Under Japan's current Trust Law, it is uncertain whether a trust beneficial interest can be represented by a security if not specifically provided for by law (for example, the Law Concerning Investment Trusts and Investment Corporations, and the Law Concerning Securitization of Assets).
Such recognition would greatly benefit securitization transactions that use trusts by increasing the liquidity of trust beneficial interests created in these transactions. In a typical Japanese securitization transaction involving a trust, the originator, as trustor, entrusts the trust assets to the trustee and, in return, the originator receives a senior beneficial interest in the trust assets. The senior beneficial interest is then sold to investors, who prefer that the beneficial interest be negotiable.
Under the new Trust Law, which was promulgated on December 15 2006 and is expected to come into effect in September 2007, beneficial certificates issued by trusts will be permitted if agreed to by all parties to the trust agreement. So even if no special statutory provision establishing a beneficial interest as a security exists, these beneficial certificates will represent the beneficial interests in the trust assets. These interests will become more freely negotiable, resulting in increased liquidity.
A beneficial certificate falls within the classification of a Paragraph 1 security under the Financial Instruments Exchange Law, which is expected to come into effect in September 2007. As such, a beneficial certificate must comply with strict disclosure requirements (for example, if the beneficial certificate is issued as a public offering, the issuer will be obliged to file a security registration statement with the relevant government authority). Also, ownership of beneficial certificates will be eligible for recording in the book-entry transfer system, meaning their liquidity will further increase.
A beneficial certificate under the new Trust Law could potentially function in the same way as a foreign depositary receipt because of its ability to represent shares or other securities issued by foreign entities. American depositary receipts are issued by depositary agents (such as banks or trust banks) and traded on US exchanges, but no similar financial instrument is recognized as a security under Japanese laws. Based on the changes brought by the new Trust Law (although there still is an issue concerning whether, in entrusting foreign stock, the new Trust Law would govern these transactions), investors might soon enjoy the benefits associated with having beneficial certificates participate in the book-entry transfer system and functioning in the same way as American depositary receipts.