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Revisions to Japan’s insider trading regulations

On December 25 2012, the Financial Services Agency of Japan (FSA) published a report titled Development of Systems Concerning Insider Trading Regulation Based on Recent Violations and Financial and Corporate Practices. The report summarises the problems with the present insider trading regulations in Japan and presents recommended revisions. The present insider trading regulations in Japan are expected to be reformed based on the recommendations presented by the report in the future.

The foremost important recommendation presented by the report that may influence the compliance structure adopted by the financial institutions in Japan is the establishment of regulations on disclosure of information and encouragement of trading. While the present insider trading regulations prohibit certain trading of securities while having any undisclosed information falling into the category of Material Facts, they do not regulate the act of distributing undisclosed information falling into the category of Material Facts to a third person, or the act by a person who possesses any undisclosed information that falls into the category of Material Facts of encouraging a third parson to trade securities without distributing such information itself. The FSA report concludes that it is appropriate to regulate such acts.

Even under the present insider trading regulations, there is a possibility that the person who carries out such acts could be punished as an abettor of the principal who carried out the insider trading. There have, however, been few cases where such persons were punished due to the difficulties in proving the intention of abetting the principal. As such, the report recommends establishing regulations with respect to such acts and making them subject to criminal and monetary charges. In order not to reduce the distribution of information or encouragement of trading in regular business, the report also mentions that such acts should be treated as violations of insider trading regulations only when the person who carries out such acts has the purpose of having a third person who receives undisclosed information falling into the category of Material Facts engage in insider trading, and when that third person actually engages in such insider trading.

The report also mentions that, in the case where a company operating a securities brokerage business carries out such acts, it is appropriate to release to the public the name of the individual who violates the regulations to call attention to investors, as well as imposing penalties on the company.

The report points out that there are many cases where the amount of monetary penalties for violations committed by asset managers on customers' accounts is too low. It recommends modifying the calculation method so that the amount of the monetary penalties will have an adequate deterrent effect on violators.

More specifically, the report concludes that, considering the possibility of continually receiving management fees, the amount of the monetary penalties for violations committed by asset managers on customers' accounts should be calculated based on the overall management fees received by such asset managers for a certain period (three months, for example). In addition, the report indicates that it is appropriate to consider establishing a calculation method for cases where there is difficulty in knowing the details of a fund managed by an asset manager who violates the regulations, or the size of the profit earned by such asset manager (such as in the case where the asset manager manages a fund set up in a foreign country).

The Report recommends several other revisions based on recent financial and corporate practices, such as an expansion of the scope of persons subject to regulation concerning tender offers, revisions on the regulatory exemption related to trading conducted between persons aware of Material Facts, and revisions on the regulatory exemptions of trading based on contracts entered into and plans adopted before becoming aware of the Material Facts.

The outline of the Report has been released in English on the FSA's web page (www.fsa.go.jp/en/refer/councils/singie_kinyu/reports/20121225.html). It is important, particularly for financial institutions in Japan, to follow how the discussion of future revisions to the insider trading regulations proceed in the future.

Nobuhiro Anzai

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