The law for amending the Securities and Exchange Law and other
financial laws (2006 Law No.65) and the law for abolishing and
amending the related laws to implement the law for amending the
Securities and Exchange Law and other financial laws (2006 Law
No.66) were promulgated on June 14, following the approval and
passage of the respective bills at the 164th Diet session held
on June 7, 2006.
The said Laws consist of legislations including reorganizing the
Securities and Exchange Law into the Financial Instruments and
Exchange Law (so-called ''Investment Services Law'') in response
to the report titled ''Legislation for the Investment Services
Law (provisional title)'' released by the First Subcommittee of
the Sectional Committee on Financial System of the Financial
System Council on December 22, 2005, which was featured in the
February edition of the FSA Newsletter. Their aim is to adapt to
changes in the environment surrounding financial and capital
markets, strictly enforce rules on user protection, improve user
convenience, secure market functions to shift funds from savings
to investments, and adapt to the globalization of financial and
capital markets. |
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More specifically, the legislations can broadly be
divided into the following four basic elements:
(1) Development of a cross-sectoral legal system to
protect investors regarding financial instruments with
strong investment characteristics (legal system based on
so-called ''Investment Services Law'');
(2) Enhancement of the disclosure system;
(3) Reinforcement of self-regulatory functions of stock
exchanges; and
(4) Strict approach to unfair trading, etc. |
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The key adjectives here are ''comprehensive and cross-sectoral'',
''flexible (increased structural flexibility)'', ''fair and
transparent'' and ''strict''.
This is the first of the three-part series featuring the latest
set of legislations.
Provisions regarding the enhancement of punitive clauses in
disclosure documents and unfair trading, including fictitious
orders, in the law for amending the Securities and Exchange Law
and other financial laws came into force on July 4, 2006 (20
days after the promulgation date). In conjunction with the
enforcement of these provisions, the Cabinet Order for
implementing the Securities and Exchange Law (1965 Ordinance
No.321) was amended. |
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| 1. Building a Cross-sectoral Legal System to Protect
Investors regarding Financial Instruments with Strong
Investment Characteristics (Legislation for ''the
Investment Services Law'') |
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| 1) |
Transition from Securities and Exchange Law to
Financial Instruments and Exchange Law |
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- The latest legislations involved abolishing four
laws, including the Financial Futures Trading Law, and
consolidating them into the Securities and Exchange Law,
in view of reviewing the existing sectional business
laws. Furthermore, they involved amending 89 laws,
including the Law Concerning Investment Trusts and
Investment Corporations, and consolidating some of the
amended provisions into the Securities and Exchange Law.
- As a result, the Securities and Exchange Law covers a
wider scope of financial instruments than before.
Accordingly, it is renamed ''Financial Instruments and
Exchange Law''. |
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(Note*) The Securities and Exchange Law and
the Financial Instruments and Exchange Law are
hereinafter referred to as ''SEL'' and ''FIEL'',
respectively. |
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- In conjunction with this, regulated businesses are
now legally referred to as ''financial instruments firms''
instead of ''securities companies'', and exchanges are now
legally referred to as ''financial instruments exchanges''
instead of ''securities exchanges''. (However, these are
just legal names so securities companies and securities
exchanges can continue using their existing names.) |
2) |
Expansion of Scope of Regulated Products |
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In recent years, financial instruments that are not
regulated by SEL and other user-protection laws have
started to appear on the back of the progress in
financial technology, etc., and users have been
victimized in some cases. FIEL has expanded the scope of
regulated products as follows, in order to close the
loopholes in the existing legal system for user
protection.
a) Expansion of Definition of Securities
The definition of ''securities'' as products regulated by
the existing SEL has been expanded. For example,
interests in trusts in general are regarded as
securities (paragraph 2 (1) and (2) of Article 2 of FIEL)
and holdings of so-called collective investment schemes
(funds) are comprehensively regarded as securities
(paragraphs 5 and 6 of Article 2 of FIEL).
b) Expansion of Definition of Regulated Derivative
Transactions
Under the existing SEL, only ''derivative transactions''
related to securities are regulated. Under FIEL,
transactions relating to a wide range of underlining
assets and indexes and various types of transactions are
regulated, including transactions subject to the
Financial Futures Trading Law under the existing system
(such as foreign exchange margin trading). So-called
currency swaps, interest rate swaps, weather derivative
and credit derivative transactions are also regulated.
(Paragraphs 20 through 25 of Article 2 of FIEL). |
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(Reference) Comprehensive Definition of
Collective Investment Schemes
Holdings of arrangements (collective investment
schemes) with the following characteristics are
regarded as securities under the Financial
Instruments and Exchange Law: |
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i) Receives investment
(contribution) of money, etc. from other
parties;
ii) Runs a business by using those
assets; and
iii) Distributes proceeds, etc. from the
business to the investors, etc. |
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It is a comprehensive definition in that it
does not matter whether it is a partnership
contract under the Japanese civil code or in any
other legal format, or what kind of business is
operated by using the invested money, etc.
(Assuming the above, certain schemes in which
all investors participate in the business are
excluded from the definition of securities.) |
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3) Regulated Cross-sectoral Operations
Under the existing SEL, ''sales and solicitation'' operations
relating to securities and derivative transactions are regarded
as ''securities businesses'', and are basically regulated through
a registration system. Under FIEL, the existing sectional
business laws have been reviewed, and a wide range of operations
including conventional securities businesses are regarded as
''financial instruments businesses'' and regulated across sectors
through a registration system (paragraph 8 of Article 2 and
Article 29 of FIEL).
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| a) |
''Sales and Solicitation'' Operations |
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Under FIEL, the scope of regulated
operations (financial instruments businesses)
has been expanded in conjunction with the
expanded definition of securities and derivative
transactions as referred to in 2) above: an
example is the consolidation of financial
futures trading business regulated by the
Financial Futures Trading Law under the current
system. |
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Furthermore, in contrast with SEL,
which does not regulate ''sales and solicitation''
by the securities issuers themselves (so-called
own offering), FIEL treats own offering such as
holdings of collective investment schemes as
newly-regulated operations (paragraph 8 (7) of
Article 2 of FIEL). |
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| b) |
''Investment Advisory'', ''Investment
Management'' and ''Customer Asset Administration''
Operations |
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In addition to ''sales and
solicitation'' relating to securities and
derivative transactions, FIEL regulates
''investment advisory'', ''investment management''
and ''customer asset administration'' operations
as core operations. |
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FIEL also clearly states that
operations in which assets of collective
investment schemes are invested mainly in
securities or derivative transactions (so-called
investment on own account) are also subject to
regulation (paragraph 8 (15) of Article 2 of
FIEL).
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4) Flexible Requirements on Market Entry according to Nature
of Operations
FIEL regulates financial instruments businesses based on a
registration system across sectors as referred to in 3) above.
On the other hand, it categorizes financial instruments
businesses according to the scope of their operations, and by
category, sets forth requirements on market entry (criteria for
rejection of registration), including the acceptability of entry
by individuals and basic financial requirements (paragraph 4 of
Article 29 of FIEL).
If a financial instruments dealer wishes to launch operations in
a category that is different from the one it is engaged in, the
dealer must go through procedures to modify the registration
(paragraph 4 of Article 31 of FIEL).
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The next edition will review the development of
codes of conduct that should be observed by businesses
in ''1. Building a System based on the Legislation for
the Investment Services Law'' focusing on:
5) Relaxation of codes of conduct, etc. according to
customer categories;
6) Treatment of deposits, insurance, etc. with strong
investment characteristics; and
7) Development of other systems for user protection. |
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[Primer on Financial Literacy] |
Hostile Corporate Takeover Bids |
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The takeover bid (TOB) disclosure system is a system
designed to ensure transparency and fairness in securities
transactions that might affect the controlling stake in a
company. Specifically, in cases where shares are to be purchased
in large volumes by non-exchange trade, the bidder is obliged to
disclose the TOB period, bidding volume, TOB price, etc. in
advance and give a fair opportunity to the shareholders of the
targeted company to sell their shares.
There has been a rapid increase in the number of corporate
mergers and acquisitions in Japan lately, and the number of
cases of TOB as one of the measures of acquiring a company is on
the increase as well. TOBs are also diversifying in form, as
exemplified by the emergence of cases involving so-called
hostile TOB, in which TOB is carried out without the consent
of the management of the targeted company.
It is therefore indispensable to have a framework that enables
shareholders and investors to receive sufficient information
from both the bidder and the targeted company and properly
determine whether or not to sell their shares after giving
careful thought. For this reason, the TOB disclosure system was
revised under the Law for the Partial Amendment of Securities
and Exchange Law, etc. established in June 2006. The specifics
of the revision are described below. |
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| 1) |
Response to Law-evading Types of
Transactions
Cases in which the bidder has acquired more than
one-third of all outstanding shares after
rapidly purchasing the shares based on a
combination of trades including purchase at
on-exchange and non-exchange markets were
clarified as the type of transactions subject to
TOB regulations. |
2) |
Enhancement of Provision of Information to Investors
In order to provide shareholders and investors
with sufficient information so that they can
decide whether or not to accept the TOB after
giving careful thought, measures were taken
including obliging the targeted company to
declare its opinion on the TOB, giving the
targeted company the opportunity to ask
questions to the bidder, and allowing the
targeted company to request an extension of the
TOB period. |
3) |
Flexible Approach to Withdrawal of TOB, etc.
In order to prevent the bidder from being put in
an extremely unreasonable position, rules on
withdrawal of the TOB and changes in the terms
of the TOB became more flexible in cases where
the so-called anti-takeover measure is launched
by the targeted company. |
4) |
Partial Introduction of Obligation to Purchase All Shares
For the purpose of ensuring fairness between
shareholders and investors, purchasing pro-rate
became a narrower option and acquiring all the
shares responding to the TOB became mandatory in
cases where the post-TOB shareholding ratio
exceeds a certain percentage. |
5) |
Ensuring Fairness between Bidders
In cases where another shareholder who holds
more than one-third of all outstanding shares of
the targeted company rapidly accumulates certain
shares while a bidder is executing a TOB, TOB
became mandatory for such shareholders. |
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Further improvements in the transparency and fairness of the
procedures are expected to be made in cases of so-called hostile
TOB, relying upon due consideration given by the parties
concerned with respect to the objective of the TOB system. |
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