In order to sustain the growth of Japan's economy (especially needed due to the aging population), it is essential that the country's financial and capital markets provide good investment opportunities to Japanese households to allow them to more efficiently utilise their assets, and that companies are supplied with the adequate amount of capital for growth. In addition, strengthening the competitiveness of Japan's financial and capital markets is important given the intensifying global competition among markets. In response to such needs, the Cabinet submitted to the Japanese Diet a bill to amend the Financial Instruments and Exchange Law and other related laws on March 4 2008. This amendment mainly aims to i) create a new market for professional investors, ii) revamp the firewall regulations regarding the holding of concurrent posts in securities firms, banks and insurance firms and iii) expand the administrative monetary penalty system.
The amendment will permit the creation of exchange markets limited to participants that are professional investors. Current law imposes strict disclosure requirements to protect general investors, but some of these regulations are not necessary. Professional investors have the ability to collect appropriate information by themselves for their decision-making purposes, and these regulations sometimes interfere with what otherwise could be smooth and efficient transactions. Moreover, it is important to differentiate professional investors from general investors and allow the former more freedom in transactions in accordance with the principle of self-responsibility. It is thought that this change will invigorate the country's financial and capital markets and will make them more competitive internationally. The amendment exempts securities directed at only professional investors from current disclosure regulations, and establishes a simpler framework for providing information to professional investors (for example, providing information at least once a year). At the same time, the amendment restricts resale of such securities to general investors to prevent circumvention of the regulations. In addition, the amendment creates new civil damage compensation as well as administrative and criminal penalty provisions to ensure compliance in the newly created professional markets.
The amendment revises a part of the firewall regulations affecting securities firms, banks and insurance firms. The current prohibition against an individual holding concurrent posts in a securities firm, bank or insurance firm is to be abolished. This will allow an individual to hold a post, for example, in a bank and a securities firm at the same time. This change is intended to bring together these different disciplines to allow for the exchange of tools and information needed to create more diversified products. As financial services become more diversified and sophisticated, it is expected that financial groups will provide higher quality financial services to customers. At the same time, systems for managing conflicts of interest will be established to create proper internal controls to protect customers' interests from potentially being harmed by a firm trading on its own account or that of a group company.
In order to improve the market's fairness, transparency and reliability, more effective deterrents against market misconduct are needed. From this standpoint, the administrative monetary penalty system will be reviewed and expanded. The penalties for acts such as insider trading, market manipulation, dissemination of unfounded rumours, trading by fraudulent means, and false statements in offered disclosure documents will increase. Also, several new violations, including that of providing false statements in or failure to submit tender offer bid disclosure documents and that of illegal market stabilisation, will be added to the list of actions subject to penalties. Furthermore, the statute of limitations will be extended from the current three years to five years.
If the amendment becomes law, it will take effect on a date specified by Cabinet order. The date must be within six months of the date of the announcement of the bill's passage. However, the Cabinet can specify a date within the one-year period following the announcement that the revamping of the firewall regulations will take effect.