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New framework protects investors

On March 13 2006, a bill concerning the Financial Instruments and Exchange Law (the FIEL) was submitted to the Diet. The FIEL will amend, with respect to various financial instruments, a number of statutes to ensure greater investor protection and to regulate traders dealing in financial instruments. Under the new regime, investor protection will be broadened and strengthened, but some regulations will be eased to reduce trading costs associated with excessive restriction. The FIEL is expected to come into effect within 18 months of its promulgation.

To better protect investors, the FIEL will more comprehensively regulate the trading of various financial instruments across a number of sectors. Under the current system, the laws that regulate financial instruments, such as the Securities and Exchange Law (the SEL) and the Financial Futures Trading Law (the FFTL), each cover different types of financial instruments. For instance, the SEL covers only securities and their related instruments, which includes corporate bonds, stocks, certain partnership interests and equity derivatives. The FFTL only regulates financial futures. The FIEL will not only set out wider and more flexible definitions of securities and deemed securities, but will also more broadly and more comprehensively regulate trading of various financial instruments, including securities and financial futures, in the one statute.

The FIEL will impose tighter disclosure requirements on issuers. For financial years commencing on or after April 1 2008, listed companies will be required to file with the securities authorities: (i) quarterly reports; (ii) reports concerning the internal control of the issuer; and (iii) confirmation of the content of annual reports. Current disclosure rules require an issuer to file annual reports and semi-annual reports, but the semi-annual reports will be replaced with quarterly reporting requirements in the case of listed companies. Independent auditors will audit the internal control report.

Under the FIEL, some of the regulations will be relaxed to reduce the trading costs associated with excessive restriction. The restrictions under the FIEL will be applied flexibly depending on the nature of investors (professional or general public). For example, some of the business regulations aimed at correcting the information disparity between an issuer and an investor (such as the obligation to deliver documents before entering into a transaction) will not apply to a sale to or solicitation of professional investors.

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