This content is from: Local Insights

Securities broker-dealer regulation

Nobuharu Sakai

The Act Partially Amending the Financial Instruments and Exchange Act, Etc. which was promulgated on May 19 2010 (2010 Amendment) introduces regulation and supervision of operators of Type I financial instruments businesses on a consolidated basis. Provisions relating to this introduction will become effective on April 1 2011.

In principle, regulation and supervision of Type I financial instruments business operators (Securities broker-dealers or Type I Fibos) is on a non-consolidated basis; however, corporate structures housing Type I Fibos have become increasingly large and complex and it is sometimes difficult for the authorities to understand the business management and the risk conditions of the whole group.

Type I Fibos which are housed in large, complex groups face the possibility of sudden insolvency or other financial distress as a result of the financial and business problems of the parent company, subsidiaries and sister companies of the business group. This type of distress could, in turn, adversely affect the larger financial system. The 2010 Amendment introduces increased regulation and supervision of Type I Fibos for which businesses and risks are difficult to capture on a non-consolidated basis.

After the provisions take effect, when the total assets of a Type I Fibo (excluding foreign entities) exceed one trillion yen, the Type I Fibo must submit notice to the authorities within two weeks from the date on which the amount of its total assets exceeded one trillion yen disclosing (i) the fact that its total assets exceed one trillion yen; (ii) the amount of its total assets; and (iii) the basis for the calculation.

Institutions which have submitted this notice will then be classified as Special Fibos. A Special Fibo will have an obligation to report periodically on the financial condition of the business group to which it belongs. A Special Fibo will also have an obligation to periodically prepare and submit business reports which describe the condition of its business and assets and its subsidiary and companies over which the Special Fibo and its subsidiaries may have material influence on the financial and operational policies through relationship of contribution, personnel, funding, technology and trading on a consolidated basis.

Further, a Special Fibo will be obliged to submit and make available for public inspection its capital-to-risk ratio on a consolidated basis. The 2010 Amendment also adds increased supervision, such as the ability of regulators to order reports on and conduct inspections of subsidiaries of a Special Fibo.

When such parent company (or its subsidiaries) provides finance assistance to the Special Fibo and there is high possibility that the suspension of such finance assistance would impede the sound and appropriate operation of the Special Fibo, a parent company of a Special Fibo manages the Special Fibo and sound and appropriate operation of the parent company and subsidiaries of the parent company is particularly necessary for protecting the public interest or investors, then such parent company will with limited exceptions be designated by the authorities.

An ultimate designated company (a designated company which has no parent company that is a designated company in connection with the same Special Fibo) will have an obligation to periodically prepare and submit business reports which describe the condition of the business and assets of the ultimate designated company and its subsidiaries on a consolidated basis.

The ultimate designated company will also be obliged to submit and make available for public inspection its capital-to-risk ratio on a consolidated basis. The 2010 Amendment also adds increased supervision, such as the ability of regulators to order reports on and conduct inspections of subsidiaries of designated companies and companies to which business has been outsourced from designated companies.

Nobuharu Sakai

Instant access to all of our content. Membership Options | One Week Trial