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Strengthening Japan’s markets

Akiko Tomiyama
On April 16 2013, the Financial Services Agency of Japan (FSA) submitted the Bill for Amendment of the Financial Instruments and Exchange Act, etc. to the ordinary Diet session. It was indicated that the main purpose of the bill is to put in place measures against insider trading and market fraud, measures against financial crises that originate from market disruption, and measures to strengthen the functions of the financial and capital markets and the financial industry in Japan. The bill includes amendments to many finance-related bills, including the Financial Instruments and Exchange Act, the Investment Trust and Investment Corporation Act, the Deposit Insurance Act, the Banking Act, the Insurance Business Act, and the Trust Business Act. The main purposes of this bill are the strengthening of insider trading regulations, the establishment of an orderly resolution regime for financial institutions, revisions to asset management regulations, the encouragement of the provision of capital by banks, and the encouragement of the robustness of Japanese Real Estate Investment Trust (J-Reit) structures.

The strengthening of insider trading regulations was proposed following recent insider trading cases, such as when a listed company made a public offering and information was compromised by an employee of the lead managing underwriter and an investor who obtained such information engaged in insider trading. In particular, the disclosure of inside information and trading recommendations made by corporate insiders who have inside information will be regulated under new rules. In addition, the monetary penalty for violations committed by asset managers with respect to their client accounts will be raised.

The bill also attempts to prevent financial crises that are triggered by distress and failure of systemically important financial institutions that may spread across financial markets and seriously impact the economy, such as the failure of Lehman Brothers, an orderly resolution regime for financial institutions based on the agreement by the G20 Summit countries will be established. Within the scope of this regime are financial institutions including deposit-taking financial institutions, insurance companies, financial instruments business operators, and financial holding companies. Following the deliberations of the Financial System Management Council, the Prime Minister of Japan confirmed the need to implement an orderly resolution mechanism for financial institutions and then provide liquidity and financial assistance under the oversight of the Deposit Insurance Corporation when it is necessary to prevent severe market turmoil.

Another objective of the bill is to revise asset management regulations. This was seen to be necessary following a case in which AIJ Investment Advisors, a Japanese investment advisory company, made investments that failed, affecting assets entrusted to it by pension funds, and falsified reports relating to such assets which were submitted to such pension funds. In particular, increases in the criminal penalties for false reporting and fraudulent solicitation by discretionary investment management business operators were proposed. Eligibility requirements for pension funds to be classified as professional investors will also be strengthened.

The bill also aims to encourage banks to make capital investments in other companies. A bank, or one of its subsidiary companies, is prohibited from acquiring or holding voting rights in a domestic business company if the total number of such voting rights held by the bank and/or subsidiary exceeds five percent of the number of voting rights held by all the shareholders of the domestic business company. In future, if it is expected that a certain contribution will enhance corporate recovery or revitalise a region, in order to allow banks to provide capital funds more flexibly, the restriction on the holding of voting rights by banks' subsidiaries will be relaxed. In addition, regulations regarding large exposure rules or regulations governing foreign bank branches will be reviewed.

Finally, in light of the present conditions of J-Reit structures, the diversification of sources of financing and instruments for capital growth were examined, and new rules such as allowing a J-Reit to repurchase its equity and undertake rights offerings, introducing measures to facilitate the acquisition of overseas real estate by a J-Reit and regulating insider trading by J-Reits, were proposed. In addition, the provision by investment trusts to their beneficiaries of investment performance data in a simplified format will be regulated.

Apart from these amendments, many amendments to finance-related bills are included in the bill. If it is passed into law in the Diet, except for some provisions, the relevant legislation will come into effect on the date specified by Cabinet Order, which must be within a period not exceeding one year from the date of promulgation.

Akiko Tomiyama

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