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Expanding English-language disclosure

On December 17 2010, the Disclosure System Working Group of the Financial Services Agency (FSA) issued a report proposing to increase the variety of disclosure documents which a foreign company may submit in English instead of Japanese. The working group expects this enhanced disclosure system will increase the number of foreign entities raising funds in Japan.

The English-language disclosure system was initially introduced in December 2005 for issuers of foreign exchange-traded funds (ETFs), and from June 1 2008 this system became available for issuers of any type of securities such as stocks and bonds. Although this system aimed to attract foreign entities to the capital markets of Japan by eliminating language barriers, no company used it until April 2010 when a US-based corporation filed English-language documents; according to the working group this has been the sole example of using the English-language disclosure system to date. To make matters worse, the decline in the number of foreign companies listed on the Tokyo Securities Exchange has not stopped; the number decreased to 12 as of October 2010.

Why is the option so unpopular? One reason is that English-language disclosure is limited to continuous disclosure documents such as annual securities reports, semi-annual reports and quarterly reports (not including extraordinary reports). This means that a foreign company is required to document completely in Japanese when it issues its new securities in Japanese markets; once it has completed documentation for the initial issuance, it is not a burdensome task for the issuer and its agent to continue drafting documents in Japanese for continuous disclosures. Another reason is that the English-language disclosure system does not allow foreign entities to solely use English; a portion of the supplemental papers to be attached to disclosure documents is required to be in Japanese. Furthermore, among the supplemental papers, the summary of material items such as risk factors, management’s discussion and analysis, and financial statements is required to be in Japanese but guidelines specifying the extensiveness of this summary are lacking. In sum, foreign issuers and their agents are hesitant to use the English-language disclosure system because the rules create little incentive in terms of the time and effort required to prepare the documents, while generating new risks for companies by lacking practical guidelines on the extent of information to provide to investors.

The December 2010 report of the working group proposes that the scope of documents for English-language disclosure should be expanded to include issuance disclosure documents (securities registration statements) and extraordinary reports. The report states that information on the issuer can be disclosed in English in the issuance disclosure documents when this information is “widely available and evaluated” in foreign markets. This expression is taken to mean where investors in foreign markets can adequately evaluate the information on the issuer and market its securities for appropriate prices. Furthermore, the report proposes that in case of simultaneous listings or offerings in Japan and a foreign market, the issuer should be able to select English-language disclosure in Japan even if information on the issuer is not yet “widely available and evaluated” in the foreign market, considering the issuer will be examined during the course of listing in the foreign market. However, the report insists that information on the securities should be disclosed in Japanese since this information is significant not only for the decision-making of investors but also for the accountability of securities brokers.

Additionally, the report proposes to increase the use of English for supplemental papers. However, it also continues to require a Japanese summary of material items such as risk factors, management’s discussion and analysis, and financial statements, for issuance disclosure documents, although the working group expects that a standard on the extensiveness of the summary will be determined in the future.

The enhanced English-language disclosure system is positioned as one of the action plans of the FSA for vitalising the financial markets and financial industry, and the FSA aims to revise the relevant laws and regulations within this fiscal year.

Yoichi Maekawa

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