such as securities companies or (ii) traders or investors who are likely to conduct sale and purchase transactions of listed securities based on some of this material information, a listed company has to announce material information via the internet at the same time of the provision of material information. However, this rule doesn't apply where a recipient of material information is obligated not to leak material information until it is announced, and not to conduct sale and purchase transactions of listed securities pursuant to a contract, laws and regulations.

A listed company also has to announce material information promptly after, for instance, it recognises (i) a recipient of material information has committed the above obligations, or (ii) information provided by a listed company has fallen within the scope of material information even if the listed company was unaware it was material information.

Moreover, for the fair disclosure rule to be effective, the government has the authority to instruct a listed company to announce material information when the government finds that material information has not been announced. If a listed company doesn't follow these instructions, there is a possibility that criminal sanctions, such as a financial penalty, may be applied to it.

Though the Amendment Bills might be subject to change based on discussions in the Diet and the details of the fair disclosure rule are to be set out in government ordinance and cabinet office ordinance related to the Financial Instruments and Exchange Act, its introduction is expected to affect securities transaction practice in the Japanese securities market.

  Shohei Naka