Introduction of a new system (requirement for Additional Notifications, etc.)
regarding Specially Permitted Businesses for Qualified Institutional Investors, etc.,
and Specially Permitted Investment Management Businesses
following 2015 revisions to the Financial Instruments and Exchange Act, etc.

• ○On May 27, 2015, a law ("Revised FIEA of 2015") to revise some of the provisions of the FIEA related to operators of the Specially Permitted Businesses for Qualified Institutional Investors, etc. (hereinafter, "Specially Permitted Business Operators") was passed. The law was promulgated on June 3 of the same year.

• ○The revised law will apply not only to Special Business Activities but also to operators of businesses specified under Article 48(1) of the Supplementary Provisions of the Act to Partially Amend the Securities and Exchange Act (Act No. 65 of 2006), or Specially Permitted Investment Management Business Operators (SPIMBO).

• ○The FSA solicited broad opinions by publicly disclosing drafts of the Cabinet Orders, Cabinet Office Ordinances and supervisory guidelines related to the law revision (public comments invited from November 20 to December 21, 2015).

• ○After examining the comments thus offered, our Authority publicly disclosed our views on them on February 3, 2016, and promulgated the law after revising parts of the Cabinet Orders, Cabinet Office Ordinances and supervisory guidelines on the same day.

  *Public comments and FSA’s views are available here (Japanese only).

• ○The revised FIEA of 2015 is stipulated to take effect on a date specified by a Cabinet Order within a year from the date of its promulgation (i.e., June 3, 2015). It will be enforced on March 1, 2016, except for provisions that are subject to transitional measures, in accordance with Cabinet Orders.

• A.  Scope of submissions and attachments was expanded

  • After the introduction of the new system, the addition of the following notification items and attachments will be required, in addition to the notifications and attachments that were already required previously.

  • As part of efforts to promote the digitization of documents, our Authority asks notifier to make submissions in an electronic format (i.e., CD-Rs) plus attachments. Submissions will not be deemed valid notifications in accordance with Article 63(2) of the FIEA if there is failure to include required information or attach required documents. Our Authority urges applicants to make sure your notifications are complete with all additionally required information and attachments.

  • The new Notification Form (Form 20; In the case Special Business Activities are operated by Financial Instruments Business Operators, etc.: Form 21) are posted on the website below.

  (FYI) "To Operators of Specially Permitted Businesses for Qualified Institutional Investors, etc." on the FSA website

  http://www.fsa.go.jp/en/news/2016/20160203-1.html

  [Items to be Notified]

  • ●Name and address of the Principal Business Office that operates Special Business Activities

  • ●Items specified by a Cabinet Office Ordinance*¹

  • *¹Note: Items specified by a Cabinet Office Ordinance:

    • Details of Invested Business Equity

    • Name, type and number of all Qualified Institutional Investors (“QIIs”)

    • If the Special Business Activities are to be operated with the purpose of smoothly supplying funds to a business operator (see (5) B. below), the names of the certified public accountants or auditing firms that will audit the financial statements, etc.

  [Required attachments]

  • ●Pledge statement (stating that the operators does not fall under disqualifying factors, etc.; see (2) below)

  • ●Article of incorporation and certificate of registered matters, etc. if the applicant is a corporation

  • ●Items specified by a Cabinet Office Ordinance*²

  • *²Items specified by a Cabinet Office Ordinance:

    • Resume and abstract of residence certification of the notifier (or officers if the notifier is a corporation) and Important Employees

    • Certificate by a public agency or equivalent documentation verifying that the notifier (or officers if the notifier is a corporation) and Important Employees do not fall under adult ward or person under curatorship.

    • Written statement in which the Important Employees (including officers in the case of a corporation) pledge that relevant officers and Important Employees are not organized crime group members, etc.

    • If the QII is an Investment Limited Partnership (LPS), the total amount of money and other assets the QII manages for the counterparty of the LPS contract under the LPS agreement, and the amount of the LPS's borrowings.

      Note: In case LPS is the only QII, it is not recognized as a QII for the Special Business Activities unless it has 500 million yen or more in the balance of its invested assets (excluding borrowing).

      (*Existing operators are not permitted to engage in self-offering unless they secure a separate QII who meets the requirements. However, such operators can continue to engage in self-management on the portion of investment for which they completed self-offering before the revised FIEA took effect.)

    • The amount of total investment of the fund being structured and the total amount contributed by persons who have a close relationship with the notifier (the relevant Specially Permitted Business Operator) (See "Persons who are in a close relationship with the notifier (the relevant Specially Permitted Business Operators)” in *14 in (5) A. below. Note, however, that officers and employees of the relevant Specially Permitted Business Operators and their parent companies, etc. are excluded), and persons who have expertise and experience in matters related to investment (see *16 of (5) B. below)

      Note: The operation will not be recognized as a Special Business Operation if the total amount invested by “persons in a close relationship with the Specially Permitted Business Operator” and “persons equipped with expertise and experience in matters related to investment” represent half or more of the overall invested amount.

• B.  Disclosure of notified items

  • Following the introduction of the new system in accordance with the latest law revisions, Specially Permitted Business Operators, etc., are required to publicly disclose part of the notified items that are specified under a Cabinet Office Ordinance*³ by placing them to make them available for public inspection at their principal business office, as well as at all business offices that operate Special Business Activities, etc., or by posting them on their company website.

  • Please be reminded that existing operators are required to make such items available for public inspection or public disclose immediately after making the additional notifications under 2. Additional Notifications, while persons newly notifying on the day the law takes effect or later are required to do the same without delay after they make the notifications.

  • *³All of the notified items excluding the followings (Form 20-2)

    • Name of business or name of QII

    • If the notifier is a foreign corporation or a person whose residency is located in a foreign country, the status of the representative in Japan or agent in Japan

• A.  Scope of conduct control subject to regulations was expanded

  • In addition to the existing provisions banning false explanations and loss compensation, the following conduct control rules must be observed after the new system is introduced.

  • Our Authority urges the applicant to closely examine the conduct control provisions before making notifications and take necessary measures to operate business in compliance with such provisions by, for example, preparing documents early for delivery to investors prior to the conclusion of a contract.*⁷

  • *⁷As part of efforts to avoid obstructing free transactions between professionals, provisions regarding the Obligation to Notify Professional Investors, etc. (Chapter III Section 1 Subsection 5 of FIEA (Article 34 through Article 34-5)) apply to transactions with Professional Investors.

  [Conduct control]

  • ●Duty of Good Faith to Customers (FIEA Article 36(1))

  • ●Prohibition of Name Lending (FIEA Article 36-3)

  • ●Regulation of Advertising, etc. (FIEA Article 37)

  • ●Delivery of Documents Prior to the Conclusion of a Contract (FIEA Article 37-3)

  • ●Delivery of Documents Upon the Conclusion of a Contract (FIEA Article 37-4)

  • ●Prohibition of Providing Conclusive Judgment (FIEA Article 38(ii))

  • ●Prohibition of Acts Specified by a Cabinet Office Ordinance (FIEA Article 38(viii))

  • ●Principle of Suitability, etc. (FIEA Article 40)

  • ●Prohibition of Sales and Purchase, etc., Where Segregated Management Is Not Ensured (FIEA Article 40-3)

  • ●Prohibition of Public Offering, etc., Where Money Has Been Diverted (FIEA Article 40-3-2)

  • ●Duty of Loyalty, Duty of Due Care of a Prudent Manager (FIEA Article 42)

  • ●Prohibition of Transactions Conducted for the Operator’s Own Account, etc. (FIEA Article 42-2)

  • ●Segregated Management (FIEA Article 42-4)

  • ●Delivery of Investment Report (FIEA Article 42-7)

• B.  Preparation and preservation of records

  • The new system calls on operators to prepare documents specified by a Cabinet Office Ordinance*⁸ as records of Special Business Activities, etc., and to preserve them for specified periods.

  • Our Authority urges the applicant to make necessary preparations to ensure such documents will be prepared and preserved.

  • *⁸List of required records:

  Private placement or investment management	Required records	Required storage period
  In both private placement and investment management	Documents to be delivered when shifts from professional investors to general investors are approved Documents to be delivered on exemptions from legal application for individual general investors shifting to professional investors Document to be delivered Prior to the Conclusion of a Contract Document to be delivered Upon the Conclusion of a Contract Letter of consent for approval of shifts from juridical person general investors to professional investors	5 years
  Private placement	Transaction Record on (a)Public Offering or Secondary Distribution, or (b)Private Placement or Solicitation for Selling, etc. for Professional Investors Customer Ledger	10 years
  Investment management	Document recording asset investment such as an Entrustment Contract for Assets Investment or a Discretionary Investment Contract with a registered investment corporation and other judicial acts Investment Report regarding Investment Property Investment Description	10 years

• C.  Introduction of the Business report and Explanatory documents

  • Starting in the first fiscal year following the enforcement of the FIEA of 2015, overseas operators will be required to submit a Business report (Form 21-2) every fiscal year to the Kanto Local Finance Bureau to which they have notified the Special Business Activities.

  • Operators will also be required to prepare Explanatory documents (Form 21-3) about items among the information included in the Business report that are designated under a Cabinet Office Ordinance as necessary for the purpose of protecting investors, and publicly disclose them by methods including placing them for public inspection at their principal business office, as well as all business offices that operate Special Business Activities, etc., or by posting them on their company website.

  • As the law sets deadlines*⁹ respectively for the submission of the Business report and public disclosure of the Explanatory documents, applicants are requested to take necessary measures to ensure these deadlines are adhered to before making application.

  *9

  The submission deadline for the Business report is the end of the third month after the end of every fiscal year. The deadline for public disclosure of the Explanatory documents is the end of the fourth month after the end of every fiscal year. *Note: Operator is allowed to substitute Explanatory documents with a copy of the Business report. There are rules permitting foreign operators to extend the submission deadline. *Forms for the Business report and Explanatory documents are found here.

• A.  Introduction to supervisory dispositions

  • The Kanto Local Finance Bureau has issued warnings to Specially Permitted Business Operators found to have problems, but the new system introduces issuances of orders for business improvement, orders to suspend part or all of business operations (up to six months) and orders for the abolition of business to such Specially Permitted Business Operators.

• B.  Enhanced authority of inspection

  • The new system will expand the authority to inspect, as follows.

  • ●Clarification of inspection authority*¹⁰

  • ●Expansion of the scope subject to prohibition or suspension orders by the court*¹¹

  • *¹⁰The new system has clarified that inspectors have the authority to order the submission of reports and conduct on-site inspection of business operations (i.e., business activities related to self-directed private placement and self-management) when doing so is deemed necessary and appropriate in order to protect public interests or investors.

  • *¹¹The new system specifies sales and solicitation acts that carry emergency needs to be suspended in order to prevent the aggravation of damage to investors in cases where the execution of business significantly lacks appropriateness, and investor interests have already been significantly damaged.

• C.  Stricter penalties

  • The new system will reinforce penalties, including the addition of penalties related to the expanded conduct control and the introduction of stricter or new penalties as shown below.*¹²

  • *¹²The new system will not apply to acts committed before the date that the revised FIEA of 2015 goes into effect.

  [Stiffer penalties]

  Act	Penalty after the revision
  Business operation without notification/registration (Unregistered Business Operation)	Maximum 5 year prison term or maximum 5 million yen fine (concurrent imposition possible)
  False notification or submission of attachment documents to notification that include false statements, etc.

  [New penalties]

  Act	Penalties after the revision
  Violation of order to abolish business operations	Maximum 5 year prison term or maximum 5 million yen fine (concurrent imposition possible)
  Violation of order to suspend business operations	Maximum 2 year prison term or maximum 3 million yen fine (concurrent imposition possible)
  Violation of requirement to prepare and preserve records; preparation of false records	Maximum 1 year prison term or maximum 3 million yen fine (concurrent imposition possible)
  Violation of requirement to submit a Business report; submission of a report including false statement
  Violation of obligation to make Explanatory documents available for public inspection; making such documents bearing false statement available for public inspection
  Violation of obligation to make notification information available for public inspection; making false statement available for public inspection
  Violation of obligation to submit copies of investment contract*13; submission of false copies
  Violation of orders for business improvement	Maximum 300,000 yen non-penal fine

  • *¹³Specially Permitted Business Operators that operate Special Business Activities with a purpose of smoothly providing funds to the businesses (see (5) B. below), in principle, must submit a copy of the contract for the businesses for which funds are provided within three months from the day when the notification was submitted in accordance with provisions of FIEA Article 63 (2) or the day when the purpose of the operation was changed to smoothen the provision of funds to the businesses.

• A.  Scope set for allowable investors

  • As the new system limits the scope of investors other than QIIs, public solicitation of investment in the fund is prohibited.*¹⁴

  • Solicitation of investment with a person other than those within the permitted scope as a counterparty will require registration for a Type II financial instruments business license, while the investment of money thus contributed by such person would require registration for an investment management business license.

  • The act of solicitation, etc., with such a person without obtaining such a license would constitute the operation of financial business without registration. With this in mind, when the applicant initiates Special Business Activities, please make doubly sure that investors lie within the permitted scope.

  • *¹⁴The scope of investors other than QIIs are listed below:

    • National government and local governments

    • Bank of Japan

    • Financial Instruments Business Operators (excluding Type I Financial Instruments Business Operators and investment management business operators) and the relevant Specially Permitted Business Operators

    • Persons who have a close relationship with the relevant Specially Permitted Business Operators ((a)Officers and employees of the relevant Specially Permitted Business Operators; (b)Parent companies, etc., and subsidiaries, etc., (including subsidiaries, etc., of the relevant parent companies, etc.); (c)Parties entrusted with the management of funds; (d)Investment advisories (including persons who advise the relevant person); (e)Corporate officers or employees of parent companies, etc., subsidiaries, etc., parties entrusted with the management of funds, and investment advisories of the Specially Permitted Business Operators; (f)Relatives (third degree of kinship) of the followings: the relevant Specially Permitted Business Operators; corporate officers or employees of the Specially Permitted Business Operators; corporate officers or employees of the parent companies, etc., subsidiaries, etc., parties entrusted with the management of funds and investment advisories.)

    • Listed companies

    • Corporations with net assets or capitalization totaling 50 million yen or more

    • Subsidiaries, affiliates, etc., of Financial Instruments Business Operators, listed companies and corporations (with net assets or capitalization totaling 50 million yen or more)

    • Special corporations, incorporated administrative agencies, etc.

    • Specific purpose companies

    • Pension funds, foreign pension funds (with financial assets for investment purposes totaling 10 billion yen or more)

    • Foreign corporations

    • Individuals (with financial assets for investment (including financial investments and rights related to derivative transactions) totaling 100 million yen or more and a securities account opened at least one year ago), corporations (with financial assets for investment totaling 100 million yen or more)

    • Asset managing firms

    • Individuals and corporations who are operating partners (with financial assets for investment totaling 100 million yen or more) of partnerships, silent partnerships, Limited Liability Partnerships or foreign partnerships, etc.

    • Public interest incorporated associations and public interest incorporated foundations (in which the national government or local governments hold at least one-fourth of the voting rights and stake, and whose public-interest business is related to local revitalization or industrial promotion)

    • Foreign partnership-style funds, etc.

• B.  Venture funds that meet the specified requirements

  • Venture funds that meet the "Requirements for operating Special Business Activities with the purpose of smoothly providing funds to businesses”*¹⁵ are permitted to solicit investment from, in addition to A. above, "Persons specified under a Cabinet Office Ordinance as being equipped with expertise and experience in matters related to investment.”*¹⁶

  • Just as in A. above, engagement in solicitation, etc., of persons who do not satisfy the requirements stipulated in Cabinet Orders or Cabinet Office Ordinances as a counterparty requires Financial Instruments Business Operator registration, and engaging in such solicitation without obtaining registration constitutes the operation of financial business without registration. Bearing this in mind, please make sure that your investors meet the Cabinet Order or Cabinet Office Ordinance requirements for operating Special Business Activities.

  • *¹⁵Specific requirements for operating Special Business Activities with the purpose of smoothly providing funds to businesses are listed below:

    • Over 80 percent of the operator's holdings are in shares, etc., in non-listed companies.

    • The operator does not borrow funds or provide guarantees for debts, in principle.

    • The fund does not repay the principal before maturity, and requirements stipulated under a Cabinet Office Ordinance (including the name and description of the fund, the name of business, name and address of all investors and the fund manager, the amount contributed by each investor, the provision of financial statements and audit reports to investors, the calling of investors’ meetings, the notification to investors of the details of investment in cases where assets are invested, and the rights of investors to dismiss investment managers and change contract provisions, etc.) are included in investment contracts.

    • The operator issues documents including the above items and explains them to investors before signing the investment contract.

  • *¹⁶Specific examples of persons specified under a Cabinet Office Ordinance as being equipped with expertise and experience in matters related to investment are listed below:

    • Present or former corporate officers of listed companies or corporations (whose net assets or capital totals 50 million yen or more) that submit annual securities reports

    • Present or former operating partners (with financial assets for investment totaling 100 million yen or more) of partnerships, silent partnerships, Limited Liability Partnership s or foreign partnerships, etc.

    • Persons who have a total of one year’s or more experience in the establishment of companies, capital increases, the issuance of share options, the launch of new businesses, the creation of management strategies, corporate finances, investment services, the management of general shareholders meetings or board of directors meetings, the actual handling of corporate acquisitions, share listing, etc., and for whom five years or less have passed since the day of their last involvement in the above work until the day they became a counterparty of solicitation.

    • Persons who are recorded among the top 10 or top 50 shareholders in Securities Registration Statements or Securities Reports that were submitted within five years from the day they became a counterparty of solicitation

    • Certified management innovation support organizations (attorneys, accountants, etc.)

    • Companies controlled by investors who are permitted to invest in the fund, as described above

• C.  Exclusion of persons who have potential risk of causing problems for investor protection

  • Under the new system, persons deemed to have the potential to cause problems for investor protection as specified in a Cabinet Office Ordinance*¹⁷ are excluded from the scope of Special Business Activities, so operators are advised to take special caution.

  • Any person who falls in this category is require to register as a financial instruments business operator to engage in investment solicitation for relevant funds. Engagement in solicitation, etc., without registering as such constitutes the operation of financial business without registration. With this in mind, please make doubly sure that you do not fall under any of the following cases.

  • *¹⁷Cases where protection of investors is likely to be hindered:

    • All of the QIIs involved in self-directed private placement or self-management are Investment Limited Partnerships (excluding those whose total investment according to their Investment Limited Partnership contract minus borrowings is expected to total 500 million yen or more)

    • Half or more of the total amount of investment in the relevant fund is contributed by persons who have a close relationship with the relevant Specially Permitted Business Operator (See “Persons who are in a close relationship with the relevant Specially Permitted Business Operators” in *14 in (5) A. Note, however, that corporate officers and employees of the relevant Specially Permitted Business Operators and their parent companies are excluded), and persons who have expertise and experience in matters related to investment (see (5) B.).

• ○Specially permitted businesses, etc., that started operation before the day when the revised FIEA of 2015 takes effect (i.e., March 1, 2016) are permitted to continue operations on and after that date.

• ○Please note, however, that such "Existing Operators" will be required to submit additional notifications and attachments that have been newly introduced in the Revised FIEA of 2015, Cabinet Orders and Cabinet Office Ordinances, within six months of the date that the Act takes effect (by August 31, 2016).

  [Items required to be additionally notified]

  • ●Items specified in the new notification forms (Form 20; Form 21 in the case of Financial Instruments Business Operators operating Special Business Activities)*¹⁸

  Form 20 (Excel:85KB)	:	Persons who, before the enforcement of the law, made required notifications in relation to Specially Permitted Businesses for Qualified Institutional Investors, etc. (SPBQII) or Specially Permitted Investment Management Businesses (SPIMB) (See entry examples here (PDF:172KB).)
  Form 21 (Excel:75KB)	:	Financial Instruments Business Operators who, before the enforcement of the law, made required notifications in relation to SPBQII or SPIMB

  • *¹⁸As part of efforts to promote the digitization of documents, additional notification items are in principle required to be submitted in an electronic medium (CD-R) and printed attachments. Submissions will not be deemed valid as additional notifications if there is failure to include required information or attach required documents. Applicants are requested to make sure their notifications are complete with all additionally required items and attachments.

  [Required additional attachments]

  • ●Pledge statement (documents stating that the operator does not fall under any of the disqualifying factors (see (2) above) or specifying the relevant disqualifying ground in the case that he/she does fall under a disqualifying ground.)

  • ●Article of incorporation and certificate of registered matters if the operator is a corporation

  • ●Information specified by a Cabinet Office Ordinance (see *²)

• ○Please be reminded that failure to submit notifications including the additional items specified, submission of false notifications, or the inclusion and submission of false information in attachments is subject to the following penalty. Please also be aware that both additional notifications and attachments must be submitted by August 31, 2016.

  Parties subject to penalty	Penalty detail
  Person making submissions	Maximum 1 year prison term or maximum 3 million yen fine (concurrent imposition possible)
  Representatives (if the operator is a corporation), agents, employees and other relevant individuals of the Specially Permitted Business Operator *19
  Specially Permitted Business Operator, etc. (if the operator is an individual)*20
  Specially Permitted Business Operator, etc. (if the operator is a corporation)*20	Maximum 200 million yen fine

  • *¹⁹If there is a violation of the obligation to submit notifications regarding the operations or assets of the Specially Permitted Business Operator, etc.

  • *²⁰If representatives (if the operator is a corporation), agents, employees or other relevant individuals of the Specially Permitted Business Operator, etc., have violated the obligation to submit notifications regarding operations or assets of the Specially Permitted Business Operator, etc.

*Please refer to 1. Overview of the Regulatory Revisions section for details.

• ○Inquiries on requirements for registration and notifications, procedures, etc., should be directed to the Kanto Local Finance Bureau. Contact information is listed below.