Akimoto Kawamura of Atsumi & Sakai examines Japan’s legal registration requirements for high frequency traders, investment managers and investment advisors that use fintech in Japan
In Japan, the major areas in the financial services industry include the financial instruments business, banking and insurance. The financial instruments business is regulated by the Financial Instruments and Exchange Act (FIEA) and specifically consists of:
- Type 1 businesses: the sale and trading of securities and derivatives;
- Type 2 businesses: investments in trusts (excluding mutual funds, which fall under Type 1 businesses), partnerships; and limited liability partnerships, etc.;
- Investment management businesses; and
- Investment advisory and agency businesses
In order to run a financial instruments business, an entity must be registered under the FIEA as a financial instruments business operator. The registration requirements vary, depending on which category of the financial instruments business an entity is operating in. Broadly speaking, the major players in Japan’s financial instruments business are securities companies (broker/dealers and investment banks) and investment/asset management or advisory companies.
In Japan, the fintech focus is currently directed towards banking activity (remittance, settlement, lending, etc.). In the financial instruments business, however, the following two segments are noticeable.
High frequency trading
Algorithmic trading accounts form a significant part of the trading activity on Japan’s exchanges (most noticeably, on the Tokyo Stock Exchange (TSE)). Algorithmic trading places a huge number of orders on the exchanges via broker/dealers and the orders are placed instantly because algorithmic trading accounts benefit from direct market access to the exchanges. Consequently, algorithmic trading activities sometimes significantly impact, in particular, an exchange’s price formation functions.
In order to regulate such activities, in 2018 the Financial Services Agency of Japan (JFSA) introduced registration requirements for high-speed traders. Stated simply, registration as a high-speed trader is required when - for the purchase and sale of securities or derivatives or the entrusting of these transactions, the determination on performance is automatically made by an electronic data processing system and the provision of information to an exchange is made by means of information and communications technology as a method for cutting the time normally required for the provision of information to the exchanges.
Even a business which does not have an office in Japan is subject to this registration requirement if it places orders to be executed on exchanges in Japan. In such instances, a high-speed trader must appoint an attorney-in-fact in Japan. The attorney-in-fact assumes the role of primary contact with the JFSA. As of June 20 of this year, 43 businesses were registered as high-speed traders and only one company has its own office in Japan; the other 42 do not have offices in Japan.
Investment management/advisory and agency businesses
Recently, some investment management businesses have been marketing ‘robo advisors’ which use fintech (ie, AI) to manage the investment of customers’ funds. There are two categories of financial instruments businesses under the FIEA which relate to businesses that manage the investments of customers’ funds. The first is investment management on a discretionary basis and the other is investment advisory. The former manages customers’ funds by handling their investments in securities, derivatives, etc. on a discretionary basis (the investment management business places orders on behalf of its customers). In the latter, an investment advisor can only give advice to its customers and the customers then decide whether or not to follow the advice; investment advisors are prohibited from placing orders on behalf of their customers. To reflect this difference, the registration requirements for the former are substantially more rigid than those of the latter.
An investment management business can be a foreign company but its organisation must be similar to a joint stock corporation under the Companies Act of Japan. In this regard, the most important requirement is that the (foreign) company must have a board of directors. If a foreign business does not set up a local subsidiary in Japan for the purpose of registration, it must set up a business office and appoint a representative in Japan. In addition, both its capital and net assets must be at least ¥50 million (approximately $46,000). In terms of staffing, even when it uses AI for managing the investment of customers’ funds, the company must have person(s) who have experience as a fund manager and who are responsible for the company’s investment management.
In order to carry on an investment management business in or involving Japan, registration under the FIEA is required, even for a foreign business. As an exception, however, without registering or having a business office in Japan, a foreign investment management business may provide its services for Japan if its counterparties in Japan are registered investment management companies or licensed trust banks. This exception is allowed because these institutions do not necessarily have expertise in investment management in certain foreign financial instruments or certain geographical areas outside of Japan. Foreign businesses may provide AI investment management services in this manner without being subject to the registration requirements under the FIEA.
The registration requirements for investment advisory businesses are less rigid and an individual (natural person) can be registered, as well. However, even when AI is used, as with the investment management business, a business must have a person responsible for its investment advice. It can operate its investment advisory business from outside of Japan and need not set up an office in Japan. In that case, the business must appoint an attorney-in-fact in Japan. As allowing the registration of individuals suggests, there are no financial requirements, unlike in the case of investment management businesses. Lastly, the same registration exemption as the one for foreign investment management businesses applies (see above).
Agency businesses handle the marketing of investment management or investment advisory businesses (subject to the registration requirements, which are similar to those for investment advisory businesses). Agency businesses can be used for marketing unregistered foreign businesses to registered investment management businesses or licensed trust banks in Japan.
The Financial Market Entry Consultation Desk
The JFSA is eager to encourage foreign investment management and advisory businesses to provide services in Japan and to this end, in 2017 it established a Financial Market Entry Consultation Desk as a contact point for foreign businesses. English guidance for foreign businesses to launch in Japan is also available (see https://www.fsa.go.jp/en/policy/marketentry/index.html).
|About the author|
Akimoto Kawamura is a partner in Atsumi & Sakai. He was general counsel for Citigroup Japan for six years before joining Atsumi & Sakai in 2018, prior to which he was in private practice for over 20 years. Leveraging the expertise and strengths developed throughout his career, Akimoto is highly experienced in all aspects of financial services regulation, regulatory investigation, corporate M&A and cross-border transactions and investment. He advises commercial banks, investment banks, asset management companies and insurance companies, as well as a wide range of general corporations, including food and beverage, pharmaceutical, entertainment and e-commerce businesses.
Akimoto has a bachelor of laws from the University of Tokyo Faculty of Law and an LLM from the University of Michigan Law School. He was admitted as an attorney (Bengoshi) in Japan in 1991 and in New York State in 1997.