FAQ on Financial Instruments and Exchange Act

Section 2 Definitions

Outline

Q1.

What regulations are invoked where a Financial Instrument falls under the definition of “Securities” under the FIEA?

A1.

First, with regard to “Securities” regulations on conducting certain activities in the course of trade (regulations on conducting business) and those requiring or prohibiting the performance of certain activities by business operators (regulations on activities) are applied. Specifically, with regard to “Securities” the regulations on conducting business under the FIEA are applied to such activities as sales and purchases, etc., and, in principle, only persons registered as Financial Instruments Business Operators are permitted to conduct such activities in the course of trade (Article 29 of the FIEA). Financial Instruments Business Operators, etc. are subject to the regulations on activities under the FIEA, and in principle, they have obligations such as to deliver a document to the customer prior to the conclusion of a contract (Article 37-3; Chapter III, Section 2 of the FIEA).

2.

Second, disclosure regulation under the FIEA is applied to “Securities” in principle. Specifically, as a disclosure rule in the primary market, with regard to Public Offering and Secondary Distribution of Securities, Issuers of Securities, etc. are obligated to facilitate public inspection of Securities Registration Statements by submitting them to the authorities and directly provide information to investors through the delivery of Prospectuses. As a disclosure rule in the secondary market, with regard to some types of Securities, such as listed Securities, Issuers of Securities, etc. are obligated to facilitate public inspection of Annual Securities Reports, etc. by submitting them to the authorities (Chapter II of the FIEA).

3.

Third, with regard to “Securities” provisions that prohibit unfair transactions, including prohibition of wrongful acts (Article 157) and prohibition of spreading rumor, using fraudulent means, committing assault or intimidation (Article 158) are applied (Chapter VI of the FIEA).

4.

Fourth, Financial Instruments Exchanges are permitted to handle “Securities” (Article 2(14) and (16), Chapter V of the FIEA).

Q2.

What are beneficiary securities of beneficiary securities issuing trusts?

A1.

"Beneficiary securities of beneficiary securities issuing trusts" (Article 2(1)(xiv) of the FIEA) are certificates indicating beneficial interests (beneficiary securities) of trusts for which issuance of beneficiary securities is provided for under the terms of trust (beneficiary securities issuing trusts). The definition is provided for in Article 185 of the Trust Act.

2.

The Trust Act provides that Securities under private law may be issued with regard to beneficial interests by introducing the system of beneficiary securities issuing trusts (Chapter VIII of the Trust Act). Meanwhile, the FIEA prescribes beneficiary securities issuing trusts as Securities (Article 2(1)(xiv) of the FIEA).

Q3.

What kinds of Financial Instruments are designated as “Securities” by Cabinet Order?

A1.

The FIEA allows for additional designation of the Securities set forth in Article 2(1) and the "securities equivalents" set forth in Article 2(2) by Cabinet Order (Article 2(1)(xxi) and Article 2(2)(vii) of the FIEA).

2.

Specifically, the Financial Instruments designated as the Securities set forth in Article 2(1) of the FIEA are deposit certificates of negotiable deposits issued by foreign judicial persons (Article 2(1)(xxi) of the FIEA; Article 1(i) of the Order for Enforcement of the FIEA (hereinafter referred to as the "FIEA Enforcement Order")), and Securities or certificates which indicate certain monetary claims (limited to those that are not nominative claims) against incorporated educational institutions, etc. and indicate matters including the name of the incorporated educational institution, etc. and the amount of the monetary claims (school bonds) (Article 1(i) of the FIEA Enforcement Order; Article 4 of the Cabinet Office Ordinance on Definitions under Article 2 of the Financial Instruments and Exchange Act (Definition Ordinance)). "Those that are not nominative claims" assumes monetary claims of which Securities or certificates do not indicate the creditors and are recognized to have the nature of Securities as bearer securities under private law (see Supreme Court judgment, June 24, 1969, Minshu Vol. 23, No. 7, p. 1143). They are not considered to include mere certificates of evidence.

3.

In addition, the Financial Instruments designated as the "securities equivalents" set forth in Article 2(2) of the FIEA include claims pertaining to loans that are made to incorporated educational institutions, etc. and that satisfy all of the following requirements (Article 2(2)(vii) of the FIEA; Article 1-3-4 of the FIEA Enforcement Order; Article 8 of the Definition Ordinance):

• (1)loans with the same interest rate and due date that are made by multiple persons;

• (2)loans made by persons other than interested persons (enrolled students, their parents, etc., graduates, and officers and employees of the incorporated educational institution) or loans of which claims are not prohibited from being transferred to persons other than interested persons; and

• (3)loans made by persons other than banks, etc. or loans of which claims are not prohibited from being transferred to persons other than banks, etc. (including collection companies).

Q4.

Why are deposits and insurance not designated as “Securities”?

A1.

Since deposits and insurance are regulated under the Banking Act and the Insurance Business Act, they are not directly regulated under the FIEA by way of designating them as “Securities”

2.

However, according to the basic idea to apply the same user protection rules (sales/solicitation rules) for Financial Instruments and transactions having the same economic nature, regulations equivalent to regulations on activities are secured for deposits and insurance with a strong investment character, by applying mutatis mutandis the regulations on activities under the FIEA pursuant to the Banking Act and the Insurance Business Act (Articles 13-4 and 52-45-2 of the Banking Act; Article 300-2 of the Insurance Business Act).

3.

Meanwhile, Financial Instruments such as ordinary deposits, time deposits, and security-type insurance have a different economic nature from instruments with a strong investment character as represented by shares and corporate bonds. They do not involve any loss of principal caused by market risks and do not require application of regulations equivalent to regulations on activities for instruments with a strong investment character, so regulations on activities under the FIEA are not applied mutatis mutandis to these instruments. These deposits and insurance have also been subject to the regulations on activities(note) under the Banking Act and the Insurance Business Act .

Interests in collective investment schemes (funds)

Q5.

What is the definition for interests in collective investment schemes under the FIEA?

A1.

In recent years, due to progress in financial and IT technologies, the introduction of new "vehicles" through development of the legal system, and diversification of fund procurement and investment methods, new fund-type Financial Instruments which are not subject to existing user protection laws have emerged. In addition, there have been incidents of damage caused by business-type funds taking the form of Anonymous Partnerships targeting many general investors. Moreover, the Livedoor incident (violations of the Securities and Exchange Act by Livedoor) and other circumstances triggered active debates over investment partnerships and investment funds.

2.

In response to such a situation, with a view to filling the regulatory "gaps" for ensuring application of user protection rules, the FIEA provides a comprehensive definition for rights that are categorized as "securities equivalents" (Article 2(2)(v) and (vi) of the FIEA). This comprehensive definition can be referred to as "interests in collective investment schemes (funds)." The FIEA provides for both rights based on domestic laws and regulations (Article 2(2)(v) of the FIEA) and rights based on foreign laws and regulations (Article 2(2)(vi) of the FIEA).

3.

As rights based on domestic laws and regulations, the FIEA lists rights based on a partnership contract under the Civil Code, an Anonymous Partnership agreement under the Commercial Code, an investment limited partnership agreement, or a limited liability partnership agreement, as well as membership rights of an incorporated association (Article 2(2)(v) of the FIEA). These are only listed as examples of vehicles used for a collective investment scheme, and as clear from the phrase of "or other rights," the type of law is irrelevant in determining whether or not a right is categorized as an interest in a collective investment scheme.

4.

The definition of an interest in a collective investment scheme consists of the following three elements (Article 2(2)(v) of the FIEA; Article 1-3 of the FIEA Enforcement Order):

• (1)the holder of the right (equity investor) invests or contributes money, etc.;

• (2)a business is conducted by using the invested or contributed money, etc. ("Invested Business"); and

• (3)the right enables the equity investor to receive dividends from profits arising from the Invested Business or distribution of the assets of the Invested Business.

However, because there may be rights that satisfy all of these requirements but do not necessarily need to be regulated under the FIEA, the FIEA excludes certain rights from the definition of interests in a collective investment scheme (Article 2(2)(v)(a) through (d) of the FIEA).

5.

The term "collective" investment scheme may give an impression that it only includes schemes in which multiple persons make investments or contributions, but investments or contributions by multiple persons is not a requirement for a collective investment scheme under law. Therefore, a scheme in which a single person makes an investment or contribution can also fall under the comprehensive definition of a collective investment scheme.

Q6.

What regulations have been prescribed with regard to interests in collective investment schemes?

A1.

To fill regulatory "gaps," the FIEA provides a comprehensive definition regarding interests in collective investment schemes (Article 2(2)(v) and (vi) of the FIEA) and treats the schemes as Securities. As a result, various regulations under the FIEA are applied to collective investment schemes.

2.

First, disclosure regulation is applied to Public Offering or Secondary Distribution of interests in so-called investment-type collective investment schemes ("Rights in Securities Investment Business, etc.") (Article 3(iii), Article 4(1), Article 24(1), etc.).

3.

Second, under regulations on conducting business, the following activities have been added to the scope of Financial Instruments Business.

• (1)Self-offering of interests in collective investment schemes (solicitation by the Issuer itself of an application for the acquisition of such interests, including both through Public Offering and Private Placement) (Article 2(8)(vii)(f)). This activity falls under the definition of Type II Financial Instruments Business (Article 28(2)(i)).

• (2)Management of investment (self-management) mainly in Securities or Derivative Transactions in the form of a collective investment scheme (Article 2(8)(xv)(c)). This activity falls under the definition of Investment Management Business (Article 28(4)(iii)).

Therefore, in order to conduct the above activities in the course of trade or as a business, not to mention the business of dealing in Public Offering or Secondary Distribution or dealing in Private Placement of interests in collective investment schemes (Article 2(8)(ix)), it is necessary to obtain registration as Financial Instruments Business Operators or Registered Financial Institutions, in principle (Articles 29 and 33-2).

4.

Third, various regulations on activities are applied to Financial Instruments Business Operators, etc. which conduct these activities (Articles 34 through 45).

5.

However, with regard to regulations on conducting business related to collective investment schemes, care is taken to avoid excessive regulation that could impede financial innovation based on the premise of protecting investors, thereby ensuring regulatory flexibility. To be more specific, business operations related to self-offering (Private Placement) of interests in collective investment schemes and Investment Management Business (self-management) involving such interests, if conducted only with professional investors (such as Qualified Institutional Investors, etc.) as counterparties, are regarded as "Specially Permitted Businesses for Qualified Institutional Investors, etc." and therefore they are exempted from the obligation for registration. Meanwhile, with regard to these businesses, notification is required in order to grasp the actual circumstances of business, and a simple set of regulations on activities, etc. is applied (Articles 63 through 63-4).

6.

Fourth, regulations concerning various unfair transactions (Chapter VI) are applied to transactions involving interests in collective investment schemes as well. Under the FIEA, when Partnerships, etc. own 10% or more of the voting rights of Listed Companies, etc. as property of the Partnerships, etc., they are subject to the obligation for the submission of trading reports and for the provision of profits arising from sales and purchases conducted in the short term (Article 165-2).

Q7.

What kinds of rights are excluded from interests in collective investment schemes?

A1.

While providing a comprehensive definition regarding interests in collective investment schemes, the FIEA excludes categories of rights that are considered to have little need to achieve investor protection by regulating them under the FIEA from said definition under law, thereby clarifying the scope of application of the FIEA (Article 2(2)(v) of the FIEA).

2.

Specifically, the following rights are excluded from application of the FIEA (Article 2(2)(v)(a) through (d)):

• (1)rights where all of the equity investors participate in the Invested Business and where there is little need to protect the equity investors as investors;

• (2)rights where the equity investors will not receive dividend of profits or distribution of the assets of the Invested Business in an amount exceeding the amount invested or contributed by them and where no investment nature is found;

• (3)rights where the equity investors are protected under other Acts (Insurance Business Act, the Agricultural Cooperatives Act, the Small and Medium-Sized Enterprise Cooperatives Act, the Real Estate Specified Joint Enterprise Act, etc.) that apply mutatis mutandis the regulations on activities under the FIEA;

• (4)rights that are found not to hinder the public interest or protection of equity investors because the necessary regulatory or supervising system is provided for under another Act or for other reasons.

3.

Rights indicated on the Securities listed in the items of Article 2(1) of the FIEA and rights that are deemed as Securities pursuant to Article 2(2) of the FIEA (excluding interests in collective investment schemes) are excluded from the definition of interests in collective investment schemes (Article 2(2)(v)). Accordingly, rights that are individually listed in Article 2(1) and (2), such as shares and membership rights of an incorporated association, are not categorized as interests in collective investment schemes.

Q8.

What are the cases where all of the equity investors participate in the Invested Business, which are excluded from the definition of interests in collective investment schemes?

A.

"Cases where all of the equity investors participate in the Invested Business" (Article 2(2)(v)(a) of the FIEA), which are excluded from the definition of interests in collective investment schemes, need to satisfy all of the following requirements (Article 1-3-2 of the FIEA Enforcement Order):

• (1)the business execution of the Invested Business is conducted with the consent of all of the equity investors (including the case where there is an agreement on not requiring the consent of all of the equity investors but business execution is conducted after all of the equity investors manifest their intentions on whether or not to give consent on the decision of the business execution); and

• (2)all of the equity investors satisfy either of the following requirements:

  (i)

  to be regularly engaged in the Invested Business; or

  (ii)

  to be engaged in the Invested Business while demonstrating a particularly specialized ability that is indispensable for the continuance of the Invested Business.

Q9.

What other rights are excluded from the definition of interests in collective investment schemes?

A1.

The FIEA specifies the following rights as rights that are "found not to hinder the public interest or protection of equity investors" to be excluded from the definition of interests in collective investment schemes (Article 2(2)(v)(d) of the FIEA):

• (1)rights based on insurance or mutual aid contracts (those that are not subject to the Insurance Business Act) (Article 1-3-3(i) of the FIEA Enforcement Order);

• (2)rights pertaining to investments in or contributions to juridical persons (excluding general incorporated associations other than public interest incorporated associations and general incorporated foundations other than public interest incorporated foundations) (Article 1-3-3(ii) of the FIEA Enforcement Order);

• (3)rights based on shared forest contracts (Article 1-3-3(iii) of the FIEA Enforcement Order);

• (4)rights based on partnership contracts, etc. where the Invested Business is the business of an attorney-at-law, certified public accountant, certified public tax accountant, etc. (Article 1-3-3(iv) of the FIEA Enforcement Order); and

• (5)rights pertaining to an employee shareholding association, expanded employee shareholding association, or client shareholding association (Article 1-3-3(v) and (vi) of the FIEA Enforcement Order; Articles 6 and 7 of the Definition Ordinance).

2.

Rights based on insurance or mutual aid contracts (those that are not subject to the Insurance Business Act) ((1) above) are excluded from the definition of interests in collective investment schemes, given that rights subject to the Insurance Business Act are excluded (Article 2(2)(v)(c) of the FIEA).

3.

Rights pertaining to investments in or contributions to juridical persons (excluding general incorporated associations other than public interest incorporated associations and general incorporated foundations other than public interest incorporated foundations) ((2) above) are excluded from the definition of interests in collective investment schemes, because given that provisions on supervision by administrative organs are stipulated under laws and regulations for juridical persons, there is no need to make them subject to regulations under the FIEA in an overlapped manner.
However, since there are no provisions on supervision by administrative organs for general incorporated associations other than public interest incorporated associations and general incorporated foundations other than public interest incorporated foundations, rights pertaining to investments in or contributions to such associations or foundations are not excluded from the definition of interests in collective investment schemes. Nevertheless, there are cases where, upon contribution of funds to a general incorporated association other than a public interest incorporated association or a general incorporated foundation other than a public interest incorporated foundation, an arrangement is made by articles of incorporation, etc. so that residual assets in an amount exceeding the amount of the fund contributed will not be distributed to the fund contributor and such arrangement is actually observed, and as a result of this, rights pertaining to such contribution fall under Article 2(v)(b) of the FIEA and are excluded from interests in collective investment schemes.

4.

Rights based on shared forest contracts ((3) above) are excluded from the definition of interests in collective investment schemes, because provisions on supervision by prefectural governors are stipulated under the Act on Special Measures concerning Shared Forest.

5.

Rights based on partnership contracts, etc. where the Invested Business is solely the business of an attorney-at-law, certified public accountant, certified public tax accountant, etc. ((4) above) are excluded from the definition of interests in collective investment schemes, because laws and regulations obligate certified public accountants, attorneys-at-law, certified public tax accountants, etc. to observe the articles of association of the organization to which they must become a member (institute of certified public accountants, bar association, certified public tax accountants' association, etc.) and are under the supervision of said organization.

6.

Rights pertaining to an employee shareholding association or expanded employee shareholding association ((5) above) are excluded from the definition of interests in collective investment schemes, as was the case under the former Securities and Exchange Act and relevant regulations, because an employee shareholding association or expanded employee shareholding association purchases share certificates based on a specific plan instead of individual Investment Decisions and the business executor has little discretional power on the matter, and because there is a social condition that such association contributes to the welfare of employees, etc. Rights pertaining to a client shareholding association ((5) above) are also excluded from the definition of interests in collective investment schemes under certain requirements, because a client shareholding association has a nature similar to that of employee shareholding associations and expanded employee shareholding associations.

Derivative Transactions

Q10.

What is the definition of "Derivative Transactions" under the FIEA?

A1.

Under the FIEA, "Derivative Transactions" is a collective term for "Market Transactions of Derivatives," "Over-the-Counter Transactions of Derivatives," and "Foreign Market Derivatives Transactions" (Article 2(20) of the FIEA).

• (1)"Market Transactions of Derivatives" are a certain type of Derivative Transactions conducted in a Financial Instruments Market, in accordance with requirements and by using methods prescribed by the operator of the Financial Instruments Market (Article 2(21) of the FIEA).

• (2)"Over-the-Counter Transactions of Derivatives" are a certain type of Derivative Transactions conducted in neither a Financial Instruments Market nor a foreign Financial Instruments Market (Article 2(22) of the FIEA).

• (3)"Foreign Market Derivatives Transactions" are transactions which are conducted in a Foreign Financial Instruments Market and are similar to Market Transactions of Derivatives (Article 2(23) of the FIEA).

2.

"Derivative Transactions" are basically divided into the following transaction types: (1) a type of transactions where assets subject to spot transactions are used as "underlying assets"; (2) a type of transactions where numerical values, which are not subject to spot transactions themselves, are used as "reference indicators"; and (3) any other type of transactions. Specifically, the FIEA provides for the following. The types of transactions can be additionally designated by Cabinet Order (Article 2(21)(vi) and Article 2(22)(vii)).

• –As type (1): futures transactions / forward transactions (Article 2(21)(i), Article 2(22)(i)), Option transactions (Article 2(21)(iii), Article 2(22)(iii)).

• –As type (2): index futures transactions / index forward transactions (Article 2(21)(ii), Article 2(22)(ii)), Option transactions (Article 2(21)(iii), Article 2(22)(iii)), index Option transactions (the portion in parentheses in Article 2(21)(iii)(b), Article 2(22)(iv)), swap transactions (Article 2(21)(iv), Article 2(22)(v)), commodity swap transactions (Article 2(21)(iv)-2).

• –As type (3): credit derivative transactions (Article 2(21)(v), Article 2(22)(vi)).

3.

With regard to underlying assets of Derivative Transactions ("Financial Instruments"), the FIEA provides for Securities, deposit claims, etc., currencies, and commodities, and "assets for which there are many of the same kind, [and] which have substantial price volatility" may be designated by Cabinet Order (Article 2(24)).

4.

With regard to reference indicators of "Derivative Transactions" ("Financial Indicators"), the FIEA provides for prices or interest rates of Financial Instruments, and meteorological observation figures, and indicators where it is impossible or extremely difficult for a person to exert his/her influence on the fluctuation thereof and which may have material impact on business activities of business operators or "statistical figures pertaining to social or economic conditions" may be designated by Cabinet Order (Article 2(25)).

5.

As above, the FIEA constitutes the definition of "Derivative Transactions" based on transaction types and underlying assets/reference indicators, and allows for expansion of the scope and designation by Cabinet Order of both the transaction types and underlying assets/reference indicators, from the viewpoint of filling regulatory "gaps."

Q11.

What is the relationship between "Derivative Transactions" and “Securities”?

A1.

Both "Derivative Transactions" and “Securities” are regulated under the FIEA as Financial Instruments/transactions with an investment character. However, since “Securities” are instruments that indicate rights whereas "Derivative Transactions" are acts, their positioning under the FIEA differs from each other. In the case of “Securities” certain acts conducted in relation to such Securities (sales and purchases, etc.) are subject to the regulations on conducting business or the regulations on activities under the FIEA, but in the case of "Derivative Transactions," the act of such transaction itself is subject to the regulations on conducting business or the regulations on activities.

2.

In addition, while “Securities” are subject to the disclosure regulation under the FIEA since they contribute to the Investment Decisions of investors, "Derivative Transactions" are not subject to the disclosure regulation. The provision of information on "Derivative Transactions" to investors is ensured through the regulations on activities relating to sales and solicitation (obligation to deliver a document, etc.).

Q12.

Is a person registered for Financial Instruments Business eligible to conduct both so-called securities derivative transactions and financial futures transactions?

A1.

From the viewpoint of developing more comprehensive regulations, the FIEA has consolidated the various business operations that had conventionally been regulated by the individual laws governing the respective types of business into "Financial Instruments Business" (Article 2(8) of the FIEA), and has consolidated and simplified the registration procedures. As part of this measure, securities derivative transactions, which had conventionally been regulated under the Securities and Exchange Act, and financial futures transactions, which had been regulated under the Financial Futures Trading Act, were categorized as "Derivative Transactions" (Article 2(20) of the FIEA) and included within the scope of Financial Instruments Business (Article 2(8)(i) through (iv) of the FIEA).

2.

Meanwhile, from the viewpoint of ensuring regulatory flexibility, the FIEA provides for the following categorization of the specific types of Derivative Transactions:

• (1)Market Transactions of Derivatives and Foreign Market Derivatives Transactions pertaining to highly liquid Securities ("Paragraph (1) Securities") and Over-the-Counter Transaction of Derivatives are categorized as "Type I Financial Instruments Business" with strict market entry requirements (requirements for registration refusal) (Article 28(1)(i) and (ii) of the FIEA); and

• (2)Market Transactions of Derivatives and Foreign Market Derivatives Transactions pertaining to less liquid Securities ("Paragraph (2) Securities") and Financial Instruments other than Securities are categorized as "Type II Financial Instruments Business" with relatively simplified market entry requirements (requirements for registration refusal) (Article 28(2)(ii) and (iii) of the FIEA).(note)

Public Offering, Secondary Distribution, etc.

Q13.

What is “Public Offering of Securities”?

A1.

The Financial Instruments and Exchange Act (hereinafter referred to as the “FIEA”) defines “Public Offering of Securities” (Article 2(3) of the FIEA) to be, in the case of such Securities as share certificates and corporate bond certificates (“Paragraph (1) Securities”), solicitations of applications to acquire newly issued Securities (“Solicitation for Acquisition”) that are made to “a large number of persons,” which is 50 or more persons.

2.

Interests in collective investment schemes, etc. that are deemed as Securities under the FIEA (“Paragraph (2) Securities”) are generally formed by way of determining their contents while taking into account investor demand, etc., unlike such Securities as share certificates and corporate bond certificates, etc. of which contents are fixed (“Paragraph (1) Securities”). Therefore, the FIEA defines “Public Offering” of interests in collective investment schemes, etc. to be solicitations of applications to acquire newly issued interests in collective investment schemes, etc. which will render the Securities pertaining thereto to be held by 500 or more persons who respond to such Solicitation for Acquisition (the principal sentence of Article 2(3) and Article 2(3)(iii) of the FIEA), and provides that the Public Offering is to be determined on the basis of not the number of persons solicited, but the number of persons who will hold Securities by responding to the solicitation.

3.

An act that is categorized as a “Public Offering of Securities” with a total issue value of 100 million yen or more requires submission of a Securities Registration Statement to the Prime Minister (Article 4(1) of the FIEA).

Q14.

What is “Secondary Distribution of Securities”?

A1.

The FIEA defines “Secondary Distribution of Securities” (Article 2(4) of the FIEA) to be, in the case of such Securities as share certificates and corporate bond certificates (“Paragraph (1) Securities”), solicitations of applications to sell or purchase already-issued Securities (“Solicitation for Selling, etc.”) that are made to “a large number of persons,” which is 50 or more persons.

2.

In addition, the FIEA excludes from the category of “Secondary Distribution of Securities” sales and purchases of Securities on the Financial Instruments Exchange Market and the transactions equivalent thereto where investors are basically able to acquire sufficient investment information and the exclusion of such transactions from the category of Secondary Distribution is not likely to impair the protection of investors (the principal sentence of Article 2(4)), and classifies that disclosure regulation will not be applied to such transactions. Specifically, a Cabinet Order specifies sales and purchases of Securities on the Financial Instruments Exchange Market and transactions of Securities listed in a Financial Instruments Exchange through a proprietary trading system (PTS) as such excluded transactions (Article 1-7-3 of the FIEA Enforcement Order).

3.

The FIEA defines Secondary Distribution of interests in collective investment schemes, etc. that are deemed as Securities under the FIEA (“Paragraph (2) Securities”) to be solicitations of applications to sell or purchase already-issued interests in collective investment schemes, etc. (“Solicitation for Selling, etc.”) which will render the Securities pertaining thereto to be held by 500 or more persons who respond to such Solicitation for Selling, etc. (Article 2(4)(iii) of the FIEA; Article 1-8-5 of the FIEA Enforcement Order), similar to the definition of Public Offering of Paragraph (2) Securities, and provides that the Secondary Distribution is to be determined on the basis of not the number of persons solicited, but the number of persons who will hold Securities by responding to the solicitation.

4.

An act that is categorized as a “Secondary Distribution of Securities” with a total distribution value of 100 million yen or more requires submission of a Securities Registration Statement to the Prime Minister (Article 4(1) of the FIEA). Regarding a Secondary Distribution of Securities in the case where disclosures have been made with regard to the Securities, and a Secondary Distribution which satisfies certain requirements among Secondary Distributions of Securities information of which have already been disclosed in a foreign state, etc., the FIEA excludes such Secondary Distributions of Securities from an obligation to submit a Securities Registration Statement (Article 4(1)(iii) and (iv) of the FIEA).

Q15.

What is the outline of “Qualified Institutional Investors”?

A.

“Qualified Institutional Investors,” who are persons having expert knowledge of and experience with investment in Securities, include the following (Article 2(3)(i) of the FIEA; Article 10(1) of the Definition Ordinance):

• –Financial Instruments Business Operators (limited to those that conduct Securities-Related Business or Investment Management Business)

• –Investment corporations

• –Foreign investment corporations

• –Banks

• –Insurance companies

• –Foreign insurance companies, etc.

• –Shinkin banks

• –Federations of Shinkin banks

• –Labor banks

• –Federations of labor banks

• –Norinchukin Bank

• –Shoko Chukin Bank

• –Credit cooperatives*

• –Federations of credit cooperatives*

• –Federations of agricultural cooperatives that are able to receive deposits or savings or provide mutual aid service on a regular basis

• –Federations of mutual aid fishery cooperatives

• –Regional Economy Vitalization Corporation of Japan (limited to the case of purchasing claims against a business operator subject to rehabilitation, etc.)

• –Rehabilitation Support Organization for Companies Damaged by the Great East Japan Earthquake (limited to the case of purchasing claims against a target business operator, etc.)

• –Persons engaged in the management and investment of the fiscal loan fund

• –Government Pension Investment Fund

• –Japan Bank for International Cooperation

• –The Okinawa Development Finance Corporation

• –Development Bank of Japan

• –Agricultural cooperatives that are able to receive deposits or savings on a regular basis**

• –Federations of fishery cooperatives that are able to receive deposits or savings on a regular basis**

• –Call loan brokers (limited to Registered Financial Institutions)

• –Venture capitals (stated capital: 500 million yen or more)*

• –Investment LPS

• –Employees' pension funds (Net Assets: 10 billion yen or more)*

• –Corporate pension funds (Net Assets: 10 billion yen or more)*

• –Pension Fund Association

• –Organization for Promoting Urban Development (in the case of acquiring corporate bonds, etc. of approved business operators, etc.)

• –Trust companies (excluding management-type trust companies)*

• –Foreign trust companies (excluding management-type foreign trust companies)*

• –Juridical persons (the balance of Securities held: one billion yen or more)*

• –Juridical persons which are Operating Partners, etc. of a partnership (the balance of Securities held by the partnership: one billion yen or more; and the consent of all of the other partners)*

• –Specific Purpose Companies (the balance of Securities which are specified assets: one billion yen or more; and other requirements)*

• –Individuals (the balance of Securities held: one billion yen or more; and one year has elapsed from the day of opening the account)*

• –Individuals who are Operating Partners, etc. of a partnership (the balance of Securities held by the partnership: one billion yen or more; and the consent of all of the other partners)*

• –Foreign Financial Instruments Business Operators, etc. (stated capital: more than a certain amount)*

• –Foreign national governments, etc.*

• –Foreign employees' pension funds (Net Assets: 10 billion yen or more)*

*

Limited to those that have made notification to the FSA Commissioner

**

Limited to those designated by the FSA Commissioner

Financial Instruments Business

Q16.

What is the definition of "Financial Instruments Business" under the FIEA?

A1.

The FIEA has expanded the scope of business operations subject to regulations, from the viewpoint of reviewing the conventional individual laws governing the respective types of business and simplifying the regulations (developing cross-sectoral regulations) and in line with the expansion (consolidation) of the subject commodities and transactions.

2.

Accordingly, the FIEA defines the regulated business as "Financial Instruments Business" (Article 2(8) of the FIEA). The fundamental business operations of "Financial Instruments Business" are "sales and solicitation," "asset investment and advice," and "asset management" (Report of the First Subcommittee).

3.

In addition, the following acts are also treated as "Financial Instruments Business": solicitation by the Issuer of an application for the acquisition of its newly issued Securities (so-called self-offering) (Article 2(8)(vii) of the FIEA); agency or intermediary services for conclusion of Investment Advisory Contracts or Discretionary Investment Contracts (Article 2(8)(xiii) of the FIEA); formation of collective investment schemes, etc. and investment of funds mainly in rights pertaining to Securities or Derivative Transactions (so-called self-management)(Article 2(8)(xv) of the FIEA); acceptance of deposits of money or Securities from the customer with regard to Securities transactions, etc. (Article 2(8)(xvi) of the FIEA); and transfer of corporate bonds, etc. conducted in response to opening of an account for transfer of corporate bonds, etc. (Article 2(8)(xvii) of the FIEA).

Q17.

Are so-called self-offering and self-management covered by "Financial Instruments Business"?

A1.

The FIEA prescribes "Public Offering or Private Placement of Securities" as an act categorized as Financial Instruments Business (Article 2(8)(vii) of the FIEA), and provides that an act of conducting self-offering (sales or solicitation by the Issuer itself) on a regular basis is categorized as Financial Instruments Business. "Public offering or Private Placement" refers to the case where the Issuer of Securities practically conducts solicitation for an application for the acquisition of its newly issued Securities ("Solicitation for Acquisition") (see Article 2(3) of the FIEA). The types of Securities subject to the "Public Offering or Private Placement" which is categorized as "Financial Instruments Business" are limited to beneficiary securities of investment trusts pertaining to beneficial interest of trust for investment based on settlor's instruction, beneficiary securities of foreign investment trusts, mortgage securities, interests in collective investment schemes, and interests in commodity funds (trust type) (Article 2(8)(vii) of the FIEA; Article 1-9-2 of the FIEA Enforcement Order), in consideration of the need for investor protection and the convenience of fund procurement by the Issuer.

2.

The FIEA prescribes an act of investing money or other properties contributed from a person who holds interests in collective investment schemes, trust beneficial interests, or beneficiary securities of beneficiary securities issuing trusts mainly as an investment in Securities or rights pertaining to Derivative Transactions conducted under Investment Decisions based on analysis of values, etc. of Financial Instruments, as an act categorized as Financial Instruments Business (Article 2(8)(xv) of the FIEA). In addition, the FIEA prescribes that an act of forming collective investment schemes, etc. and investing funds mainly as an investment in Securities or Derivative Transactions (so-called self-management) is categorized as Financial Instruments Business. An act of self-management is categorized as "Investment Management Business" under the FIEA only when funds are invested mainly as an investment in Securities or rights pertaining to Derivative Transactions. An act of forming collective investment schemes, etc. and investing funds mainly as an investment in any other property, such as real estate, etc. is not categorized as "Financial Instruments Business" even if it is conducted on a regular basis.

3.

A person who intends to conduct self-offering or self-management on a regular basis needs to be registered. However, when such act falls under the category of Specially Permitted Business for Qualified Institutional Investor, etc. (so-called funds for professional investors) pertaining to interests in collective investment schemes, no registration is required, and notification suffices (Article 63(1) and (2) of the FIEA). Also, when a juridical corporation conducting Investment Management Business pertaining to collective investment schemes in a foreign state conducts Investment Management Business pertaining to collective investment schemes in Japan only with Financial Instruments Business Operators or a Registered Financial Institution engaged in Investment Management Business as counterparties, no registration or notification is required (Article 61(3) of the FIEA; Article 17-11(1) of the FIEA Enforcement Order).

Q18.

Is the FIEA applied to acts that are excluded from "Financial Instruments Business"?

A1.

Whether or not the provisions of the FIEA apply to acts that are excluded from the definition of "Financial Instruments Business" should be determined in light of the purport of the respective provisions and other factors.

2.

Basically, such acts are not directly subject to regulations on conducting business or regulations on activities (the obligation to deliver a document prior to and at the time of the conclusion of a contract, the obligation to prepare and deliver investment reports, etc.), and nor are they directly subject to the obligation of preparation and preservation of books and documents. For example, registration of sales representatives is presumed to be unnecessary for Over-the-Counter Transactions of non-Securities-related Derivatives, etc. conducted with professional investors as counterparties (Article 1-8-6(1)(ii) of the FIEA Enforcement Order), which are excluded from Financial Instruments Business.

3.

The FIEA limits the type of actors for some of the acts that are excluded from the definition of "Financial Instruments Business," and in such cases, only acts conducted by such actors are excluded. Thus, it is not possible to uniformly conclude that Financial Instruments Business Operators are eligible to conduct all of such acts. However, it is presumed that business operations that satisfy the requirements under individual provisions can basically be conducted as "incidental business" of Financial Instruments Business Operators (persons who conduct Type I Financial Instruments Business or Investment Management Business) (the principal sentence of Article 35(1) of the FIEA), and that such acts can be conducted without making notification of subsidiary business (Article 35(3) of the FIEA) or receiving approval for subsidiary business (Article 35(4) of the FIEA). Nevertheless, the general provisions on supervision under Article 51 of the FIEA are considered to apply to such business operations as well, so such business operations may become subject to the order to improve business operations under Article 51 of the FIEA or other measures.

4.

Also when banks, etc. conduct acts that are excluded from the definition of "Financial Instruments Business," the registration to become a Registered Financial Institution (Article 33-2 of the FIEA) is considered to be unnecessary, unless where the FIEA excludes Financial Institutions from the actors of those acts.

Q19.

What is the scope of professional investors who are counterparties of Over-the-Counter Transactions of Derivatives, etc. that are excluded from "Financial Instruments Business"?

A1.

The FIEA excludes Over-the-Counter Transactions of non-Securities-related Derivatives, etc. that are conducted with persons specified by Cabinet Ordinance as those who are found to have expert knowledge of and experience with Derivative Transactions, or stock companies with a capital amount not less than the amount specified by Cabinet Ordinance as counterparties, from the definition of "Financial Instruments Business" (Article 1-8-6(1)(ii) of the FIEA Enforcement Order).

2.

However, in accordance with the purport of the FIEA to ensure investor protection, the FIEA limits the scope of acts excluded from the definition of "Financial Instruments Business" to those that are truly found not to hinder investor protection. To be more specific, the FIEA excludes acts from the definition of "Financial Instruments Business" only when the counterparties are Financial Instruments Business Operators (limited to those engaged in Type I Financial Instruments Business), Registered Financial Institutions, Qualified Institutional Investors, etc., stock companies with a capital amount of not less than one billion yen, or Specific Purpose Companies, etc. with a specified capital amount of not less than one billion yen (Article 15 of the Definition Ordinance; Public Notice of the Financial Services Agency No. 53 of 2007).
According to this, if a bank, etc. which is a Registered Financial Institution conducts over-the-counter interest rate swap transactions, etc. with a small and medium-sized company with a capital amount of less than one billion yen as the counterparty, such act is subject to regulations under the FIEA.

Q20.

What kinds of acts pertaining to interests in collective investment schemes are excluded from "Financial Instruments Business"?

A1.

The FIEA treats "Public Offering or Private Placement" (so-called self-offering) of interests in collective investment schemes as Financial Instruments Business (Article 2(8)(vii)(f) of the FIEA), and regulates such act as "Type II Financial Instruments Business" (Article 28(2)(i) of the FIEA). When the Issuer of interests in collective investment schemes entrusts the Solicitation for Acquisition of said interests to an external third party and does not directly engage in the act of solicitation, the Issuer does not need to make registration or notification concerning the self-offering, since the Issuer is not conducting the "Public Offering or Private Placement."

2.

Also, the FIEA treats business operations of investing money, etc. contributed from a person who holds interests in collective investment schemes mainly as an investment in Securities or Derivative Transactions (so-called self-management) as Financial Instruments Business (Article 2(8)(xv)(c) of the FIEA), and regulates such operations as Investment Management Business (Article 28(4)(iii) of the FIEA).

3.

However, the FIEA excludes acts which are formally categorized as self-management but which fall under the following cases from the definition of Financial Instruments Business (Article 2(8)(xv) of the FIEA) because they are considered to have little need to be regulated as Investment Management Business (the principal sentence of Article 2(8) of the FIEA).

• (1)The first case is self-management conducted as contribution of the entire amount of capital to a single juridical person in a two-tier commodity fund scheme (Article 1-8-6(1)(iii) and Article 1-8-6(2) of the FIEA Enforcement Order). In this case, contribution is made to a single juridical person by using all of the money, etc. contributed from a person who holds beneficial interests in commodity investment. Therefore, this case satisfies such requirements as the juridical person wholly entrusting a commodities investment advisor, etc. with Investment Decisions concerning commodity investment.

• (2)The second case is self-management conducted in the case where all of the authority for investment with regard to a collective investment scheme has been entrusted to another person (Article 1-8-6(1)(iv) of the FIEA Enforcement Order; Article 16(1)(x) of the Definition Ordinance). In this case, a person has entrusted all of the authority for investment. Therefore, this case satisfies such requirements as conclusion of a Discretionary Investment Contract with a Financial Instruments Business Operator, etc. (registered business operator), and it is a case where such Financial Instruments Business Operator, etc. has made notification of the required matters concerning said person in advance.

• (3)The third case is self-management of a baby fund of a two-tiered real estate fund (Article 16(1)(xi) of the Definition Ordinance). This is a case where money, etc. contributed based on an Anonymous Partnership agreement concluded with a single counterparty (a Financial Instruments Business Operator, etc. who is a business operator of another Anonymous Partnership (a person who conducts Investment Management Business), a Specially Permitted Business Notifying Person, or a person who conducts special Investment Management Business (Article 48(1) of the Supplementary Provisions of the Act for Partial Revision of the Financial Instruments and Exchange Act (hereinafter referred to as the "Revising Act")) is invested in beneficial interests of real estate trust. It is a case where the counterparty (a business operator of the mother fund) has made notification of the required matters concerning said person (a business operator of baby fund) in advance.

• (4)The fourth case is self-management in a race horse fund scheme (Article 16(1)(xii) of the Definition Ordinance). This is a case where a person conducting "race horse investment related business operations" (Article 7(iv)(d) of the Cabinet Office Ordinance on Financial Instruments Business, etc. (hereinafter referred to as the "Financial Instruments Business Ordinance")) (such business operations refer to sales or solicitation operations pertaining to rights based on Anonymous Partnership agreements (those intended for acquiring race horses by using all of the money that has been contributed, and providing those race horses as contribution in kind to a business operator of another Anonymous Partnership, etc.)) (such person is a so-called horse-lovers corporation) makes the equity interest in said other Anonymous Partnership (a so-called club corporation) the investment target.

• (5)The fifth case is self-management of a foreign collective investment scheme (Article 16(1)(xiii) of the Definition Ordinance). This is a case that satisfies such requirements as the act being conducted by a Qualified Institutional Investor or Specially Permitted Business Notifying Person where less than 10 equity investors of the foreign collective investment scheme are residents in Japan, and the amount of contribution by the residents in Japan is not more than one-third of the total amount of contribution.

4.

Furthermore, the following acts of underwriting pertaining to interests in collective investment schemes are excluded from the definition of "Financial Instruments Business" (Article 2(8)(vi) of the FIEA) since there is little need to protect investors by treating such acts as "underwriting" (the principal sentence of Article 2(8) of the FIEA):

• (1)First is the act of underwriting pertaining to a lease business (Article 1-8-6(1)(iv) of the FIEA Enforcement Order; Article 16(1)(v) of the Definition Ordinance). This is a case where a Financial Instruments Business Operator (limited to a juridical person conducting Type II Financial Instruments Business, with a stated capital, etc. of 50 million yen or more) underwrites rights based on an Anonymous Partnership agreement from a wholly owned subsidiary (stock company) conducting a lease business.

• (2)Second is the act of underwriting pertaining to the formation of a two-tiered real estate fund (Article 16(1)(vi) of the Definition Ordinance). This is a case where a Financial Instruments Business Operator (limited to a juridical person conducting Type II Financial Instruments Business) underwrites equity interests in an Anonymous Partnership of a real estate private placement fund (corresponding to a so-called baby fund) for the purpose of having a business operator of another Anonymous Partnership (corresponding to a so-called mother fund) acquire those equity interests.