Administrative Actions, etc. against
SMBC Nikko Securities Inc.
and Sumitomo Mitsui Financial Group, Inc.

Today, the Financial Services Agency (FSA) took administrative actions against SMBC Nikko Securities Inc. (Chiyoda City, Tokyo; corporate number: 7010001125714; hereinafter referred to as "SMBC Nikko Securities") and Sumitomo Mitsui Financial Group, Inc. (Chiyoda City, Tokyo; corporate number: 2010001081053; hereinafter referred to as "Sumitomo Mitsui Financial Group") as described in I. and II. below. In addition, the FSA issued orders to submit reports as described in III. below to Sumitomo Mitsui Banking Corporation (Chiyoda City, Tokyo; corporate number: 5010001008813; hereinafter referred to as "SMBC") and Sumitomo Mitsui Financial Group.

Ⅰ. Administrative action against SMBC Nikko Securities

1. Reasons for the administrative action

As a result of conducting an on-site inspection of SMBC Nikko Securities, the Securities and Exchange Surveillance Commission (SESC) made a recommendation for taking an administrative action on September 28, 2022, based on the findings of the following violations of laws and regulations.

With regard to 10 issues of listed shares, SMBC Nikko Securities, in its operations, attempted to prevent their closing prices on the execution dates of "block offer" trading, which served as the basis for the trading prices in the block offers, from significantly declining from their closing prices on the immediately preceding dates, thereby maintaining their share prices at certain levels. To that end, in violation of the provisions of Article 20 of the Order for Enforcement of the Financial Instruments and Exchange Act, the company made purchases and offers to purchase at a series of limit prices for the purpose of stabilizing the market prices of the respective shares (hereinafter referred to as the "conduct in this case").

The conduct in this case is found to be in violation of Article 159, paragraph (3) of the Financial Instruments and Exchange Act (hereinafter referred to as the "FIEA").

In addition, the conduct in this case is found to have been committed due to insufficiency in SMBC Nikko Securities' control environment for transaction screening aimed at checking and preventing unfair transactions and in its control environment for governance aimed at ensuring strict legal compliance and appropriate business operations.

(2) Deficiency in the control environment for transaction screening

SMBC Nikko Securities conducts transaction screening based on certain standards for transactions extracted by using its transaction trend monitoring system (hereinafter referred to as the "system"). If a transaction is found to have a risk of leading to violation of laws and regulations, etc. as a result of the screening, SMBC Nikko Securities takes actions, such as conducting an interview or giving a warning (hereinafter referred to as "measures") against the customer, etc. that has conducted the transaction (including proprietary trading), according to the contents of the transaction and the past transaction status of the customer, etc. Under such circumstances, transactions of eight out of the ten issues of shares in the conduct in this case were extracted by the system as those suspected of being unfair transactions. However, as SMBC Nikko Securities sets a standard to implement the measures when the transactions are conducted over two or more days, transactions like those relating to the conduct in this case, which are conducted only on one market day for each issue, are not made subject to the measures, even if they are extracted by the system.

Moreover, SMBC Nikko Securities conducts transaction screening for proprietary trading related to specific events, such as block trades, irrespective of whether it is extracted by the system (hereinafter referred to as "event screening"). However, block offers are not made subject to the event screening, even though they involve similar risks as block trades, etc., such as there being an incentive to manipulate the closing price through proprietary trading.

Accordingly, the measures were not implemented for any of the transactions relating to the conduct in this case.

The circumstances above indicate that SMBC Nikko Securities' control environment for transaction screening is found to be deficient, and they constitute the circumstances provided in Article 123, paragraph (1), item (xii) of the Cabinet Office Order on Financial Instruments Business (hereinafter referred to as the "FIB Cabinet Office Order") based on the provisions of Article 40, item (ii) of the FIEA.

Meanwhile, the circumstances above are found to be attributable to SMBC Nikko Securities' insufficient recognition of the risks involved in proprietary trading and other matters, as well as to the failure on the part of SMBC Nikko Securities' management team to respond to the increasing number of transaction screening cases by sophisticating the system and developing the transaction screening framework accordingly.

(3) Deficiency in the control environment for business operations relating to block offers

Upon execution of a block offer, SMBC Nikko Securities confirms the buying customers' purchase intent in advance. In that process, a considerable number of SMBC Nikko Securities sales representatives provide such an explanation which allows buying customers to identify the execution date of the block offer. This situation is found to be giving an opportunity for customers who intend to conduct short selling on the block offer execution date to do so, and is serving as a cause that induces short selling.

Since the time when the introduction of block offers was considered (in 2012), SMBC Nikko Securities had recognized concerns that buying customers' short selling of the issue subject to the block offer would distort the price formation of the issue. However, SMBC Nikko Securities had commenced the block offer operations without appropriately discussing a desirable way of providing information to buying customers in relation to the block offer execution date and other matters within the company.

Later, as SMBC Nikko Securities actually faced falls in share prices of the target issues on block offer execution dates, questions were raised, such as concerns about price formation. Nevertheless, the company has failed to take effective countermeasures against the concerns.

The abovementioned status of SMBC Nikko Securities' business operations concerning block offers is likely to undermine market fairness, and is found to constitute a situation in which it is "necessary and appropriate in the public interest or for the protection of investors as concerns ... business operations" as prescribed in Article 51 of the FIEA.

The situation above is attributable to the fact that SMBC Nikko Securities lacked awareness as a gatekeeper of the market by prioritizing the promotion of its own business operations and hardly having the awareness to rectify the problems relating to its block offers, and that the company's control environment for appropriately identifying business risks and challenges and taking effective measures, such as reviewing the product features, was insufficient. Therefore, SMBC Nikko Securities' control environment for governance aimed at ensuring appropriate business operations is found to be deficient.

(4) Inappropriate operations of business in cooperation with a bank

Article 153, paragraph (1), item (vii) of the FIB Cabinet Office Order based on the provisions of Article 44-3, paragraph (1), item (iv) of the FIEA provides that a financial instruments business operator engaged in a securities-related business (limited to an operator engaged in a type I financial instruments business) must not receive from, or provide to, its parent corporation, etc. or subsidiary corporation, etc. any undisclosed information on the issuer, etc., unless the issuer, etc. has given prior consent in writing or by means of an electronic or magnetic record on the provision of such undisclosed information by the financial instruments business operator or its parent corporation, etc. or subsidiary corporation, etc. However, SMBC Nikko Securities received from, or provided to SMBC, which is its parent corporation, etc., undisclosed information on corporate customers multiple times and shared this information within SMBC Nikko Securities, while recognizing that suspension of the information sharing was requested by or consent to the information sharing was not obtained from the corporate customers.

With regard to shares of Listed Company A held by multiple corporations, including SMBC, an officer of Company A directly requested SMBC to stop providing SMBC Nikko Securities with undisclosed information concerning secondary distribution of the shares. However, officers and employees of SMBC Nikko Securities, in spite of recognizing the request for suspension of the provision of information, received information on the time of execution, amount, method, and other matters concerning the secondary distribution from SMBC multiple times, and shared this information among the persons concerned within SMBC Nikko Securities, to plan its marketing strategy, in order to acquire the position as the lead managing underwriter in the secondary distribution. Furthermore, an executive managing officer of SMBC Nikko Securities requested SMBC to urge Company A to enable SMBC Nikko Securities to acquire that position in the secondary distribution.

SMBC Nikko Securities and SMBC each pledged to Listed Company B that they will not share between SMBC Nikko Securities and SMBC any information concerning the acquisition of Company C by Company B and fund procurement relating to the acquisition (hereinafter referred to as the "acquisition, etc.") that they learn in the course of transactions with Company B, without obtaining prior consent from Company B. However, officers and employees of SMBC Nikko Securities received undisclosed information concerning the acquisition, etc. from SMBC multiple times, and shared this information among the persons concerned within SMBC Nikko Securities, in spite of the fact that SMBC had not obtained prior consent from Company B.

In addition, officers and employees of SMBC Nikko Securities communicated to SMBC undisclosed information that SMBC Nikko Securities obtained from Company B, without obtaining prior consent from Company B.

Listed Company D held the majority of shares of Listed Company E, and the two companies were in a relationship of a so-called publicly listed parent/subsidiary pair. Company D was considering a tender offer bid (hereinafter referred to as the "TOB") for shares of Company E. In this regard, an officer of Company D directly requested SMBC to strictly manage information on the TOB and to only disclose information on the TOB to the minimum number of members necessary within SMBC. However, officers and employees of SMBC Nikko Securities, while recognizing the necessity for strict management of the information, etc., received undisclosed information concerning the TOB from SMBC multiple times, and shared this information among the persons concerned within SMBC Nikko Securities.

The abovementioned conducts of SMBC Nikko Securities are found to constitute the act prescribed in Article 153, paragraph (1), item (vii) of the FIB Cabinet Office Order based on the provisions of Article 44-3, paragraph (1), item (iv) of the FIEA.

Meanwhile, the abovementioned conducts are found whereby officers and employees of SMBC Nikko Securities prioritized the profit of SMBC Nikko Securities through obtaining deals, nevertheless recognizing that information cannot be received or provided between the bank and the securities company. Also given that executive managing officers of SMBC Nikko Securities are found to have been directly involved in receiving undisclosed information and sharing information with the persons concerned within the company, the abovementioned conducts are found to be attributable to the fact that there is a lack of awareness of complying with laws and regulations, etc. in promoting bank-securities business relationships in SMBC Nikko Securities.

2. Content of the order

○ Order to suspend business (Article 52, paragraph (1) of the FIEA)

Suspend the operations concerning new solicitations, acceptance of entrustment, and transactions relating to "block offer" trading (excluding the operations individually allowed by the authorities) from October 7, 2022 to January 6, 2023.

○ Business improvement order (Article 51 of the FIEA)

In light of the market manipulation cases, implement the following so as to ensure the sound and appropriate operation of the business:

 

So as to ensure the sound and appropriate operation of business, promptly develop and steadily implement an effective business improvement plan including the following points, based on an analysis of the cases in violation of the bank-securities firewall regulations, toward recurrence prevention:

 

II. Administrative action against Sumitomo Mitsui Financial Group

1. Reasons for the administrative action

As a result of reviews on the report, etc. which Sumitomo Mitsui Financial Group was requested to submit under the provisions of Article 56-2, paragraph (2) of the FIEA, points to be improved were found regarding Sumitomo Mitsui Financial Group's governance over SMBC Nikko Securities with regard to the market manipulation cases.

Given the seriousness of the market manipulation cases, such situation is found to constitute a situation where it is found "to be particularly necessary in the public interest or for the protection of investors in light of the state of the business or assets," which is a requirement for issuing an order to take measures necessary for improving the financial instruments business operator's business operations or the state of its assets under Article 32-2, paragraph (2) of the FIEA.

2. Content of the order

○ Order for improvement measures (Article 32-2, paragraph (2) of the FIEA)

 

III. Orders to submit reports against SMBC and Sumitomo Mitsui Financial Group

1. With regard to the cases in violation of the bank-securities firewall regulations, the FSA today ordered SMBC to report the following matters in writing under Article 24 of the Banking Act by November 7, 2022:

2. With regard to that case, the FSA today ordered Sumitomo Mitsui Financial Group to report the following matters in writing under Article 56-2 of the FIEA and Article 52-31 of the Banking Act by November 7, 2022: