FAQ on Financial Instruments and Exchange Act

Section 6 Financial Instruments Business Operator, etc.

Outline

Q1.: What kind of operator is a Financial Instruments Business Operator?
A1.: A Financial Instruments Business Operator is a person registered by the Prime Minister under Article 29 of the FIEA with regard to conducting Financial Instruments Business (Article 2(9) of the FIEA).
2.: Financial Instruments Business (Article 2(8) of the FIEA) includes securities business, financial futures trading, mortgage securities business, commodity investment business, beneficiary right sales, Investment Advisory Business, Discretionary Investment Management Business, investment trust management business, and investment corporation asset management business under the former Securities and Exchange Act and Act on Foreign Securities Brokers, as well as an act of an Issuer soliciting applications for acquisition of Securities newly issued by the Issuer (self-offering), an agency or intermediary service for conclusion of Investment Advisory Contracts or Discretionary Investment Contracts, an act of forming a collective investment scheme, etc. and mainly investing in Securities or rights pertaining to Derivative Transactions (self-management), an act of receiving deposit of money or Securities from customers with regard to Securities transactions, etc., and an act of transferring bonds, etc. in response to opening of an account for transfer of bonds, etc. Financial Instruments Business Operators are those that have been registered to conduct these businesses.
3.: The FIEA provides for the following as the Categories of Businesses of Financial Instruments Business Operators: Type I Financial Instruments Business (Article 28(1) of the FIEA); Type II Financial Instruments Business (Article 28(2) of the FIEA); Investment Advisory and Agency Business (Article 28(3) of the FIEA); and Investment Management Business (Article 28(4) of the FIEA). A Financial Instruments Business Operator needs to be registered in order to conduct any of these businesses (Article 29 of the FIEA). Any business that is categorized as a Financial Instruments Business can be conducted with single registration. Accordingly, it would be sufficient for a business operator to have obtained single registration as a Financial Instruments Business Operator to conduct Type I Financial Instruments Business or any other categories of Financial Instruments Business listed above, although there are differences in the requirements for refusing registration. However, authorization needs to be obtained to conduct PTS (Proprietary Trading System) business (Article 30(1) of the FIEA).
4.: As for Investment Management Business and Securities-Related Business (Article 28(8) of the FIEA) conducted by financial institutions, they are not categorized as Financial Instruments Business (the principal sentence of Article 2(8) of the FIEA), so financial institutions cannot obtain registration as a Financial Instruments Business Operator for conducting Investment Management Business and Securities-Related Business. Meanwhile, the FIEA does not expressly deny obtainment of registration as a Financial Instruments Business Operator for financial institutions to conduct businesses other than Investment Management Business and Securities-Related Business, such as Investment Advisory Business. However, since financial institutions that have obtained registration as Registered Financial Institutions (Article 2(11) of the FIEA) are able to conduct certain operations of Securities-Related Business and conduct businesses other than Investment Management Business and Securities-Related Business, such as Investment Advisory Business, financial institutions are generally expected to be registered not as Financial Instruments Business Operators, but as Registered Financial Institutions (Article 33-2 of the FIEA).

Q2.: What is Type I Financial Instruments Business?
A1.: Type I Financial Instruments Business is conducting any of the following acts of Financial Instruments Business on a regular basis (Article 28(1) of the FIEA):

(i)

sales and purchase/Market Transactions of Derivatives/Foreign Market Derivatives Transactions, intermediary/brokerage/agency services for these transactions, intermediary/brokerage/agency services for entrustment of these transactions, Brokerage for Clearing of Securities, etc., Secondary Distribution, or dealing in Public Offering/Secondary Distribution/Private Placement with regard to Paragraph (1) Securities;

(ii)

intermediary/brokerage/agency services with regard to Commodity-Related Market Transactions of Derivatives, or Brokerage for Clearing of Securities, etc. with regard to Over-the-Counter Transactions of Derivatives;

(iii)

Over-the-Counter Transactions of Derivatives;

(iv)

Underwriting of Securities;

(v)

PTS (proprietary trading system) business; or

(vi)

Securities, etc. Management Business.
2.: Financial Instruments Business Operators that conduct Type I Financial Instruments Business are subject to strict property regulation including Capital Adequacy Ratio (Article 29-4(1)(vi)(a) and Article 46-6(2) of the FIEA), as well as stock company requirement, major shareholder regulation, and subsidiary business regulation (Article 29-4(1)(iv) through (v), Articles 32 through 32-4, and Article 35 of the FIEA).
3.: Since Financial Instruments Business Operators that are registered to conduct Type I Financial Instruments Business satisfy such strict property regulation, etc., they also basically satisfy the property regulation, etc. for conducting Financial Instruments Business other than Type I Financial Instruments Business (Type II Financial Instruments Business, Investment Advisory and Agency Business, and Investment Management Business). However, in order to change the Category of Businesses (Article 29-2(1)(v) of the FIEA), registration of change is required (Article 31(4) of the FIEA; Article 22 and Appended Form 1 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q3.: What are businesses that can only be conducted by Financial Instruments Business Operators conducting Type I Financial Instruments Business?
A.: Businesses categorized as Type I Financial Instruments Business (Article 28(1) of the FIEA) can only be conducted by Financial Instruments Business Operators that are registered to conduct Type I Financial Instruments Business due to the following reasons, and they cannot be conducted by Financial Instruments Business Operators that are registered to only conduct Financial Instruments Business other than Type I Financial Instruments Business (Type II Financial Instruments Business, Investment Advisory and Agency Business, or Investment Management Business):

(i)

sales and purchase, etc. of high-liquidity Securities are expected to involve a large number of persons in the transactions;

(ii)

Over-the-Counter Transactions of Derivatives, etc. are recognized to involve particularly high expertise and risks;

(iii)

Underwriting of Securities is recognized to involve high expertise and underwriting risks;

(iv)

PTS (Proprietary Trading System), as in the case of Financial Instruments Exchanges, expect participation of a large number of persons due to its nature, and particularly require smooth and stable business operations, while Securities handled in its system are expected to have high liquidity; and

(v)

Securities, etc. Management Business involves the risk of causing the entitled persons to lose their rights unless ensuring the financial soundness of those receiving a deposit of money or Securities from customers in relation to Financial Instruments Business and of Account Management Institutions.

Q4.

What is Type II Financial Instruments Business?

A1.

Type II Financial Instruments Business is conducting any of the following acts of Financial Instruments Business on a regular basis (Article 28(2) of the FIEA):

(i)

self-offering or Private Placement of Securities;

(ii)

sales and purchase/Market Transactions of Derivatives/Foreign Market Derivatives Transactions, intermediary/brokerage/agency services for these transactions, intermediary/brokerage/agency services for entrustment of these transactions, Brokerage for Clearing of Securities, etc., Secondary Distribution, or dealing in Public Offering/Secondary Distribution/Private Placement with regard to Paragraph (2) Securities;

(iii)

Market Transactions of Derivatives or Foreign Market Derivatives Transactions unrelated to Securities, intermediary/brokerage/agency services for these transactions, intermediary/brokerage/agency services for entrustment of these transactions, or Brokerage for Clearing of Securities, etc. with regard to these transactions; or

(iv)

the acts specified by Cabinet Order as those categorized as Financial Instruments Business.

The acts designated as those set forth in (iv) above are the purchase without the purpose of resale of Beneficiary Securities of Investment Trusts Managed under the Instructions of the Settlor and Beneficiary Securities of foreign investment trusts (Article 1-12 of the FIEA Enforcement Order).

2.

The self-offering set forth in (i) above has been newly prescribed under the FIEA as an act categorized as Financial Instruments Business. Since this is a business where an Issuer solicits Offers to Acquire Securities newly issued by the Issuer, which involves no need to protect investors by imposing strict property requirements as those for an intermediary, the business is categorized as Type II Financial Instruments Business instead of Type I Financial Instruments Business.

3.

With regard to registration as a Financial Instruments Business Operator that only conducts Type II Financial Instruments Business, the requirements are more relaxed compared to those for the registration to conduct Type I Financial Instruments Business or Investment Management Business. For example, individuals are able to be registered as such Financial Instruments Business Operators, and the only property regulation applied is the minimum amount of stated capital regulation (the deposit for operation regulation in the case of individuals) (Article 29-4(1)(iv) and Article 31-2 of the FIEA).

Q5.: What is Investment Advisory and Agency Business?
A1.: Investment Advisory and Agency Business is conducting any of the following acts of Financial Instruments Business on a regular basis (Article 28(3) of the FIEA):

(i)

an act of concluding an Investment Advisory Contract, and giving advice on Investment Decisions that are based on analysis of values, etc. of Securities or values, etc. of Financial Instruments under such Investment Advisory Contract (i.e. Investment Advisory Business) (Article 2(8)(xi) of the FIEA); or

(ii)

an agency or intermediary service for conclusion of Investment Advisory Contracts or Discretionary Investment Contracts (Article 2(8)(xiii) of the FIEA).
2.: As for the scope of Investment Advisory Business (Article 28(6) of the FIEA), with regard to Securities and Transactions of Securities-Related Derivatives, an act of merely giving advice on the values, etc. of Securities (the value of Securities, amount receivable for Securities Related Options, or movement of Securities Indicators) is categorized as such business. However, with regard to Derivative Transactions that are unrelated to Securities, a mere act of giving advice on the value of a Financial Instrument, which is an underlying asset, or movement of a Financial Indicator, which is a reference indicator, is not categorized as Investment Advisory Business; an act is categorized as such only when advice on Investment Decisions is given. For example, an act of only giving advice on Japan’s average temperature this summer is not categorized as Investment Advisory Business.
3.: With regard to registration as a Financial Instruments Business Operator that only conducts Investment Advisory and Agency Business, for example, individuals are able to be registered as such Financial Instruments Business Operators. Also, no property regulation is applied (except for the deposit for operation regulation [Article 31-2 of the FIEA]), so anyone who satisfies the requirements common to all Financial Instruments Business can be registered (Article 29-4(1)(i) through (iii) of the FIEA).

Q6.: What is Investment Management Business?
A1.: Investment Management Business is conducting any of the following acts of Financial Instruments Business on a regular basis (Article 28(4) of the FIEA):

(i)

an act of concluding an entrustment contract for the asset management with a registered investment corporation, and the management money or other properties as an investment in Securities or in rights pertaining to Derivative Transactions under Investment Decisions based on an analysis of values, etc. of Financial Instruments (the value of Financial Instruments, amount receivable for Options, or movement of Financial Indicators) (Article 2(8)(xii)(a) of the FIEA) (the conventional Investment Corporation Asset Management Business);

(ii)

an act of concluding a Discretionary Investment Contract, and the management money or other properties as an investment in Securities or in rights pertaining to Derivative Transactions under Investment Decisions based on an analysis of values, etc. of Financial Instruments (Article 2(8)(xii)(b) of the FIEA) (the conventional Business Pertaining to Discretionary Investment Contract);

(iii)

an act of the management money or other properties contributed by right holders of Beneficiary Securities of Investment Trusts as an investment in Securities or rights pertaining to Derivative Transactions under Investment Decisions based on analysis of values, etc. of Financial Instruments (Article 2(8)(xiv) of the FIEA; Article 1-11 of the FIEA Enforcement Order) (the conventional Investment Trust Management Business); or

(iv)

an act of the management money or other properties invested or contributed by right holders of trust beneficial interests or interests in collective investment schemes as an investment in Securities or in rights pertaining to Derivative Transactions under Investment Decisions based on an analysis of values, etc. of Financial Instruments (Article 2(8)(xv) of the FIEA) (self-management of funds).
2.: In this manner, the FIEA provides for the scope of Investment Management Business as including not only the conventional business pertaining to Discretionary Investment Contract, investment corporation asset management business, and investment trust management business, but also the business of forming a collective investment scheme, etc. and mainly investing in Securities or rights pertaining to Derivative Transactions (self-management).
3.: Those registered as Financial Instruments Business Operators that conduct Investment Management Business are subject to stock company requirement, subsidiary business regulation, and major shareholder regulation (Article 29-4(1)(v)(a) and (c) through (f), Articles 32 through 32-4, and Article 35 of the FIEA). They are also subject to the property regulation imposed on those that conduct Type I Financial Instruments Business, except for the Capital Adequacy Ratio (Article 29-4(1)(iv) and (v)(b) of the FIEA), so they will basically satisfy the property requirements, etc. for conducting Type II Financial Instruments Business and Investment Advisory and Agency Business. However, in order to change the Category of Businesses (Article 29-2(1)(v) of the FIEA), a registration of change is required (Article 31(4) of the FIEA; Article 22 and Appended Form 1 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
4.: Meanwhile, an act of a financial institution conducting any of the acts categorized as Investment Management Business on a regular basis does not fall under the definition of Financial Instruments Business (the principal sentence of Article 2(8) of the FIEA), but the FIEA clearly provides that such an act falls under the definition of Investment Management Business (the principal sentence of Article 28(4) of the FIEA).

Q7.: How is the distinction between Discretionary Investment Management Business and Investment Advisory Business determined?
A1.: Between Investment Management Business (Article 28(4) of the FIEA) and Investment Advisory and Agency Business (Article 28(3) of the FIEA), both of which are Financial Instruments Business, there is a difference in the applicable regulations depending on the nature of their respective operations, such as the applicability of subsidiary business regulation (Article 35 and Article 35-2 of the FIEA). Due to such circumstances, there is a question of whether the operations of an asset manager (AM) that are conducted for a Special Purpose Company (SPC) that invests in real estate trust beneficial interests in a real estate securitization scheme are either categorized as Investment Management Business (business pertaining to Discretionary Investment Contract) (Article 2(8)(xii)(b) of the FIEA) or Investment Advisory Business (Article 2(8)(xi) of the FIEA).
2.: This is determined by whether or not the SPC has fully or partly entrusted the AM with discretion in making Investment Decisions and has also entrusted the AM with the authority necessary for making investment on behalf of the SPC (Article 2(8)(xii)(b) of the FIEA). “Investment Decisions” is defined as decisions on classes, issues, volumes, or prices of Securities to be invested as well as whether the Securities are purchased or sold and by what method and at what timing, or decisions on contents and timing of Derivative Transactions to be conducted (Article 2(8)(xi)(b) of the FIEA).
3.: The determination of the distinction between Discretionary Investment Management Business and Investment Advisory Business should be made not merely based on formal aspects such as contract wording or the type of scheme, but a substantive determination should be made according to the actual conditions of individual cases.

Q8.: What is Financial Instruments Intermediary Service?
A1.: Financial Instruments Intermediary Service is the business of conducting any of the following acts on behalf of a Financial Instruments Business Operator (limited to those that conduct Type I Financial Instruments Business or Investment Management Business) or a Registered Financial Institution under entrustment from them (Article 2(11) of the FIEA):

(i)

intermediary service for sales and purchase of Securities (excluding those categorized as PTS business);

(ii)

intermediary service for the entrustment of sales and purchase of Securities, Market Transactions of Derivatives, or Foreign Market Derivatives Transactions;

(iii)

dealing in Public Offering or Secondary Distribution of Securities or dealing in Private Placement; or

(iv)

intermediary service for conclusion of Investment Advisory Contracts or Discretionary Investment Contracts.
2.: The Financial Instruments Intermediary Service system is characterized by the following: (i) the business is conducted under entrustment from a specific Financial Instruments Business Operator, etc. (Article 2(11) of the FIEA); (ii) the scope of business is limited to intermediary service, and does not allow brokerage and agency service (Article 2(11) of the FIEA); (iii) the service provider is prohibited from receiving a deposit of money or Securities from customers with regard to its Financial Instruments Intermediary Service (Article 66-13 of the FIEA); and (iv) the business adopts the entrusting company system, and an Entrusting Financial Instruments Business Operator, etc. is liable for the damages caused to a customer with regard to the Financial Instruments Intermediary Service rendered by the Financial Instruments Intermediary Service Provider to which it entrusted said service (Article 66-24 of the FIEA).
3.: Because Entrusting Financial Instruments Business Operators, etc. are subject to the liability for damages mentioned above (Article 66-24 of the FIEA), those that are able to become an Entrusting Financial Instruments Business Operator, etc. of a Financial Instruments Intermediary Service Provider are limited to those that have a certain financial basis, and they are limited to Financial Instruments Business Operators that conduct Type I Financial Instruments Business or Investment Management Business and Registered Financial Institutions (Article 2(11) and Article 66-2(1)(iv) of the FIEA). As for the scope of persons who are able to become a Financial Instruments Intermediary Service Provider, Financial Instruments Business Operators that conduct Type I Financial Instruments Business can basically conduct any business categorized as Financial Instruments Intermediary Service, so there is little need to specifically permit them to conduct Financial Instruments Intermediary Service, and there will also be a need to avoid causing confusion between business conducted as a Financial Instruments Business Operator and the business conducted as a Financial Instruments Intermediary Service Provider. Therefore, the FIEA provides that Financial Instruments Business Operators conducting Type I Financial Instruments Business cannot become a Financial Instruments Intermediary Service Provider (Article 66-4(vi) and Article 66-19(2) of the FIEA).

Q9.: What is Securities-Related Business? Why is such business defined under the FIEA?
A1.: The FIEA defines Securities-Related Business as conducting any of the following acts on a regular basis (Article 28(8)(i) through (viii) of the FIEA; Article 15-2 and Article 15-3 of the FIEA Enforcement Order):

(i)

sales and purchase of Securities, or intermediary, brokerage (excluding Brokerage for Clearing of Securities, etc.), or agency service;

(ii)

intermediary, brokerage, or agency service for the entrustment of sales and purchase of Securities on Financial Instruments Exchange Markets or Foreign Financial Instruments Markets;

(iii)

Market Transactions of Derivatives related to Securities;

(iv)

Over-the-Counter Transactions of Derivatives related to Securities;

(v)

Foreign Market Derivatives Transactions related to Securities;

(vi)

intermediary, brokerage (excluding Brokerage for Clearing of Securities, etc.), or agency service for Transactions of Securities-Related Derivatives ((iii) through (v) above) or intermediary, brokerage, or agency service for the entrustment of the transactions set forth in (iii) or (v);

(vii)

Brokerage for Clearing of Securities, etc. pertaining to sales and purchase of Securities or to Transactions of Securities-Related Derivatives, etc.; or

(viii)

Underwriting of Securities, Secondary Distribution, dealing in Public Offering/Secondary Distribution, or dealing in Private Placement.
2.: In addition, the FIEA uses the concept of Securities-Related Business also for demarcating the following: (i) the Securities subject to the strict separate management obligation imposed on Financial Instruments Business Operators, etc. and those subject to external audit on the state of separate management (Article 43-2 of the FIEA); (ii) the scope of General Customers subject to protection by the Investor Protection Fund (Article 79-20(1) of the FIEA); and (iii) the scope of Financial Instruments Business Operators that are able to use the words “Securities Company” in their names (Article 25(2) of the Supplementary Provisions of the Revising Act).

Business regulation

Q10.: How does the FIEA provide for the entry regulation for Financial Instruments Business Operators?
A1.: The FIEA adopts the registration system as a uniform entry regulation for Financial Instruments Business (Article 29 of the FIEA), except for the PTS (proprietary trading system) business, which maintains the authorization system (Article 30(1) of the FIEA). Thus, the previously adopted authorization system for Over-the-Counter Transactions of Derivatives related to Securities and wholesale underwriting business conducted by securities companies, authorization system for investment trust management business and investment corporation asset management business, authorization system for Discretionary Investment Management Business, and license system for commodities investment sales business have been unified into a registration system.
2.: Accordingly, a Financial Instruments Business Operator only needs to obtain single registration to conduct any type of Financial Instruments Business, except for the PTS business.
3.: Meanwhile, the extent to which investors should be protected by ensuring the financial basis, etc. of the Financial Instruments Business Operator would naturally differ depending on the type of business conducted by the Financial Instruments Business Operator. Therefore, the FIEA has made the entry regulation flexible (ensuring regulatory flexibility) by categorizing Financial Instruments Business into Type I Financial Instruments Business, Type II Financial Instruments Business, Investment Advisory and Agency Business, and Investment Management Business depending on the contents of the business (Article 28(1) through (4) of the FIEA), and providing for tiered requirements for refusal of registration for the respective categories (Article 29-4(1) of the FIEA).

Q11.: Is a separate registration procedure required for each category of business of Financial Instruments Business Operators?
A1.: While the FIEA categorizes Financial Instruments Business into Type I Financial Instruments Business, Type II Financial Instruments Business, Investment Advisory and Agency Business, and Investment Management Business (Article 28(1) through (4) of the FIEA), these categories have only been established in order to make the entry regulation flexible (ensuring regulatory flexibility). It is sufficient for a Financial Instruments Business Operator to follow a single registration procedure under a single registration system for Financial Instruments Business for conducting any of these categories of business.
2.: In the meantime, the FIEA provides for tiered requirements for refusal of registration according to the contents of the business conducted by Financial Instruments Business Operators (Article 29-4(1) of the FIEA), which means that a person registered as a Financial Instruments Business Operator cannot necessarily conduct all categories of Financial Instruments Business. It will be determined whether or not the person who intends to be registered as a Financial Instruments Business Operator meets the requirement for refusal of registration for the Category of Businesses (Article 29-2(1)(v) of the FIEA) stated in the written application for registration. When a Financial Instruments Business Operator intends to additionally conduct another Category of Business, the operator needs to follow the procedure for registration of change (Article 31(4) of the FIEA; Article 22 and Appended Form 1 of the Cabinet Office Ordinance on Financial Instruments Business, etc.). In that case, it will be determined whether or not the Financial Instruments Business Operator meets the requirements for refusal of registration for that additional Category of Business (Article 31(5) and Article 29-4 of the FIEA).
3.: The Categories of Businesses is defined as the categories of the business of dealing in high liquidity Securities, business of conducting Over-the-Counter Transactions of Derivatives, etc., wholesale underwriting business of holding discussions for fixing the contents of the wholesale underwriting contract, any other wholesale underwriting business, underwriting business other than wholesale underwriting, PTS (proprietary trading system) business, Securities, etc. Management Business, Type II Financial Instruments Business, Investment Advisory and Agency Business, and Investment Management Business (Article 29-2(1)(v) of the FIEA).

Q12.

What are the requirements for refusal of registration of Financial Instruments Business Operators?

A1.

The FIEA provides for tiered requirements for refusal of registration according to the category of business conducted by the Financial Instruments Business Operator. If an application of registration meets any of the requirements for refusal of registration, the applicant’s registration will be refused (Article 29-4(1) of the FIEA), and if a registered operator meets any such requirement, the operator’s registration will be rescinded (Article 52(1)(i) through (iv) of the FIEA).

2.

Firstly, the following are the requirements for refusal of registration that are commonly applied to persons who intend to conduct any of the businesses (Article 29-4(1)(i) through (iii)):

(i)

a person falling under any of the following:

–a person whose registration as a Financial Instruments Business Operator or the like has been rescinded within the past five years;
–a person who has been sentenced to a fine pursuant to the FIEA or any other Act, and for whom five years have not passed since the day when the execution of the punishment terminated or the person became free from the execution of the punishment;
–a person whose additional business is found to be against public interest; or
–a person who does not have a personnel structure sufficient to conduct Financial Instruments Business in an appropriate manner;

(ii)

a juridical person applicant that has a person falling under any of the following among its Officers or its employees specified by Cabinet Order:

–an adult ward/person under curatorship, etc.
–a person who has received a decision of commencement of bankruptcy proceedings and has not obtained restoration of rights, etc.;
–a person who has been sentenced to imprisonment with work or severer punishment, and for whom five years have not passed since the day when the execution of the punishment terminated or the person became free from the execution of the punishment;
–when a juridical person has had its registration as a Financial Instruments Business Operator or the like rescinded, a person who was an Officer of such juridical person within 30 days prior to the rescission, and for whom five years have not passed since the day of the rescission;
–when an individual has had his/her registration as a Financial Instruments Business Operator or the like rescinded, a person for whom five years have not passed since the day of the rescission;
–an Officer, etc. of a Financial Instruments Business Operator, etc. who was ordered for dismissal, and for whom five years have not passed since the day of the disposition; or
–a person who has been sentenced to a fine pursuant to the FIEA or any other Act, and for whom five years have not passed since the day when the execution of the punishment terminated or the person became free from the execution of the punishment; or

(iii)

an individual applicant who falls under any of the requirements under (ii) above or a person who has an employee specified Cabinet Order who falls under any of the requirements under (ii) above.

3.

Secondly, the FIEA provides for minimum capital regulation as a requirement for refusal of registration applicable to a person who intends to conduct Type I Financial Instruments Business, Type II Financial Instruments Business, or Investment Management Business (Article 29-4(1)(iv) of the FIEA). Type II Financial Instruments Business, which has no stock company requirement (Article 29-4(1)(v)(a) of the FIEA), can also be conducted by individuals. For an individual that conducts Type II Financial Instruments Business, the FIEA imposes the deposit for operation regulation (Article 31-2) instead of the minimum capital requirement.

4.

Thirdly, the FIEA provides for the following as the requirements for refusal of registration applicable to a person who intends to conduct Type I Financial Instruments Business or Investment Management Business (Article 29-4(1)(v) of the FIEA):

(i)

a person other than a stock company (limited to those with a board of directors and company auditors or Committees and a juridical person of the same kind as a company with a board of directors established in compliance with laws and regulations of a foreign state (a foreign juridical person that intends to conduct Type I Financial Instruments Business is limited to a person who engages in the same kind of business and who has a business office or office in Japan));

(ii)

a person whose Net Assets are less than the prescribed amount;

(iii)

a person whose other business is neither incidental business nor business subject to notification, and who is found to cause hindrance to the protection of investors due to difficulties in managing risks of loss pertaining to said business;

(iv)

a juridical person having a Major Shareholder that is an individual who falls under any of the requirements under 2(ii) above, or who is an adult ward or a person under curatorship whose statutory representative falls under any of the requirements under 2(ii) above;

(v)

a juridical person (excluding a foreign juridical person) having a Major Shareholder that is a juridical person that falls under any of the following:

–a juridical person whose registration as a Financial Instruments Business Operator or the like has been rescinded within the past five years;
–a juridical person that has been sentenced to a fine pursuant to the FIEA or any other Act, and for whom five years have not passed since the day when the execution of the punishment terminated or the juridical person became free from the execution of the punishment; or
–a juridical person that has an Officer who falls under any of the requirements under 2(ii) above; or

(vi)

a foreign juridical person for whom the Foreign Regulatory Agency has not confirmed that a person equivalent to a Major Shareholder has no risk of causing hindrance to sound and appropriate operation of Financial Instruments Business.

5.

Fourthly, the FIEA further provides for the following requirements for refusal of registration for a person who intends to conduct Type I Financial Instruments Business (Article 29-4(1)(vi) of the FIEA):

(i)

a person whose capital adequacy ratio is less than 120 percent; or

(ii)

a person who intends to use the same trade name as that already used by another Financial Instruments Business Operator conducting Type I Financial Instruments Business or a trade name that may be misidentified as another Financial Instruments Business Operator conducting Type I Financial Instruments Business.

6.

In this manner, the FIEA provides for the common requirements for refusal of registration as a Financial Instruments Business Operator in Article 29-4(1)(i) through (iii). Then, it provides for additional requirements for refusal of registration for the case of conducting Type I Financial Instruments Business, Type II Financial Instruments Business, or Investment Management Business in item (iv) of that paragraph, those for the case of conducting Type I Financial Instruments Business or Investment Management Business in item (v) of that paragraph, and those for the case of conducting Type I Financial Instruments Business in item (vi) of that paragraph. For example, while only the requirements under items (i) through (iii) of the paragraph are applied to a person who intends to conduct only Investment Advisory and Agency Business, all requirements under the items of that paragraph are applied to a person who intends to conduct Type I Financial Instruments Business. In this way, the FIEA clearly indicates the tiered application of entry regulation, and makes the entry regulation flexible (ensuring regulatory flexibility).

Q13.: What is the scope of employees that are subject to examination of the requirements for refusal of registration of Financial Instruments Business Operators?
A1.: Under the FIEA, a juridical person is refused from registration as a Financial Instruments Business Provider not only if its Officer, but also if its employee specified by Cabinet Order (an “important employee”) falls under a requirement for disqualification (Article 29-4(1)(ii) and (iii) of the FIEA). Said Cabinet Order and a Cabinet Office Ordinance under said Cabinet Order provide for the specific scope of “important employees” who are subject to examination of the requirements for disqualification as follows (Article 15-4 of the FIEA Enforcement Order; Article 6 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

persons who supervise the business related to providing guidance to have laws and regulations, etc. observed with regard to the Financial Instruments Business and persons who are in a position to exercise the authority of such supervisors on their behalf;

(ii)

persons who supervise the section which gives advice or makes investments and persons who make Investment Decisions based on values, etc. of Financial Instruments, with regard to Investment Advisory Business or Investment Management Business; and

(iii)

persons who supervise the business operation of the business office or office with regard to Investment Advisory and Agency Business and persons who are in a position to exercise the authority of such supervisors on their behalf.
2.: The requirements for disqualification of important employees not only become an issue when determining whether or not registration should be refused upon application, but also when determining whether or not registration should be rescinded due to falling under a requirement for refusal of registration ex post facto (Article 52(1)(i) of the FIEA).
3.: In the case of a Registered Financial Institution, whether or not an Officer or employee of the financial institution falls under requirements for disqualification does not constitute a requirement for refusal of registration, since Registered Financial Institutions are also subject to the supervision under other business laws, but it should be noted that the financial institution’s personnel structure will be examined (Article 33-5(1)(iii) of the FIEA; Article 49 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q14.

What are the contents of examination standards with regard to the personnel structure requirement for Financial Instruments Business Operators?

A1.

A Cabinet Office Ordinance provides for the following examination standards with regard to the personnel structure requirement for Financial Instruments Business Operators (Article 13 of the Cabinet Office Ordinance on Financial Instruments Business, etc.), and an applicant who falls under any of these is refused to be registered:

(1)the applicant is found to be unable to appropriately conduct the business in light of the status of securing Officers and employees with sufficient knowledge and experience concerning the business and the organizational structure of the applicant (Article 13(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.);
(2)the applicant is found to have the risk of causing a loss of confidence in Financial Instruments Business due to having an Officer or employee who has qualities that are inappropriate for conducting business in light of his/her background, relationship with an organized crime group or a member thereof, or any other circumstances (Article 13(ii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.);
(3)in the case of conducting the business of sales and purchase of real estate trust beneficial interests, etc. (Article 7(vi) of the Cabinet Office Ordinance on Financial Instruments Business, etc.), the applicant fails to satisfy the following requirements (Article 13(iv) of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the applicant allocates Officers and employees with expert knowledge and experience on transactions of building lots and buildings in its supervision section, internal audit section, and compliance guidance section; and

(ii)

Officers and employees who conduct the business have expert knowledge and experience on transactions of building lots and buildings that are necessary for appropriately explaining the contents of real estate trust beneficial interests, etc. to customers; or
(4)in the case of conducting specified Investment Management Business related to real estate (Article 7(vii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.), the applicant fails to satisfy the requirements specified by the FSA Commissioner (Article 13(v) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

2.

Based on the standard set forth in 1(4) above, Financial Services Agency Public Notice No. 54 of 2007 requires that the applicant has been registered as a comprehensive real estate investment advisor as provided under rules on registration of real estate investment advisor business (Ministry of Construction Public Notice No. 1828 of 2000) which is a public notice of the Ministry of Land, Infrastructure, Transport and Tourism, or, in light of the applicant’s personnel structure, the applicant is found to have the knowledge and experience required for fairly and appropriately conducting Specified Investment Management Business Related to Real Estate to the same extent as a person who has been registered as such and to have sufficient social credibility.

3.

The examination standards with regard to the personnel structure requirement for Registered Financial Institutions are the same as those for Financial Instruments Business Operators (Article 33-5(1)(iii) of the FIEA; Article 49 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q15.

What are the standards for the minimum capital and Net Assets regulations for Financial Instruments Business Operators?

A1.

For Financial Instruments Business Operators that conduct Type I Financial Instruments Business or Investment Management Business, the minimum capital regulation and the Net Assets regulation are applied as a requirement for refusal of application and grounds for rescission, etc. of registration (Article 29-4(1)(iv) and (v)(b), Article 31(5), and Article 52(1)(ii) and (iii) of the FIEA). The minimum capital regulation is also applied to juridical persons that conduct Type II Financial Instruments Business (Article 29-4(1)(iv) of the FIEA), but for individuals who conduct Type II Financial Instruments Business, not the minimum capital regulation, but the deposit for operation regulation is applied (Article 31-2(1) of the FIEA).

2.

The specific amount of the minimum capital for an operator that conducts Type I Financial Instruments Business is to be specified by Cabinet Order (Article 29-4(1)(iv) and Article 30-4(ii) of the FIEA), and Cabinet Order specifies as follows (Article 15-7(1)(i) through (iii) and Article 15-11(1) of the FIEA Enforcement Order):

(i)

the case of conducting wholesale underwriting of Securities that involves holding of the discussion for fixing the contents of a wholesale underwriting contract with the Issuer or holder of the Securities (Article 28(1)(iii)(a) of the FIEA; Article 15 of the FIEA Enforcement Order; Article 4 of the Cabinet Office Ordinance on Financial Instruments Business, etc.): 3 billion yen;

(ii)

the case of conducting wholesale underwriting of Securities other than that set forth in (i) above: 500 million yen;

(iii)

the case of conducting PTS (proprietary trading system) business: 300 million yen; and

(iv)

the case of conducting business other than those set forth in (i), (ii), and (iii): 50 million yen.

Cabinet Order also provides for amounts similar to the minimum capital as amounts pertaining to the Net Assets regulation (Article 29-4(1)(v)(b) of the FIEA; Article 15-9(1) of the FIEA Enforcement Order; Article 30-4(iii) and (ii) of the FIEA Enforcement Order; Article 15-11(1) of the FIEA Enforcement Order).

3.

Next, the specific amount of the minimum capital for an operator that conducts Investment Management Business is prescribed as 50 million yen under Cabinet Order (Article 29-4(1)(iv) of the FIEA; Article 15-7(1)(iii) of the FIEA Enforcement Order). Again, Cabinet Order provides for the same amounts as the minimum capital as amounts pertaining to the Net Assets regulation (Article 29-4(1)(v)(b) of the FIEA; Article 15-9(1) of the FIEA Enforcement Order).

4.

Furthermore, the specific amount of the minimum capital for a juridical person conducting Type II Financial Instruments Business is prescribed as 10 million yen under Cabinet Order (Article 29-4(1)(iv) of the FIEA; Article 15-7(1)(iv) of the FIEA Enforcement Order).

Q16.: What are the standards for the deposit for operation regulation for Financial Instruments Business Operators?
A1.: Among Financial Instruments Business Operators, individuals who conduct Type II Financial Instruments Business and operators that conduct Investment Advisory and Agency Business are subject to the deposit for operation regulation (Article 31-2(1) of the FIEA). The specific amount of the deposit for operation is to be specified by Cabinet Order, considering the actual conditions of the Financial Instruments Business Operator's business and the necessity of the protection of investors (Article 31-2(2) of the FIEA).
2.: The amount of the deposit for operation for an individual conducting Type II Financial Instruments Business is prescribed as 10 million yen (Article 15-12(i) of the FIEA Enforcement Order), and that for an operator conducting Investment Advisory and Agency Business is prescribed as 5 million yen (Article 15-12(ii) of the FIEA Enforcement Order).

Q17.: What is the subsidiary business regulation for Financial Instruments Business Operators?
A1.: Firstly, the FIEA does not impose a subsidiary business regulation on operators that only conduct Type II Financial Instruments Business or Investment Advisory and Agency Business (Article 35-2(1) of the FIEA). It only imposes such regulation on operators that conduct Type I Financial Instruments Business or Investment Management Business (Article 35 of the FIEA). Secondly, the FIEA applies the frameworks of incidental business (Article 35(1) of the FIEA), business subject to notification (Article 35(2) and (3) of the FIEA), and business subject to approval (Article 35(4) of the FIEA) also to operators conducting Investment Management Business, just as in the case of operators conducting Type I Financial Instruments Business. With regard to business subject to approval, the FIEA provides that the Prime Minister may choose not to grant approval only where the implementation of the business is found to go against the public interest or hinder the protection of investors due to the difficulty in management of the risks of loss arising from the business (Article 35(5) of the FIEA). Thirdly, in consideration of the past situation of subsidiary business of operators conducting Type I Financial Instruments Business or Investment Management Business, the FIEA has newly prescribed consultation/intermediation concerning M&A (Article 35(1)(xi) of the FIEA), consultation concerning business management (Article 35(1)(xii) of the FIEA), and sales and purchase of currencies, etc. (Article 35(1)(xiii) of the FIEA) among others as incidental business, and building lots and buildings transaction business (Article 35(2)(iv) of the FIEA) and real estate specified joint enterprise (Article 35(2)(v) of the FIEA) as business subject to notification.
2.: Moreover, Cabinet Office Ordinance has lifted the ban on transactions that make settlement by delivery with regard to Derivative Transactions of commodities, etc., which had been business subject to notification for which only transactions that make settlement by paying or receiving the differences had been allowed (Article 35(2)(ii) of the FIEA; Article 67(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.). In addition to this, it has newly added the following businesses as business subject to notification: intermediary service for concluding contracts on execution of a will or sorting out of inherited property to be conducted by a financial institution engaged in trust business (Article 35(2)(vii) of the FIEA; Article 68(xii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.); management of real estate (Article 68(xiv) of said Cabinet Office Ordinance); emissions transactions, etc. and emissions Derivative Transactions, etc. (Article 68(xvi) and (xvii) of said Cabinet Office Ordinance); business affairs related to the operation of administrative instruments of investment corporations and special purpose companies (Article 68(xviii) of said Cabinet Office Ordinance); management of investment in assets other than Securities/Derivative Transactions (Article 68(xix) of said Cabinet Office Ordinance); guarantee of obligations/assumption of obligations, etc. (Article 68(xx) of said Cabinet Office Ordinance); mediation/introduction of other business operators (Article 68(xxi) of said Cabinet Office Ordinance); and advertising/publicizing conducted with regard to the business of other business operators (Article 68(xxii) of said Cabinet Office Ordinance).

Q18.

For what kind of business is Sales Representative registration obligated?

A1.

The FIEA provides that any Officer or employee of a Financial Instruments Business Operator, etc. who conducts any of the following acts, whatever his/her title is, must be registered as a Sales Representative (Article 64(1) of the FIEA):

(i)

the following acts pertaining to high-liquidity Securities other than Securities equivalents (the items of Article 2(2) of the FIEA):

–sales and purchase/Market Transactions of Derivatives/Foreign Market Derivatives Transactions, intermediary/brokerage/agency services for these transactions, intermediary/brokerage/agency services for entrustment of these transactions, Brokerage for Clearing of Securities, etc., Secondary Distribution of Securities, or dealing in Public Offering/Secondary Distribution or dealing in Private Placement of Securities;
–solicitations for applications for sales or purchase or for intermediary/brokerage/agency services for these transactions, solicitations for applications for Market Transactions of Derivatives/Foreign Market Derivatives Transactions or intermediary/brokerage/agency services for these transactions, or solicitations for entrustment of Market Transactions of Derivatives/Foreign Market Derivatives Transactions;

(ii)

Over-the-Counter Transactions of Derivatives, etc., Underwriting of Securities, PTS (proprietary trading system) business, or solicitations for applications for Over-the-Counter Transactions of Derivatives, etc.; or

(iii)

other acts specified by Cabinet Order.

As acts that fall under (iii) above, Cabinet Order prescribes the following: Market Transactions of Derivatives (e.g., exchange financial futures trading)/Foreign Market Derivatives Transactions that do not fall under (i) above, intermediary/brokerage/agency services for these transactions, intermediary/brokerage/agency services for entrustment of these transactions, solicitations for applications for these transactions, etc., and solicitations for entrustment of these transactions (Article 17-14 of the FIEA Enforcement Order).

2.

The regulation concerning Sales Representatives is also applied to Financial Instruments Intermediary Service Providers (Article 66-25 of the FIEA).

Scope of business

Q19.: What is the scope of business conducted by Registered Financial Institutions?
A1.: The FIEA adopts a Registered Financial Institution system, and provides that financial institutions can conduct certain Securities-Related Business by obtaining registration (Article 33(2) and Article 33-2 of the FIEA). As well, with regard to Securities that have been newly prescribed under the FIEA such as trust beneficial interests, mortgage securities, and interests in collective investment schemes (Article 2(1)(xiv) and (xvi), Article 2(2)(i), (ii), (v), and (vi), etc. of the FIEA), the FIEA provides that Registered Financial Institutions are able to conduct sales and purchase, intermediary, brokerage, or agency services for these transactions, and Market Transactions of Derivatives, etc. (Article 33(2)(i), (v)(a), and (vi) and Article 33-2(ii) of the FIEA).
2.: Next, the FIEA also positions Brokerage with Written Orders as an act that should only be conducted by financial institutions that have obtained registration (Article 33-2(i) of the FIEA).
3.: The FIEA provides that Derivative Transactions, etc. (the principal sentence of Article 33(3) of the FIEA) other than Transactions of Securities-Related Derivatives, etc. (the principal sentence of Article 33(3) of the FIEA) are categorized as Financial Instruments Business even when they are conducted by financial institutions (the principal sentence of Article 2(8) of the FIEA), and includes them also in the scope of business of Registered Financial Institutions (Article 33-2(iii) of the FIEA). The same applies to Investment Advisory and Agency Business and self-offering (the principal sentence and item (iv) of Article 33-2 of the FIEA).
4.: While financial institutions have been allowed to receive deposits of Securities for safe custody as incidental business (Article 10(2)(x) of the Banking Act, etc.), the FIEA has positioned such business as Securities, etc. Management Business (Article 28(5) of the FIEA), and included it in the scope of business of Registered Financial Institutions (Article 33(3) and the principal sentence of Article 33-2 of the FIEA), making it subject to application of regulation on activities (Articles 43 through 43-4 of the FIEA).
5.: If Brokerage with Written Orders and Investment Advisory Business are conducted in a combined manner, it would be equivalent to a financial institution making a solicitation and providing a brokerage service for sales or purchase of Securities, which would be evasion from the principle prohibiting financial institutions from conducting Securities-Related Business. Therefore, the FIEA explicitly excludes transactions conducted on receiving orders from the customer concerning Investment Advisory Business from the definition of Brokerage with Written Orders (Article 33(2) of the FIEA).

Q20.: What is the treatment of Derivative Transactions conducted by business companies?
A1.: Under the FIEA, not only securities Derivative Transactions, etc. under the former Securities and Exchange Act and financial futures trading, etc. under the former Financial Futures Trading Act, but also currency and interest rate swap transactions, credit derivative transactions, and weather derivative transactions, etc. conducted on a regular basis fall under the category of Financial Instruments Business (Article 2(8)(i) through (iv) and Article 2(20) through (25) of the FIEA).
2.: It is construed that an act conducted “on a regular basis” needs to be conducted “repetitively and continuously” and needs to “target the general public.” Thus, an act that is conducted merely for the purpose of improving one’s portfolio is construed not to be an act conducted “on a regular basis” even if it is conducted repetitively and continuously.
3.: General business companies may conduct sales or purchase of Securities or the newly added Derivative Transactions in their ordinary business process, but generally, they are considered to conduct such Derivative Transactions in order to hedge their own risks such as weather risks and credit risks. It is considered that such acts generally do not target the general public. Therefore, if a general business company conducts Derivative Transactions within such extent, it is considered unnecessary for the company to be registered as a Financial Instruments Business Operator.
4.: Meanwhile, when a business company that engages in sales and purchase of goods, etc., such as a trading company, conducts non-deliverable forward (NDF) transactions or over-the-counter currency option transactions with domestic customers in order to hedge the domestic customers’ exchange risks upon providing intermediation for import and export transactions between domestic customers and foreign business operators, such act is only conducted as a means to fix the sales or purchase price in import or export transactions by yen currency and it is considered not to be substantially independent, investment-type financial transactions. However, it cannot be concluded that such act “does not target the general public and therefore is not categorized as an act conducted on a regular basis.” Also, in the case of a corporate group, when the parent company conducts an act that is categorized as Over-the-Counter Transactions of Derivatives related to currencies with a subsidiary company in order to hedge the exchange risks involved in the assets or liabilities held by the subsidiary company, such act has a strong aspect of being conducted for integrated risk management within the corporate group, and there seems to be little need to make such act subject to business regulation. However, again, it cannot be concluded that such act “is not categorized as an act conducted on a regular basis.” Therefore, the FIEA and related Cabinet Order and Cabinet Office Ordinance clearly exclude such acts from the definition of Financial Instruments Business, as acts that are found not to hinder the protection of investors in consideration of the contents of such acts (the principal sentence of Article 2(8) of the FIEA; Article 1-8-6(1)(iv) of the FIEA Enforcement Order; Article 16(1)(iii) and (iv) of the Definition Ordinance).
5.: In addition, the FIEA and related Cabinet Order and Cabinet Office Ordinance clearly exclude Derivative Transactions, etc. unrelated to Securities that are conducted with a person who is found to have expert knowledge and experience concerning Derivative Transactions or a stock company, etc. whose stated capital exceeds a certain amount from the definition of Financial Instruments Business as the counterparty (the principal sentence of Article 2(8) of the FIEA; Article 1-8-6(1)(ii) of the FIEA Enforcement Order). On the other hand, in order to thoroughly ensure the protection of investors, the acts excluded from the definition of Financial Instruments Business are limited to those that are truly found to cause no hindrance. Specifically, such acts are excluded from the definition of Financial Instruments Business only if they are conducted with a Financial Instruments Business Operator (limited to those that conduct Type I Financial Instruments Business), Registered Financial Institution, Qualified Institutional Investors, etc., or stock company whose stated capital is 1 billion yen or more or Specific Purpose Company whose specified capital is 1 billion yen or more as the counterparty (Article 15 of the Definition Ordinance; Financial Services Agency Public Notice No. 53 of 2007).
6.: Meanwhile, a person who is able to become a member of a Financial Instruments Exchange or become qualified as a Trading Participant is limited to a Financial Instruments Business Operator, etc. (Article 91, Article 112(1), and Article 113 of the FIEA). Therefore, a general business company who is not a Financial Instruments Business Operator, etc. cannot become a member of a Financial Instruments Exchange or become qualified as a Trading Participant in order to conduct Market Transactions of Derivatives.

Q21.

What is the outline of the scope of business of Financial Instruments Business Operators?

A1.

The FIEA imposes the following regulation on the scope of business for Financial Instruments Business Operators that conduct Type I Financial Instruments Business or Investment Management Business (Article 35 of the FIEA).

(1)First, such Financial Instruments Business Operator can conduct Financial Instruments Business as well as business incidental thereto (incidental business) by operation of law (Article 35(1) of the FIEA). The incidental business includes the businesses listed in the items of Article 35(1) of the FIEA as well as those that are “any other business incidental to Financial Instruments Business.”
(2)Next, such Financial Instruments Business Operator can conduct the businesses listed in the items of Article 35(2) of the FIEA by making notification (business subject to notification) (Article 35(2) and (3) of the FIEA; Article 69 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
(3)Furthermore, such Financial Instruments Business Operator can conduct businesses other than incidental business and business subject to notification by obtaining approval (business subject to approval) (Article 35(4) of the FIEA). When an application for approval is filed, the Prime Minister may choose not to grant approval only when the business is found to go against the public interest or hinder the protection of investors due to the difficulty in management of the risks of loss arising from the business (Article 35(5) of the FIEA; Article 70 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

2.

Regulation on the scope of business is not applied to Financial Instruments Business Operators that only conduct Type II Financial Instruments Business or Investment Advisory and Agency Business (Article 35-2(1) of the FIEA).

Q22.: What is the scope of incidental business conducted by Financial Instruments Business Operators?
A1.: The businesses which Financial Instruments Business Operators that conduct Type I Financial Instruments Business or Investment Management Business can conduct as those incidental to Financial Instruments Business by operation of law and which are clearly indicated under laws and regulations are as follows:

(i)

the lending and borrowing of Securities, etc. (Article 35(1)(i) of the FIEA);

(ii)

money loan incidental to a margin transaction (Article 35(1)(ii) of the FIEA);

(iii)

money loan secured by Securities that are deposited for safe custody from customers (Article 35(1)(iii) of the FIEA; Article 65 of the Cabinet Office Ordinance on Financial Instruments Business, etc.);

(iv)

agency service for customers concerning Securities (Article 35(1)(iv) of the FIEA);

(v)

agency service of the business pertaining to payment of earnings / redemption money / cancellation money with regard to beneficial interest in the investment trust of a settlor company of an investment trust, or the business pertaining to delivery of the Securities or any other assets belonging to the trust property pertaining to beneficial interest in the investment trust (Article 35(1)(v) of the FIEA);

(vi)

agency service of the business pertaining to distribution of money, distribution of refunds/residual assets, or payment of interest/redemption money with regard to Investment Securities, etc. of an investment corporation (Article 35(1)(vi) of the FIEA);

(vii)

conclusion of a Contract for Cumulative Investment (Article 35(1)(vii) of the FIEA; Article 66 of the Cabinet Office Ordinance on Financial Instruments Business, etc.);

(viii)

provision of information or advice in relation to Securities (excluding acts falling under the category of Investment Advisory Business) (Article 35(1)(viii) of the FIEA);

(ix)

agency service of the business of any Counterparty Financial Business Operator, etc. (Article 35(1)(ix) of the FIEA);

(x)

retention of assets of a registered investment corporation (Article 35(1)(x) of the FIEA);

(xi)

consultation/intermediation with regard to M&A (Article 35(1)(xi) of the FIEA);

(xii)

consultation with regard to business management (Article 35(1)(xii) of the FIEA);

(xiii)

sales and purchase of currencies or intermediary/brokerage/agency services for these transactions (Article 35(1)(xiii) of the FIEA);

(xiv)

sales and purchase of negotiable deposits and other monetary claims or intermediary/brokerage/agency services for these transactions (Article 35(1)(xiv) of the FIEA); and

(xv)

investment of Investment Property in the specified assets defined in Article 2(1) of the Act on Investment Trusts and Investment Corporations (excluding building lots and buildings) (Article 35(1)(xv) of the FIEA; Article 15-25 of the FIEA Enforcement Order).
2.: In addition to the above, incidental business also includes businesses that are “any other business incidental to Financial Instruments Business” (the principal sentence of Article 35(1) of the FIEA).

Q23.: What is the scope of business subject to notification conducted by Financial Instruments Business Operators?
A.: The scope of business subject to notification that can be conducted by a Financial Instruments Business Operator conducting Type I Financial Instruments Business or Investment Management Business by making notification is as follows:

(i)

transactions on a commodity market, etc. (Article 35(2)(i) of the FIEA);

(ii)

commodity derivative transactions (both transactions that make settlement by delivery and transactions that make settlement by paying or receiving the differences) (Article 35(2)(ii) of the FIEA; Article 67 of the Cabinet Office Ordinance on Financial Instruments Business, etc.);

(iii)

business pertaining to money lending business or other money loan, or intermediary service of lending and borrowing of money (Article 35(2)(iii) of the FIEA);

(iv)

building lots and buildings transaction business or lease of building lots or buildings (Article 35(2)(iv) of the FIEA);

(v)

real estate specified joint enterprise (Article 35(2)(v) of the FIEA);

(vi)

management of investment in commodities (Article 35(2)(v)-2 of the FIEA);

(vii)

management of investment of Investment Property in assets other than Securities or rights arising from Derivative Transactions (building lots/buildings, etc.) (Article 35(2)(vi) of the FIEA);

(viii)

sales and purchase of gold bullion or intermediary/brokerage/agency services for these transactions (article 35(2)(vii) of the FIEA; Article 68(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.);

(ix)

conclusion of partnership contracts or intermediary/brokerage/agency services for such act (Article 68(ii) of said Cabinet Office Ordinance);

(x)

conclusion of anonymous partnership agreements or intermediary/brokerage/agency services for such act (Article 68(iii) of said Cabinet Office Ordinance);

(xi)

conclusion of loan participation contracts or intermediary/brokerage/agency services for such act (Article 68(iv) of said Cabinet Office Ordinance);

(xii)

insurance solicitation (Article 68(v) of said Cabinet Office Ordinance);

(xiii)

lease of real estate which the operator owns (Article 68(vi) of said Cabinet Office Ordinance);

(xiv)

business of leasing goods (Article 68(vii) of said Cabinet Office Ordinance);

(xv)

creation/sales of computer programs and receiving entrustment of calculation related to business of other business operators (Article 68(viii) of said Cabinet Office Ordinance);

(xvi)

business of operating and managing defined contribution pensions (Article 68(ix) of said Cabinet Office Ordinance);

(xvii)

affairs related to defined contribution pensions entrusted by the National Pension Fund Association (Article 68(x) of said Cabinet Office Ordinance);

(xviii)

trust contract agency business (Article 68(xi) of said Cabinet Office Ordinance);

(xix)

intermediary service for concluding contracts on execution of a will or sorting out of inherited property to be conducted by a financial institution engaged in trust business (Article 68(xii) of said Cabinet Office Ordinance);

(xx)

financial institution agency service (bank agency service, etc.) (Article 68(xiii) of said Cabinet Office Ordinance);

(xxi)

real estate management business (Article 68(xiv) of said Cabinet Office Ordinance);

(xxii)

advisory business concerning investment in real estate (Article 68(xv) of said Cabinet Office Ordinance);

(xxiii)

emissions transactions or intermediary/brokerage/agency services for these transactions (Article 68(xvi) of said Cabinet Office Ordinance);

(xxiv)

emissions derivative transactions, etc. or intermediary/brokerage/agency services for these transactions (Article 68(xvii) of said Cabinet Office Ordinance);

(xxv)

business affairs related to the administrative operation of investment corporations and special purpose companies (Article 68(xviii) of said Cabinet Office Ordinance);

(xxvi)

management of investment in assets other than Securities/Derivative Transactions (Article 68(xix) of said Cabinet Office Ordinance);

(xxvii)

guarantee of obligations/assumption of obligations, etc. (Article 68(xx) of said Cabinet Office Ordinance);

(xxviii)

mediation/introduction of other business operators (Article 68(xxi) of said Cabinet Office Ordinance);

(xxix)

advertising/publicizing conducted with regard to the business of other business operators (Article 68(xxii) of said Cabinet Office Ordinance);

(xxx)

funds transfer service (Article 68(xxiii) of said Cabinet Office Ordinance); and

(xxxi)

business incidental to business subject to notification (Article 68(xxiv) of said Cabinet Office Ordinance).

Professional Investors and General Investors

Q24.: What are the outline and purpose of the system for distinguishing between Professional Investors and General Investors?
A1.: The FIEA categorizes investors into Professional Investors and General Investors, and applies regulation on activities to Financial Instruments Business Operators, etc. according to this category, in order to ensure regulatory flexibility.
2.: Specifically, flexibility has been achieved in the regulation as follows.

(i)

When business operators conduct transactions with General Investors, sufficient regulation on activities is applied from the viewpoint of protecting investors.

(ii)

The FIEA positions persons who are considered to be able to conduct appropriate risk management with regard to financial transactions in light of the status of their knowledge/experience/property as Professional Investors. When business operators conduct transactions with Professional Investors, they are excluded from application of regulation on activities that is intended for correcting the information gap, such as the obligation to deliver a document prior to the conclusion of a contract. However, they are not excluded from application of the regulation of activities that is also intended for ensuring fairness of the market, such as prohibition of Compensation of Loss, etc. (Article 2(31), Articles 34 through 34-5, and Article 45 of the FIEA).
3.: In addition, while also using the systems of other major countries and regions as reference, the FIEA allows customers to shift their status from a General Investor to a Professional Investor, and vice versa, on their own choice in certain cases.
4.: The Report of the First Subcommittee mentions the following as the intention and purpose of introducing such a system.

(i)

It is possible to appropriately protect users and facilitate the supply of risk/capital at the same time by categorizing investors into Professional Investors and General Investors.

(ii)

Professional Investors will be adequately protected under the principle of suitability, in light of their knowledge/experience/property, and they do not necessarily seek protection under administrative regulation.

(iii)

By letting Professional Investors operate under market discipline, rather than administrative regulation, transaction costs that would arise in relation to overregulation will be eliminated, and transactions in Japan’s financial and capital markets facing global competition will be facilitated further.

Q25.

What is the scope of Professional Investors?

A1.

With regard to categorization of Professional Investors and General Investors, the Report of the First Subcommittee, using the systems of other major countries and regions as reference, indicates an idea to start with two categories of Professional Investors and General Investors, and assumes the following four categories considering the optional shifting of the status of investors:

(i)

Professional Investors who cannot shift their status to General Investors;

(ii)

Professional Investors who can shift their status to General Investors by choice;

(iii)

General Investors who can shift their status to Professional Investors by choice; and

(iv)

General Investors who cannot shift their status to Professional Investors.

2.

The FIEA defines “Professional Investors” to be Qualified Institutional Investors, the State, the Bank of Japan, and Investor Protection Funds and any other juridical persons specified by Cabinet Office Ordinance (Article 2(31) of the FIEA). Among these, Qualified Institutional Investors, the State, and the Bank of Japan fall under the category of “Professional Investors who cannot shift their status to General Investors” in (i) above.

3.

On the other hand, Professional Investors that are “Investor Protection Funds and any other juridical persons specified by Cabinet Office Ordinance” can be regarded as General Investors (fully receive the protection under regulation just as in the case of General Investors) if they request a Financial Instruments Business Operator, etc. to treat them as a “customer other than a Professional Investor” (General Investor) and follow a prescribed procedure (Article 34-2 of the FIEA), and they fall under the category of “Professional Investors who can shift their status to General Investors by choice” in (ii) above. Specifically, Cabinet Office Ordinance provides for the following juridical persons (Article 23 of the Definition Ordinance):

–juridical persons incorporated by a specific act of incorporation pursuant to the provisions of any specific Act;
–Investor Protection Funds;
–the Deposit Insurance Corporation of Japan;
–the Agricultural and Fishery Cooperative Savings Insurance Corporation;
–the Insurance Policyholders Protection Corporation of Japan;
–Specific Purpose Companies;
–issuer companies of listed share certificates;
–stock companies whose stated capital is expected to amount to 500 million yen or more, reasonably judging from the status of the transactions thereof or any other circumstances;
–Financial Instruments Business Operators, or juridical persons that fall under the category of Specially Permitted Business Notifying Persons; and
–foreign juridical persons.

4.

Furthermore, juridical persons other than Professional Investors (Article 34-3(1) of the FIEA) and individuals who satisfy certain requirements as being equivalent to Professional Investors in light of the status of their knowledge/experience/property (Article 34-4(1) of the FIEA) can be regarded by a Financial Instruments Business Operator, etc. as Professional Investors, if they request the Financial Instruments Business Operator, etc. to treat them as Professional Investors and follow a prescribed strict procedure. These fall under the category of “General Investors who can shift their status to Professional Investors by choice” in (iii) above.
All other individuals fall under the category of “General Investors who cannot shift their status to Professional Investors” in (iv) above.

Q26.: How are foreign investors treated?
A1.: The Professional Investor system under the FIEA classifies customers eligible to be protected by way of regulation and applies regulation in accordance with the customer classes, thereby ensuring regulatory flexibility. Therefore, investors not eligible to be protected by way of regulation are not covered by the Professional Investor system in the first place.
2.: As the FIEA is basically intended to protect residents in Japan, foreign investors who are non-residents are presumed to not necessarily be eligible for protection. However, foreign investors (non-residents) are presumed to be eligible for protection and to be covered by the Professional Investor system when Financial Instruments Business Operators, etc. sell products to them or solicit them as customers in Japan, for example.
3.: When Financial Instruments Business Operators, etc. conduct transactions with foreign juridical persons in Japan, it is presumed to not always be necessary to apply various investor protection laws. In light of this as well as convenience, etc. for foreign investors (non-residents), foreign juridical persons among foreign investors (non-residents) are treated as "Professional Investors who may change their status to general investors as an Option" (Article 2(31)(iv) of the FIEA; Article 23(x) of the Definition Ordinance).
4.: On the other hand, individual foreign investors are treated in the same way as domestic individual investors. However, with regard to individuals who are managers of Partnerships, etc. based on foreign laws and regulations, it is presumed to be difficult to check whether they meet the requirements for "Professional Investors who may change their status to general investors as an Option" given the diverse types of Partnerships, etc. based on foreign laws and regulations. Therefore, in order to facilitate the conduct of practical affairs and for other objectives, such individuals are not treated as "Professional Investors who may change their status to general investors as an Option" (see Article 34-4(1)(i) of the FIEA; Article 61(2) of the Financial Instruments Business Ordinance). It should be noted that individuals who are managers of Anonymous Partnerships, those who are operating partners of partnerships as specified by the Civil Code, or those who are involved in decisions on the execution of important business operations of limited liability partnerships and execute them are treated as "Professional Investors who may change their status to general investors as an Option" under certain conditions (Article 34-4(1)(i) of the FIEA; Article 61 of the Financial Instruments Businesses Ordinance).

Q27.: Which part of the regulation on activities is not applied to Professional Investors?
A1.: Since Professional Investors are considered to be capable of conducting appropriate risk management with regard to financial transactions in light of the status of their knowledge/experience/property, if the counterparty to a transaction is a Professional Investor, the Financial Instruments Business Operator, etc. is excluded from application of the regulation on activities applicable to Financial Instruments Business Operators, etc. that is intended to correct the information gap between the operator and the customer, except for the regulation intended for ensuring fairness of the market, such as prohibition of Compensation of Loss, etc., in order to ensure regulatory flexibility (Article 45 of the FIEA).
2.: Specifically, such Financial Instruments Business Operator, etc. is excluded from application of the following regulation on activities. However, this does not apply to certain cases where the public interest or protection of Professional Investors is likely to be hindered (the proviso to Article 45 of the FIEA; Article 156 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

if the counterparty to the solicitation of transactions conducted by the operator is a Professional Investor, regulation on advertising, etc. (Article 37 of the FIEA), prohibition of unrequested solicitation (Article 38(iv) of the FIEA), obligation to confirm the intention to receive solicitation (Article 38(v) of the FIEA), prohibition of repeated solicitations (Article 38(vi) of the FIEA), and the principle of suitability (Article 40(i) of the FIEA);

(ii)

if the person who makes and offers transactions to the operator, or the counterparty to the transactions conducted by the operator, is a Professional Investor, the obligation to clarify the conditions of transactions in advance (Article 37-2 of the FIEA), obligation to deliver a document prior to the conclusion of a contract (Article 37-3 of the FIEA), obligation to deliver a document upon conclusion of a contract, etc. (Article 37-4 of the FIEA), obligation to deliver a document pertaining to receipt of a security deposit (Article 37-5 of the FIEA), paper-based cancellation (Article 37-6 of the FIEA), obligation to deliver a document stating the Best Execution Policy, etc. in advance (Article 40-2(4) of the FIEA), and restriction on the act of furnishing a customer's securities as security (Article 43-4 of the FIEA);

(iii)

if the counterparty to an Investment Advisory Contract concluded by the operator is a Professional Investor, prohibition of receiving of deposits of money or Securities, etc. (Article 41-4 of the FIEA), and prohibition of loans, etc. of money or Securities (Article 41-5 of the FIEA); and

(iv)

if the counterparty to a Discretionary Investment Contract concluded by the operator is a Professional Investor, prohibition of receiving of deposits of money or Securities, etc. (Article 42-5 of the FIEA), prohibition of loans, etc. of money or Securities (Article 42-6 of the FIEA), and obligation to deliver investment reports (Article 42-7).
3.: While the principle of suitability (Article 40(i) of the FIEA) is not applied when making solicitation of transactions to Professional Investors, the principle will apply when General Investors shift their status to Professional Investors by choice. For example, if a Financial Instruments Business Operator, etc. solicits a customer that is unsuitable to become a Professional Investor in light of the customer’s knowledge/experience/property to shift the status to a Professional Investor by choice, it would be a violation of the principle of suitability.

Q28.: What kind of regulation on activities is applied to Professional Investors?
A.: Regulation on activities intended for ensuring fairness of the market and basic obligations pertaining to fiduciary responsibility are applied irrespective of whether the counterparty to transactions of a Financial Instruments Business Operator, etc. is a General Investor or a Professional Investor. Specifically, the following regulation on activities is applied:

(i)

with regard to all businesses, duty of good faith and fairness to customers (Article 36 of the FIEA), posting of signs (Article 36-2 of the FIEA), prohibition of name lending (Article 36-3 of the FIEA), and prohibition of administration of corporate bonds, etc. (Article 36-4 of the FIEA);

(ii)

with regard to sales/solicitation, etc., prohibition of providing false information (Article 38(i) of the FIEA), prohibition of providing conclusive evaluations, etc. (Article 38(ii) of the FIEA), prohibited acts (Article 38(vii) and Article 38-2 of the FIEA), prohibition of Compensation of Loss, etc. (Article 39 of the FIEA), appropriate handling of customer information, etc. (Article 40(ii) of the FIEA), and prohibition of sales and purchase, etc. where separate management is not ensured (Article 40-3 of the FIEA);

(iii)

with regard to Investment Advisory Business, duty of loyalty to customers (Article 41(1) of the FIEA), duty of due care of a prudent manager (Article 41(2) of the FIEA), prohibited acts (Article 41-2 of the FIEA), and prohibition of sales and purchase of Securities, etc. (Article 41-3 of the FIEA); and

(iv)

with regard to Investment Management Business, duty of loyalty to customers (Article 42(1) of the FIEA), duty of due care of a prudent manager (Article 42(2) of the FIEA), prohibited acts (Article 42-2 of the FIEA), entrustment of authority of investment (Article 42-3 of the FIEA), and separate management (Article 42-4 of the FIEA).

Q29.: What kinds of exceptions are provided for with regard to regulation on activities that is not applied to transactions with Professional Investors?
A1.: The FIEA provides that it is possible to provide for exceptions to regulation on activities that are not applied to transactions with Professional Investors, that is, to provide for cases where the regulation on activities is applied (the proviso to Article 45 of the FIEA).
2.: First, obligation to deliver a document upon conclusion of a contract, etc. (Article 37-4 of the FIEA), obligation to deliver a document pertaining to receipt of a security deposit (Article 37-5 of the FIEA), and obligation to deliver investment reports (Article 42-7) are applied even with regard to transactions with Professional Investors, if the business operator does not have a framework for promptly answering inquiries from customers (Professional Investors) (Article 156(i), (ii), and (iv) of the Cabinet Office Ordinance on Financial Instruments Business, etc.). The specific framework to be established should be appropriately determined from the viewpoint of securing the convenience of Professional Investors, while also considering the status of business operations of the respective Financial Instruments Business Operators, etc.
3.: In addition, prohibition of receiving deposits of money or Securities, etc. (Article 41-4 and Article 42-5 of the FIEA) is applied even with regard to transactions with Professional Investors, if the business operator does not have a framework for separately managing the deposited money or Securities (Article 156(iii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q30.: The FIEA provides that the shifting of the status between a Professional Investor and a General Investor is to be made for each Kind of Contract, but what are the different Kinds of Contracts?
A1.: The procedure for shifting the status between a Professional Investor and a General Investor under the FIEA respects the intention of the investor about whether or not to receive full protection under regulation on activities, from the viewpoint of protecting investors, such as having investors make a request for the shifting of the status on their own choice.
2.: Whether or not individual investors are able to conduct appropriate risk management with regard to financial transactions is considered to depend on the type of transactions. Therefore, the shifting of the status between a Professional Investor and a General Investor is to be made for each Kind of Contract (Article 34-2(1), Article 34-3(1), and Article 34-4(1) of the FIEA).
3.: Meanwhile, if the Kind of Contract is overly subdivided, the system could become complicated, and the workload of practical affairs, such as managing the investor categories (Professional Investors or General Investors), could become too heavy. Accordingly, the FIEA provides for the following four Kinds of Contracts in order to keep the categorization simple: (i) contracts related to Securities transactions; (ii) contracts related to Derivative Transactions; (iii) Investment Advisory Contracts and contracts for providing agency/intermediary services for the conclusion thereof; and (iv) Discretionary Investment Contracts and contracts for providing agency/intermediary services for the conclusion thereof (Article 34 of the FIEA; Article 53 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q31.

What is the scope of individuals who can be treated as Professional Investors?

A1.

From the viewpoint of ensuring the protection of individual investors, the FIEA basically positions all individual investors as General Investors, and allows only those that satisfy certain requirements as those whose status of knowledge/experience/property is equivalent to that of Professional Investors to request a shift of their status to Professional Investors by choice (Article 34-4 of the FIEA).

2.

As for the specific requirements for an individual who can request a shift of his/her status to a Professional Investor, firstly, an individual who is a business operator of an anonymous partnership, an individual who is an operating partner of a partnership under the Civil Code, or an individual who is a partner involved in and that executes important business operations of a Limited Liability Partnership must satisfy the following requirements (Article 34-4(1)(i) of the FIEA; Article 61 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the consent of all other partners has been obtained with regard to requesting a shift of the status; and

(ii)

the total amount of contribution under the partnership contract, etc. is 300 million yen or more.

Such individuals are considered to be able to shift their status to Professional Investors only in relation to business operation of such anonymous partnership or business execution of such partnership under the Civil Code, etc.

3.

Secondly, the FIEA provides that the general individuals need to satisfy all of the following requirements in order to make such a request (Article 34-4(1)(ii) of the FIEA; Article 62 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the total amount of Net Assets on the Date of Acceptance is expected to be 300 million yen or more, reasonably judging from the status of transactions and any other circumstances;

(ii)

the total amount of investment-type financial assets on the Date of Acceptance is expected to be 300 million yen or more, reasonably judging from the status of transactions and any other circumstances; and

(iii)

one year has passed since the day of first concluding a contract that falls under the Kind of Contract pertaining to the request.

Since it is considered difficult for Financial Instruments Business Operators, etc. to accurately identify the contents of assets and liabilities of individual customers, the FIEA requires that a level of 300 million yen or more is “expected” by “reasonably judging” from various circumstances.

Regulation on activities

Regulation on activities of Financial Instruments Business Operators, etc.

Q32.: What is the outline of regulation on activities under the FIEA?
A1.: In order to ensure the application of rules for protection of users, the FIEA applies rules to Financial Instruments/transactions having the same economic nature. By doing so, the FIEA positions itself as a law having general characteristics concerning sales/solicitation of Financial Instruments, and applies its regulation on activities (sales/solicitation rules) across-the-board, irrespective of the business category, also to Financial Instruments/transactions that are subject to the existing legal system for protecting users.
2.: The FIEA provides for the following as specific regulation on activities applied to Financial Instruments Business Operators, etc. (Financial Instruments Business Operators or Registered Financial Institutions) (Article 34 of the FIEA):

(i)

with regard to all businesses, duty of good faith and fairness to customers (Article 36 of the FIEA), posting of signs (Article 36-2 of the FIEA), prohibition of name lending (Article 36-3 of the FIEA), and prohibition of administration of corporate bonds, etc. (Article 36-4 of the FIEA);

(ii)

with regard to sales/solicitation, etc., regulation on advertising, etc. (Article 37 of the FIEA), obligation to clarify the conditions of transactions in advance (Article 37-2 of the FIEA), obligation to deliver a document prior to the conclusion of a contract (Article 37-3 of the FIEA), obligation to deliver a document upon conclusion of a contract, etc. (Article 37-4 of the FIEA), obligation to deliver a document pertaining to receipt of a security deposit (Article 37-5 of the FIEA), cancellation by means of a document (cooling off) (Article 37-6 of the FIEA), prohibited acts (prohibition of providing false information / providing conclusive evaluations, etc. / solicitation using a rating by an unregistered rating agency / unrequested solicitations / failure to confirm the intention to receive solicitation / repeated solicitations, etc.) (Article 38 of the FIEA), prohibition of Compensation of Loss, etc. (Article 39 of the FIEA), the principle of suitability, etc. (Article 40 of the FIEA), obligation to deliver a document stating the Best Execution Policy, etc. in advance (Article 40-2 of the FIEA), and prohibition of sales and purchase, etc. where separate management is not ensured (Article 40-3 of the FIEA);

(iii)

with regard to Investment Advisory and Agency Business (Article 28(3) of the FIEA) and Investment Management Business (Article 28(4) of the FIEA), prohibited acts (Article 38-2);

(iv)

with regard to Investment Advisory Business (Article 28(6) of the FIEA), duty of loyalty to customers/duty of due care of a prudent manager (Article 41 of the FIEA), prohibited acts (Article 41-2 of the FIEA), prohibition of sales and purchase of Securities, etc. (Article 41-3 of the FIEA), prohibition of receiving of deposit of money or Securities, etc. (Article 41-4 of the FIEA), and prohibition of loan, etc. of money or Securities (Article 41-5 of the FIEA);

(v)

with regard to Investment Management Business, duty of loyalty to customers/duty of due care of a prudent manager (Article 42 of the FIEA), prohibited acts (Article 42-2 of the FIEA), entrustment of authority of investment (Article 42-3 of the FIEA), separate management (Article 42-4 of the FIEA), prohibition of receiving of deposits of money or Securities, etc. (Article 42-5 of the FIEA), prohibition of loans, etc. of money or Securities (Article 42-6 of the FIEA), and obligation to deliver investment reports (Article 42-7);

(vi)

with regard to Securities, etc. Management Business (Article 28(5) of the FIEA), duty of due care of a prudent manager (Article 43 of the FIEA), separate management (Article 43-2 and Article 43-3 of the FIEA), and restriction on the act of furnishing a customer's securities as security (Article 43-4 of the FIEA); and

(vii)

as measures for preventing detriments, etc., prohibited acts when engaging in two or more categories of businesses (Article 44 of the FIEA), prohibited acts pertaining to other businesses (Article 44-2 of the FIEA), restriction on acts involving parent juridical persons, etc./subsidiary juridical persons, etc. (Article 44-3 of the FIEA), and restriction on credit granting by an underwriter (Article 44-4 of the FIEA).
3.: For business operators that are not categorized as Financial Instruments Business Operators such as banks, insurance companies, and trust companies, the respective business laws such as the Banking Act, the Insurance Business Act, and the Trust Business Act provide for necessary arrangements, including application mutatis mutandis of the regulation on activities under the FIEA, and thereby secure treatment equivalent to the regulation on activities under the FIEA.

Q33.: What kind of provisions does the FIEA have with regard to fiduciary responsibility?
A1.: The FIEA has the following provisions on fiduciary responsibility:

(i)

it obligates Financial Instruments Business Operators, etc. and their Officers/employees to execute business in good faith and fairly to customers (Article 36 of the FIEA);

(ii)

it imposes on Financial Instruments Business Operators, etc. the duty of loyalty and duty of due care of a prudent manager when conducting Investment Advisory Business (Article 41 of the FIEA);

(iii)

it imposes on Financial Instruments Business Operators, etc. the duty of loyalty and duty of due care of a prudent manager (Article 42 of the FIEA) and obligation of separate management (Article 42-4 of the FIEA), and prohibits them from entrusting the entire authority of investment with regard to all Investment Property (Article 42-3(2) of the FIEA) as representation of the self-executing obligation, when conducting Investment Management Business; and

(iv)

it imposes Financial Instruments Business Operators, etc. the duty of due care of a prudent manager (Article 43 of the FIEA) and obligation of separate management (Article 43-2 and Article 43-3 of the FIEA) when conducting Securities, etc. Management Business.

Q34.: What is the scope of application of the regulation on advertising, etc.?
A1.: In order to ensure application of rules for protection of users, when Financial Instruments Business Operators, etc. advertise, etc. the contents of the Financial Instruments Business they conduct, the FIEA obligates them to indicate certain matters, and prohibits them from making an indication that is significantly contradictory to facts or seriously misleading with regard to the outlook of profits (Article 37 of the FIEA).
2.: In this manner, the regulation on advertising, etc. is applied to advertising, etc. by Financial Instruments Business Operators, etc. The regulation is not considered to be applied to advertising, etc. by a Financial Instruments Firms Association which is a self-regulating organization, or by a newspaper company or a publishing company. On the other hand, even if advertising is formally not under the name of a Financial Instruments Business Operator, etc., if it is found to be conducted by a Financial Instruments Business Operator, etc. in substance, it would be subject to the regulation on advertising, etc.
3.: In addition, the FIEA applies the regulation to advertising of the “contents” of Financial Instruments Business (Article 2(8) of the FIEA). It should be noted that whether or not advertising meets this requirement should always be substantively determined for individual cases according to the actual conditions of the case, such as the contents and the purpose of advertising, given the intention of the regulation to ensure application of the rules for protection of users.
4.: Furthermore, the FIEA defines the advertising, etc. to which this regulation applies as “advertising” and “conducting any similar acts” (acts similar to advertising) (Article 37(1) of the FIEA). Since the advertising media and method are irrelevant, the regulation also applies to broadcasting media, such as television and radio, the Internet, billboards/standing signboards, and outdoor advertisements. Meanwhile, Cabinet Office Ordinance prescribes the specific scope of acts similar to advertising to be the provision of information with the same contents to many persons by postal mail, correspondence delivery, facsimile, email, distribution of flyers or pamphlets, or any other method (Article 72 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
5.: Therefore, when Financial Instruments Business Operators, etc. advertise the contents of the Financial Instruments Business they conduct, as long as it is provisions of information with the same contents to many persons, materials used for sales, for example, will also be subject to the regulation on advertising, etc.
6.: On the other hand, advertising by way of providing the following is excluded from the scope of acts similar to advertising as being acts that are not considered to require application of the regulation on advertising, etc. (the items of Article 72 of said Cabinet Office Ordinance): (i) documents prepared based on laws and regulations, etc. (e.g., Prospectuses and investment reports); (ii) analyst reports (materials concerning analysis/evaluation of individual companies which are not used for soliciting conclusion of contracts); and (iii) novelty goods that meet certain requirements.

Q35.: What kind of obligation of explanation is imposed on business operators against customers?
A1.: In consideration that it is appropriate to position an obligation of explanation with the same contents as that under the Act on Sales, etc. of Financial Instruments, which is a civil obligation, as regulation on activities under business law, the FIEA provides that a Financial Instruments Business Operator, etc. must deliver a document stating the outline of the Contract for Financial Instruments Transaction, fees, information on risks, and other matters to customers prior to conclusion of a Contract for Financial Instruments Transaction (“pre-contract document”) (Article 37-3(1) of the FIEA). When a business operator violates this obligation, a supervisory disposition can be directly invoked.
2.: In light of the intention of the obligation of explanation, it is considered necessary that information required for a customer to determine whether or not to conclude a Contract for Financial Instruments Transaction is substantively provided to the customer. From such a viewpoint, (i) the Act on Sales, etc. of Financial Instruments adopts the idea of the principle of suitability as the standard for interpreting the obligation of explanation (Article 3(2) of the Act on Sales, etc. of Financial Instruments), and (ii) in line with this, the FIEA provides for obligation of substantive explanation with regard to the pre-contract document (Article 38(vii) of the FIEA; Article 117(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q36.: Is it sufficient for a business operator to deliver a document in advance, in order to fulfill the obligation of explanation to a customer?
A1.: It is said that the obligation of explanation is business operators’ obligation to provide information on important matters concerning Financial Instruments to users, and can be regarded as a relative disclosure obligation. It is positioned as a pillar of sales/solicitation rules for protection of users, along with the principle of suitability (First Subcommittee of the Financial System Council, “First Interim Report” (July 6, 1999)).
2.: While the FIEA provides for the obligation of explanation in the form of obligation of delivery of a pre-contract document (Article 37-3(1) of the FIEA), such arrangement was made in consideration of matters including the following (Article 40 of the Securities and Exchange Act; Article 70 of the Financial Futures Trading Act, etc.): (i) consistency should be achieved with the obligation to deliver a Prospectus (Article 15(2) of the FIEA), which is a relative disclosure obligation under disclosure regulation; (ii) in non-face-to-face transactions via electronic media, explanation through an electronically delivered document will be the core; and (iii) the obligation had been provided for in the form of obligation of delivery of a pre-contract document under the former finance-related laws.
3.: In light of the intention of the obligation of explanation, it is not sufficient for a Financial Instruments Business Operator, etc. to merely deliver a document stating the stipulated matters formally, but it is necessary that the operator substantively provide the customer with important information that will be required for the customer to determine whether or not to conclude a Contract for Financial Instruments Transaction (see Article 3(2) of the Act on Sales, etc. of Financial Instruments).
4.: Given that the obligation of explanation is an obligation to provide information on important matters, it is necessary to prevent the obligation from losing its substance, and to substantiate the rule. From such a viewpoint, with regard to delivery of a pre-contract document, Cabinet Office Ordinance has added to prohibited acts an act of concluding a Contract for Financial Instruments Transaction without providing in advance an explanation by the method and to the extent necessary for the customer to understand the contents in light of the customer’s attributes (the status of knowledge, experience and property and the purpose of concluding the Contract for Financial Instruments Transaction) (Article 38(vii) of the FIEA; Article 117(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
5.: Under this obligation of substantive explanation, business operators are considered necessary to flexibly change the method and the extent of the explanation in light of the diverse customer attributes and according to the contents of the contracts. It should be noted that, with regard to the mode, etc. of explanation, importance is attached to the substantive aspect of whether the customer will understand the contents of the document in light of the customer’s attributes, rather than the formal/procedural aspects, and that it is not necessarily sufficient to use a specific formal procedure/method. Also, since whether or not the customer has actually understood the contents of the document can only be subjectively judged by the customer, and cannot be judged by other persons, the FIEA does not require the customer to have “understood” the contents as a result of receiving an explanation from the business operator. Business operators are considered to be required to basically provide an explanation by the method and to the extent that is judged to be necessary for a customer having the same attributes as the customer in question to “understand” the contents based on social conventions, and on such basis, adopt the method and extent that are appropriate for each customer.

Q37.: What are the matters to be stated in a pre-contract document?
A1.: A pre-contract document needs to contain matters that are necessary and important for general users to determine whether or not to conduct the transactions, such as information on the contract, information on risks, information on transaction costs, and information on the business operator. From such a viewpoint, the FIEA provides for the following as matters that should be commonly stated in all pre-contract documents (Article 37-3(1) of the FIEA; Article 82 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the trade name or name and address of the Financial Instruments Business Operator, etc.;

(ii)

the fact that the business operator is a Financial Instruments Business Operator, etc. and the operator’s registration number;

(iii)

the outline of the Contract for Financial Instruments Transaction;

(iv)

the fees to be payable by the customer, etc.;

(v)

if there is possible loss of principal (due to market risks), such fact;

(vi)

if there is possible loss exceeding principal (due to market risks), such fact;

(vii)

the fact that the contents of the pre-contract document be read thoroughly;

(viii)

if there is customer margin, etc. payable by the customer, its amount and calculation method;

(ix)

if there is possible loss of principal as set forth in (v) above, the indicator that will be the direct cause for such loss and the reason therefor;

(x)

if there is possible loss exceeding principal as set forth in (vi) above, the indicator that will be the direct cause for such loss and the reason therefor;

(xi)

if there is possible loss of principal (due to credit risks of the business operator or any other person), such fact, such person, and the reason therefor;

(xii)

if there is possible loss exceeding principal (due to credit risks of the business operator or any other person), such fact, such person, and the reason therefor;

(xiii)

the outline of taxes relating to the contract;

(xiv)

if there are any predetermined causes for termination of the contract, their contents;

(xv)

whether or not cooling off provisions are applicable;

(xvi)

if cooling off provisions are applicable, their contents;

(xvii)

the outline of the Financial Instruments Business Operator, etc.;

(xviii)

the outline of the contents and method of the Financial Instruments Business (or Registered Financial Institution Business) conducted by the Financial Instruments Business Operator, etc.;

(xix)

the method by which the customer contacts the Financial Instruments Business Operator, etc.;

(xx)

whether or not the Financial Instruments Business Operator, etc. is a member of a Financial Instruments Firms Association or a Target Business Operator of a Certified Investor Protection Organization, and if it is a member or a Target Business Operator, the name of the association or organization; and

(xxi)

if there is a Designated Dispute Resolution Organization, the trade name or name of the organization, and if there is no such organization, the contents of the Complaint Processing Measures and Dispute Resolution Measures.
2.: In addition to these common matters to be stated, additional matters to be stated are stipulated in detail according to the characteristics of the Financial Instruments/transactions (Articles 83 through 96 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q38.: What is the method of making statements in a pre-contract document?
A1.: The method of making statements in a pre-contract document, of which preparation/delivery are obligated under the FIEA, is divided into three steps, according to the importance, etc. of the matters to be stated (the principal sentence of Article 37-3(1) of the FIEA; Article 79 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
2.: First, the Financial Instruments Business Operator, etc. is obligated to plainly state the “fact that the pre-contract document should be read adequately” (Article 82(i) of said Cabinet Office Ordinance) and the “matters set forth in the items of Article 37(1) of the Act which are particularly important matters that affect the determination of customers” by using characters/numbers in the size of 12 points or larger (Article 79(3) of said Cabinet Office Ordinance). The latter assumes a simple and plain statement of the outline of the contract (Article 37-3(1)(iii) of the FIEA) and matters concerning fees, etc. (Article 37-3(iv) of the FIEA) that are particularly important, and the fact that there is possible loss of principal/loss exceeding principal (Article 37-3(v) and (vi) of the FIEA), among other matters.
3.: Secondly, the Financial Instruments Business Operator, etc. is obligated to clearly and accurately state the following matters within frames by using characters/numbers in the size of 12 points or larger (Article 79(2) of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the outline of the fees, etc.;

(ii)

the fact that there is possible loss of principal / loss exceeding principal / the relevant indicator, etc. / the reason therefor;

(iii)

the trade name, etc. of the counterparty to the covering transactions of over-the-counter financial futures trading, and the method/trustee of separate management; and

(iv)

whether or not cooling off provisions are applicable.
4.: Thirdly, the Financial Instruments Business Operator, etc. is obligated to clearly and accurately state any other matters to be stated by using characters/numbers in the size of 8 points or larger (Article 79(1) of said Cabinet Office Ordinance).
5.: It is desirable for a Financial Instruments Business Operator, etc. to satisfy these statutory requirements as well as to voluntarily take original measures to arouse the attention of the customer (e.g., underlining or changing the text color in certain parts).

Q39.: How should the obligation for explanation be fulfilled in the case of transactions that are not conducted face-to-face?
A1.: The obligation for substantive explanation as specified by the FIEA and a related ordinance (Article 38(vii) of the FIEA; Article 117(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.) places emphasis on substance, namely, whether customers accurately understand the contents of the pre-contract document, etc., regardless of whether the transaction is conducted face-to-face or otherwise (via an ATM, the Internet, etc.).
2.: In the case of transactions that are not conducted face-to-face in particular, it is considered to be necessary in light of their nature to devise practical measures to fulfill the obligation for substantive explanation, such as (i) ascertaining that customers have adequately read the pre-contract document, etc., (ii) developing a system to appropriately respond to customers’ inquiries and (iii) publishing a FAQ concerning matters about which inquiries are frequently received.
3.: One example of such a practical measure cited by the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. is ascertaining customers’ understanding through such means as enabling customers to indicate their understanding with the click of a button on their computer display after reading explanations shown on the display when they conduct financial instruments transactions via the Internet.
4.: In any case, whether the obligation to provide explanations to customers is fulfilled in accordance with the above provision should be judged substantively in light of the circumstances of each case.

Q40.: What is the scope of fees, etc. which a business operator must disclose to the customer?
A1.: The amount of fees, remuneration or any other consideration payable by the customer to a Financial Instruments Business Operator, etc. with regard to a Contract for Financial Instruments Transaction has a direct impact on the customer’s return. Therefore, the FIEA requires the business operator to indicate the outline of the fees, etc. when advertising, etc. (Article 37(1)(iii) of the FIEA; Article 16(1)(i) of the FIEA Enforcement Order), and to state the fees, etc. in the pre-contract document (Article 37-3(1)(iv) of the FIEA).
2.: The specific scope of fees, etc. to be disclosed is prescribed to be “the consideration payable by the customer with regard to a Contract for Financial Instruments Transaction, irrespective of what the consideration is called, such as fees, remuneration, or cost” excluding “the price of Securities or the amount of security deposit, etc.” (Article 74(1) and Article 81(1) of the Cabinet Office Ordinance on Financial Instruments Business, etc.). Therefore, the scope will include (i) not only the fees, etc. directly payable by the customer to the business operator, such as stock trade commissions and sales commissions for investment trusts, (ii) but also fees, etc. indirectly payable by the customer to the business operator, such as trust fees for investment trusts and expenses, etc. related to investment of variable pensions. It is also clearly indicated for confirmation that, in the case of investment trusts in the form of fund of funds, the fees, etc. such as trust fees pertaining to funds to be invested in are included (Article 74(2) through (4) and Article 81(2) of said Cabinet Office Ordinance).
3.: In order to ensure application of rules for protection of users, it is important that the customer is able to accurately understand overall fees, etc. that are payable to the Financial Instruments Business Operator, etc. with regard to the Contract for Financial Instruments Transaction. From such a viewpoint, the business operator is also obligated to indicate/state the “amount (or calculation method) for each type of fees, etc.” in addition to their “total amount (or calculation method)” (Article 74(1) and Article 81(1) of said Cabinet Office Ordinance). Meanwhile, considering the diversity/complexity of the fees, etc., the business operator is permitted to state/indicate the “maximum amount (or calculation method)” for each type of fees, etc. (Article 81(1) of said Cabinet Office Ordinance). Moreover, in the case of advertising, etc., it is sufficient to indicate the overall “outline,” considering space limitations, etc. (Article 74(1) of said Cabinet Office Ordinance).
4.: When it is not possible to indicate/state such information pertaining to fees, etc., the business operator will indicate/state such fact and the reason therefor (the proviso to Article 74(1) and the proviso to Article 81(1) of said Cabinet Office Ordinance). However, it should be noted that a case where the “maximum amount (or calculation method)” can be indicated/stated does not fall under the “case where it is not possible to indicate/state such information.”

Q41.: Is the sales commission payable by the producer (e.g., an insurance company) of a Financial Instrument to its seller (e.g., a bank, etc.) included in the fees, etc. that must be disclosed?
A1.: With regard to sales commissions payable by the producer of a Financial Instrument to its seller, the Report of the First Subcommittee mentions that “although we cannot deny the possibility that the amount of sales commissions would affect the sales/solicitation conducted by the seller in some aspects, we consider that there are still issues that need to be studied, such as the extent to which such disclosure obligation should be applied (e.g., the treatment of sales compensation provided as part of the salary of sales persons).”
2.: Based on the Report of the First Subcommittee, the FIEA provides for “matters concerning fees, remuneration or any other consideration payable by the customer with regard to said Contract for Financial Instruments Transaction” as the fees, etc. subject to disclosure (Article 37-3(1)(iv) of the FIEA, etc.), and does not include therein the fees, etc. payable by the producer of a Financial Instrument to its seller. The treatment of such fees, etc. will continue to be studied in the future.
3.: It is possible for a Financial Instruments Business Operator, etc. to voluntarily disclose information on such fees, etc. to customers from the viewpoint of securing their trust.

Q42.: In what kind of cases is the delivery of a pre-contract document unnecessary?
A1.: The pre-contract document under the FIEA is to be prepared/delivered for each contract, in principle (Article 37-3(1) of the FIEA), but exceptions are allowed in certain cases where non-delivery of such document will not hinder the protection of investors, considering the characteristics of the transaction and the convenience of users (the proviso to Article 37-3(1) of the FIEA).
2.: The first exception is the case where the business operator has delivered a “document on listed Securities, etc.” within the past one year with regard to sales and purchase of listed Securities, etc. (Article 80(1)(i) and (3) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
3.: The second exception is the case where the business operator has delivered a pre-contract document of the “same kind of contents” to the customer within the past one year (Article 80(1)(ii) and (4) of said Cabinet Office Ordinance). In order to receive application of this exception, it is considered sufficient to deliver the document to the customer periodically at intervals not exceeding one year. Whether or not Contracts for Financial Instruments Transactions can be regarded to have the “same kind of contents” should be substantively determined in light of social conventions from the viewpoint of customers for individual cases. A particularly important factor in such determination would be whether or not such information as the risk information (Article 37-3(1)(v) and (vi) of the FIEA; Article 82(iii) through (vi) of the Cabinet Office Ordinance on Financial Instruments Business, etc.) provided to the customer through the pre-contract documents of the respective contracts are the same. Therefore, basically, the documents would at least differ (i) for the respective kinds of Securities listed in the items of Article 2(1) and the items of Article 2 of the FIEA with regard to Securities, and (ii) for the transactions with different transaction category/underlying assets (“Financial Instruments”) / reference indicator (“Financial Indicator”) with regard to Derivative Transactions.
4.: The third exception is the case where the business operator has delivered a Prospectus, etc. to the customer (Article 80(1)(iii) of said Cabinet Office Ordinance). In order to receive application of this exception, the Prospectus must contain all matters to be stated in the pre-contract document, but supposing the case where some of those matters (e.g., the outline of the seller or the specific level of the sales commissions) are not contained in the Prospectus, the business operator is also allowed to deliver a document stating such information together with the Prospectus. Meanwhile, the case where delivery of a Prospectus is unnecessary (Article 15(2)(ii) of the FIEA) also does not require delivery of a pre-contract document (Article 80(1)(iii) of said Cabinet Office Ordinance).
5.: The fourth exception is the case where the business operator intends to conclude a contract that partially changes the contents of an already concluded contract, and there is no change in the matters to be stated in the pre-contract document or a contract change document has been delivered to the customer (Article 80(1)(iv) of said Cabinet Office Ordinance).
6.: The fifth exception is the case where the contract pertains to any of the following acts: sales of Securities purchased; intermediary or agency service for the purchase of Securities pertaining to a Tender Offer; purchase of Beneficiary Securities of Investment Trusts/foreign investment trusts; the contrary sales or purchase of Securities transactions/Derivative Transactions; sales or purchase under a Contract for Cumulative Investment, etc.; re-investment of earnings from investment trusts, etc. or sales or purchase (excluding initial sales) / cancellation of money reserve funds (MRF); Underwriting of Securities; dealing in Public Offering or Secondary Distribution of Securities or dealing in Private Placement or dealing in Solicitation for Selling, etc. Only for Professional Investors (Article 80(1)(v) of said Cabinet Office Ordinance).

Q43.: What is a document on listed Securities, etc.?
A1.: The pre-contract document under the FIEA is to be prepared/delivered for each contract, in principle (Article 37-3(1) of the FIEA), but exceptions are allowed in certain cases considering the characteristics of the transactions and the convenience of users, etc. (the proviso to Article 37-3(1) of the FIEA).
2.: For example, listed instruments, etc. have stylized instrument quality, have a certain level of social recognition, have undergone the examination for listing, etc. by the Financial Instruments Exchange, and are disclosed by way of making them available for public inspection. Considering such points, it is provided that in the case of sales or purchase, etc. of listed Securities, etc. (sales or purchase, etc. (excluding Derivative Transactions/margin transactions, etc.) of listed Securities (excluding covered warrants, etc.) in or outside Japan), it is unnecessary to prepare/deliver a pre-contract document if a “document on listed Securities, etc.,” which is a comprehensive document, has been delivered within the past one year (Article 80(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
3.: The requirement of “within the past one year” has been set on the basis that the information needs to have been provided to the customer at least within the past one year from the viewpoint of investor protection, considering the possibility of diversification of listed instruments, etc. Meanwhile, if the customer makes sales or purchase, etc. of listed Securities, etc. within one year after the delivery of such document, the customer is considered to have the necessary information at that point of time, so it is regarded that the document on listed Securities, etc. has been re-delivered at that point of time (Article 80(3) of said Cabinet Office Ordinance). Therefore, unless the interval between transactions exceeds one year, the exclusion from application will remain effective.
4.: In a document on listed Securities, etc., the following matters are to be stated by a method equivalent to the method for stating matters in a pre-contract document (Article 79 of said Cabinet Office Ordinance) (Article 80(1)(i) of said Cabinet Office Ordinance):

(i)

the trade name or name and address of the Financial Instruments Business Operator, etc.;

(ii)

the fact that the business operator is a Financial Instruments Business Operator, etc. and the operator’s registration number;

(iii)

the outline of the Contract for Financial Instruments Transaction;

(iv)

the fees to be payable by the customer, etc.;

(v)

if there is possible loss of principal (due to market risks), such fact;

(vi)

the fact that the contents of the document should be read thoroughly;

(vii)

if there is possible loss of principal (due to market risks), the indicator that will be the direct cause for such loss and the reason therefor;

(viii)

if there is possible loss of principal (due to credit risks of the business operator or any other person), such fact, such person, and the reason therefor;

(ix)

an outline of the Financial Instruments Business Operator, etc.;

(x)

whether or not the Financial Instruments Business Operator, etc. is a member of a Financial Instruments Firms Association or a Target Business Operator of a Certified Investor Protection Organization, and if it is a member or a Target Business Operator, the name of the association or organization; and

(xi)

if there is a Designated Dispute Resolution Organization, the trade name or name of the organization, and if there is no such organization, the contents of the Complaint Processing Measures and Dispute Resolution Measures.
5.: In a document on listed Securities, etc., it is considered to be necessary to state information on the target listed Securities, etc. in as much detail as possible. For example, when Securities with different instrument quality from existing listed instruments are to be newly listed, it would be necessary to deliver a document on listed Securities, etc. which accurately states such instrument quality (an outline of the contract, risk information, etc.).

Q44.: What kind of document needs to be delivered upon conclusion of a contract?
A1.: Under the obligation to deliver a document upon conclusion of a contract etc. under the FIEA (Article 37-4(1) of the FIEA), firstly, the business operator is obligated to deliver an “upon-contract document” which is a document for enabling the customer to confirm the contents of the Contract for Financial Instruments Transaction concluded.
2.: Secondly, in the case of cancellation of an investment trust / foreign investment trust (Article 98(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.) or refunding of investment equity of an investment corporation (Article 98(1)(ii) of said Cabinet Office Ordinance), the business operator is obligated to deliver a document for enabling the customer to confirm the contents thereof, although it is not “conclusion of a Contract for Financial Instruments Transaction.”
3.: Thirdly, the business operator is obligated to deliver a “transaction balance report” for reporting the contents of the transactions carried out with the customer within a certain period and the balance of Securities/money as of the last day of that period (Article 98(1)(iii) of said Cabinet Office Ordinance). As for delivery of a transaction balance report, (i) if the customer requests the delivery of the report every time a contract is established or Securities/money have been transferred, it needs to be delivered upon every such timing (Article 98(1)(iii)(a) of said Cabinet Office Ordinance), (ii) and if the customer has not made such a request, it needs to be delivered every three months (Article 98(1)(iii)(b) of said Cabinet Office Ordinance). However, the business operator is allowed to deliver the report on an annual basis if no transaction is carried out with the customer for one year, and does not require delivery of the report if there is neither a transaction, etc. nor a balance for one year.
4.: Fourthly, when a contract pertaining to commodity fund related transactions (the principal sentence of Article 91(1) of said Cabinet Office Ordinance) has been concluded with the customer, it is necessary to deliver a report on the investment status of the commodity fund (Article 98(1)(iv) and Article 98(2) of the FIEA).

Q45.: In what kind of cases is delivery of an upon-contract document unnecessary?
A1.: Delivery of an “upon-contract document” is unnecessary in such cases as where it is considered unnecessary to deliver a document every time a contract is established or where the customer is able to confirm the contents of the contract by another document. Specifically, the FIEA provides for the following cases (the proviso to Article 37-4(1) of the FIEA; Article 110(1)(i) through (vii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the case of purchase under a Contract for Cumulative Investment, etc., re-investment of earnings from investment trusts / foreign investment trusts, etc., or sales or purchase/cancellation of MRF, on the condition that the business operator periodically delivers the document to the customer and has a framework for answering inquiries;

(ii)

the case of sales or purchase of bonds on condition of repurchase/resale, transactions for which the period from the contract date to the delivery date is one month or more, sales or purchase of bonds with an option, Over-the-Counter Transactions of Derivatives, intermediary/brokerage/agency services for sales where the Issuer/holder of Securities is the customer, intermediary/agency services for purchase of Securities pertaining to a Tender Offer, or dealing in Public Offering / Secondary Distribution / Private Placement where the Issuer / holder of Securities is the customer, on the condition of delivering a written contract stating the terms and conditions of the transactions every time a contract is made;

(iii)

the case of establishment of a contract pertaining to Brokerage for Clearing of Securities, etc. conducted by a Clearing Participant;

(iv)

the case of dealing with Problematic Conduct;

(v)

the case of a transaction, etc. under a Discretionary Investment Contract that requires the consent, etc. of the customer;

(vi)

the case of partially changing the contents of a contract where there is no change in the matters to be stated in the upon-contract document or where a document stating the changed matters has been delivered to the customer; or

(vii)

the case of a give-up action.
2.: In addition, delivery of a transaction balance report is unnecessary in the following cases (the proviso to Article 37-4(1) of the FIEA; Article 111(i) through (iv) of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the case where the customer, who is a foreign government, etc., has given the consent to non-delivery of the report, and the business operator has a framework for answering inquiries;

(ii)

the case of intermediary/agency services for Securities pertaining to a Tender Offer;

(iii)

the case where transfer of Securities/money pertains to Underwriting of Securities;

(iv)

the case where establishment of a contract or transfer of Securities/money pertains to dealing in Public Offering / Secondary Distribution / Private Placement of Securities where the Issuer/holder of the Securities is the customer;

(v)

sales or purchase or any other transactions of Securities or Derivative Transactions, etc. that do not involve transfer of Securities or money; or

(vi)

the case of a give-up action.
3.: Moreover, delivery of a report on the investment status of the commodity fund is also unnecessary in cases where the customer is a person who satisfies certain requirements (the proviso to Article 37-4(1) of the FIEA; Article 112 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Q46.: What kind of prohibited acts are specified by Cabinet Office Ordinance?
A1.: Article 38 of the FIEA individually lists prohibited acts that commonly apply to all Financial Instruments Business Operators, etc. (Article 38(i) through (vi) of the FIEA), and further provides that “acts that result in insufficient protection of investors, harm the fairness of transactions or cause a loss of confidence in Financial Instruments Business” will be specified by Cabinet Office Ordinance (Article 38(vii) of the FIEA).
2.: The specific contents of Cabinet Office Ordinance have been stipulated by using the former related laws and regulations as reference (Article 117 of the Cabinet Office Ordinance on Financial Instruments Business, etc.), whereas the main changes made at the time of enacting the FIEA are as follows:

(i)

In order to ensure the obligation of substantive explanation, with regard to delivery of a pre-contract document, etc., Cabinet Office Ordinance has added to prohibited acts an act of concluding a contract without providing in advance an explanation by the method and to the extent necessary for the customer (excluding a Professional Investor) to understand the contents in light of the customer’s attributes (Article 117(1)(i) of said Cabinet Office Ordinance).

(ii)

Cabinet Office Ordinance prohibits an act of providing or promising to provide special benefits with regard to a Contract for Financial Instruments Transaction (Article 117(1)(iii) of said Cabinet Office Ordinance).

(iii)

Cabinet Office Ordinance prohibits solicitations during the time of the day that would annoy the customer with regard to all Contracts for Financial Instruments Transaction in the case of individual customers, and prohibits such acts with regard to mortgage securities / commodity funds / financial futures trading in the case of any other customers (Article 117(1)(vii) of said Cabinet Office Ordinance).

(iv)

In order to prevent evasion of the prohibition of unrequested solicitation (Article 38(iv) of the FIEA) and the prohibition of repeated solicitations (Article 38(vi) of the FIEA), Cabinet Office Ordinance prohibits an act of making a solicitation by gathering customers (excluding Professional Investors) without clearly indicating that the purpose is solicitation of over-the-counter financial futures trading (Article 117(1)(viii) of the Cabinet Office Ordinance on Financial Instruments Business, etc.), and prohibits an act of making a solicitation in spite of the fact that the customer (excluding a Professional Investor) has expressed his/her intention to not conclude a contract (including the expression of not wishing to receive solicitation) in advance with regard to financial futures trading (Article 117(ix) of said Cabinet Office Ordinance).

(v)

Cabinet Office Ordinance has provisions prohibiting securities companies from becoming involved in market manipulation, which also cover involvement in market manipulation concerning market indicators such as the market VWAP (volume weighted average price) and the transaction volume (Article 117(1)(xix) and (xx) of the Cabinet Office Ordinance on Financial Instruments Business, etc.

Q47.: In what kind of cases is the confirmation on Problematic Conduct, which is usually required in order for a case to be excluded from prohibition of Compensation of Loss, unnecessary?
A1.: The FIEA provides that the provisions on prohibition of Compensation of Loss, etc. do not apply when compensation is made “in order to compensate in whole or in part a loss incurred from Problematic Conduct,” and, in principle, requires “confirmation on the Problematic Conduct” by the authorities in order for the case to be excluded from application of those provisions (Article 39(3) of the FIEA; Article 118 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
2.: However, as a measure to further facilitate Compensation of Losses to customers in the event of Problematic Conduct, it is provided that confirmation on the Problematic Conduct is not necessary (the proviso to Article 39(3) of the FIEA; Article 119(1) of the Cabinet Office Ordinance on Financial Instruments Business, etc.) when an objective procedure has been taken to be able to presume that the compensation is made for a loss caused by Problematic Conduct without having the authorities make confirmation on the Problematic Conduct.
3.: Specifically, confirmation on the Problematic Conduct is not necessary in the following cases:

(i)

a final and binding judgment of a court (Article 119(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.;

(ii)

a judicial settlement (Article 119(1)(ii) of said Cabinet Office Ordinance);

(iii)

civil conciliation (Article 119(1)(iii) of said Cabinet Office Ordinance);

(iv)

mediation by a Financial Instruments Firms Association or a Certified Investor Protection Organization, or a settlement by a Designated Dispute Resolution Organization (Article 119(1)(iv) of said Cabinet Office Ordinance);

(v)

a settlement/arbitration by the arbitration center of a bar association (Article 119(1)(v) of said Cabinet Office Ordinance);

(vi)

a settlement through mediation by the National Consumer Affairs Center of Japan or the consumer center of a local government (Article 119(1)(vi) of said Cabinet Office Ordinance);

(vii)

a settlement through a certified dispute resolution procedure conducted by a certified dispute resolution business operator (limited to those whose target disputes cover Sales and Purchase or Other Transaction of Securities, etc.) under the Act on Promotion of Use of Alternative Dispute Resolution (the ADR Act) (Article 119(1)(vii) of said Cabinet Office Ordinance);

(viii)

a settlement through representation of the customer by an attorney-at-law/judicial scrivener who satisfies certain requirements(note) (Article 119(1)(viii) of said Cabinet Office Ordinance)

(Note)

The amount of payment is not more than 100 million yen (in the case of an attorney-at-law) or not more than 1.4 million yen (in the case of a judicial scrivener), and a document proving that the attorney-at-law/judicial scrivener investigated/confirmed that the compensation is made for a loss caused by a Problematic Conduct has been delivered to the Financial Instruments Business Operator, etc.;

(ix)

a settlement involving a committee that satisfies certain requirements (Article 119(1)(ix) of said Cabinet Office Ordinance);

(x)

the case where the property benefit to be provided to the customer is not more than 100,000 yen (Article 119(1)(x) of said Cabinet Office Ordinance); and

(xi)

the case where the representative person, etc. of the Financial Instruments Business Operator, etc. has caused a loss to the customer due to an error in the execution of the customer’s order (Article 119(1)(xi) of said Cabinet Office Ordinance).

Q48.: What kind of revision was made to the principle of suitability?
A1.: The principle of suitability is a principle that should constitute a pillar of sales/solicitation rules for protection of users, along with the obligation of prior explanation (the business operator’s obligation to provide information on the Financial Instruments to users). It is said that there is the “principle of suitability in the narrow sense” (a rule that a business operator must not conduct sales/solicitation of certain instruments to specific users regardless of how much detailed explanation the business operator provides) and the “principle of suitability in the broad sense” (a rule that a business operator must conduct sales/solicitation in a way that suits the knowledge/experience/property, etc. of the users). It is understood that the principle of suitability is that in the narrow sense, and that the principle of suitability in the broad sense is equivalent to a concept that has expanded the obligation of explanation.
2.: The rules similar to the principle of suitability under the Banking Act and the Insurance Business Act, etc. not only require development of an appropriate framework (see Article 13-7 of the Ordinance for Enforcement of the Banking Act; Article 53-7 of the Ordinance for Enforcement of the Insurance Business Act, etc.), but, from the viewpoint of achieving cross-sectoral application of regulation, also apply mutatis mutandis the principle of suitability under the FIEA (the rule prohibiting “solicitation that is found to be inappropriate”) with regard to investment-type deposits/insurance, etc., and thereby secure treatment equivalent to the regulation on activities under the FIEA (Article 13-4 of the FIEA; Article 300-2 of the Insurance Business Act).
3.: The FIEA applies the idea of the “principle of suitability in the broad sense” to the obligation of explanation, and prohibits an act of concluding a contract without providing in advance an explanation by the method and to the extent necessary for the customer to understand the contents in light of the customer’s attributes (the status of knowledge/experience/property and the purpose of concluding the contract), with regard to delivery of a pre-contract document, etc. (Article 117(1)(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.). The Act on Sales, etc. of Financial Instruments also adopts the idea of the principle of suitability as the standard for interpreting the obligation of explanation (Article 3(2) of the FIEA).

Q49.: What matters should be taken into consideration when applying the principle of suitability?
A1.: In the actual practice of sales/solicitation of Financial Instruments/transactions, the business operator would need to take the following two-step approach under the principle of suitability:

(i)

determine whether or not it is permissible to conduct sales/solicitation of certain instruments/transactions to the customer, in light of the customer’s attributes (“the principle of suitability in the narrow sense”); and

(ii)

even if it is judged to be permissible to conduct sales/solicitation, provide an explanation by the method and to the extent necessary for the customer to understand the contents in light of the customer’s attributes (“the principle of suitability in the broad sense”).
2.: With regard to the specific application of the principle, the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. mention that the business operator must ensure that investment solicitation is conducted in an appropriate manner suited to their customer’s attributes, etc., and for such purpose, it is important to establish a control environment for customer management that enables a precise identification of the customer's attributes and the actual status of transactions. From such a viewpoint, the guidelines indicate (i) efforts for securing of an appropriate identification of customer attributes and appropriate management of customer information, and (ii) precise identification of the actual status of customers' transactions and effective use of acquired information, as major supervisory viewpoints.
3.: In association with this, when an individual customer desires a certain investment-type instrument, there can be a case where the customer refuses to answer questions for confirming the customer’s attributes. However, if the business operator immediately takes a response to refrain from conducting the transaction with such customer, it could excessively hinder the convenience of customers. In addition, it is considered to be necessary to comprehensively take into account the knowledge/experience, etc. of the customer in observing the principle of suitability.
4.: The principle of suitability is simply intended for seeking business operators to take a diverse and flexible response according to the attributes of individual customers. Therefore, a response of uniformly refraining from conducting sales/solicitation to customers who are older than a certain age or a response of impairing the convenience of users with rich knowledge/experience, etc. by uniformly providing an explanation for long hours, disregarding the knowledge/experience, etc. of individual customers, is considered not to comply with the intention of the principle of suitability.
5.: Meanwhile, since "the principle of suitability in the narrow sense” is regulation on activities pertaining to “solicitation,” it is not applied when no solicitation is involved. For example, an act of providing an explanation on an instrument within the extent of responding to the customer’s request would not necessarily be categorized as “solicitation.” In addition, an act of merely delivering materials used for sales to the customer passively in response to the individual requests of customers is not considered to be categorized as “solicitation" in principle. Moreover, an act of entrusting “solicitation” to another business operator and only explaining the contents of an instrument at an explanatory meeting where a large number of customers are gathered is considered not to be categorized as “solicitation” in principle. However, whether or not an act is categorized as “solicitation” should be judged substantively and carefully in light of the circumstances of each case.

Regulation on activities concerning Investment Advisory Business

Q50.: What kind of regulation is provided for with regard to Investment Advisory Business?
A1.: The FIEA provides for regulation on activities for the case where Financial Instruments Business Operators, etc. conduct Investment Advisory Business ("special provisions concerning Investment Advisory Business”).
2.: Firstly, the FIEA provides for the duty of loyalty to customers and duty of due care of a prudent manager (Article 41 of the FIEA).
3.: Secondly, from the viewpoint of classifying these obligations into patterns, the FIEA lists the following as acts that should be particularly prohibited with regard to Investment Advisory Business: advice intended to conduct a transaction among customers that would harm a particular customer's interest for the interest of another customer (Article 41-2(i) of the FIEA); an act of scalping (Article 41-2(ii) of the FIEA); advice intended to conduct a transaction under terms and conditions that are different from ordinary terms and conditions (Article 41-2(iii) of the FIEA); a transaction based on the account of the business operator by using the information concerning the transaction conducted by the customer who has received advice (Article 41-2(iv) of the FIEA); and Compensation of Losses, etc. (Article 41-2(v) of the FIEA). In addition, Cabinet Office Ordinance provides for prohibited acts (Article 41-2(vi) of the FIEA; the items of Article 126 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
4.: Apart from these, the FIEA provides for prohibition of sales and purchase of Securities, etc. in principle (Article 41-3 of the FIEA; Article 16-8 of the FIEA Enforcement Order), prohibition of receiving deposits of money or Securities, etc. in principle (Article 41-4 of the FIEA; Article 16-9 and Article 16-10 of the FIEA Enforcement Order), and prohibition of loans, etc. of money, etc. in principle (Article 41-5 of the FIEA; Article 16-11 of the FIEA Enforcement Order).

Regulation on activities concerning Investment Management Business

Q51.: What kind of regulation is provided for with regard to Investment Management Business?
A1.: From the viewpoint of clarifying the fiduciary responsibility of those that conduct Investment Management Business, the FIEA provides for regulation on activities for the case where Financial Instruments Business Operators, etc. conduct Investment Management Business (“special provisions concerning Investment Management Business”).
2.: Firstly, the FIEA positions (i) an investment corporation to which the assets investment of the business operator has been entrusted (Article 42(1)(i) of the FIEA), (ii) the counterparty to a Discretionary Investment Contract (Article 42(1)(i) of the FIEA), a beneficiary of a trust (Article 42(1)(ii) of the FIEA), and (iii) a person who holds interests in a self-managed collective investment scheme, etc. (Article 42(1)(iii) of the FIEA) as “Right Holders,” and provides for the duty of loyalty to Right Holders and duty of due care of a prudent manager (Article 42 of the FIEA).
3.: Secondly, from the viewpoint of classifying these obligations into patterns, the FIEA lists the following as acts that should be particularly prohibited with regard to Investment Management Business: self-dealing, etc. (Article 42-2(i) of the FIEA; Article 128 of the Cabinet Office Ordinance on Financial Instruments Business, etc.); a transaction between investment properties (Article 42-2(ii) of the FIEA; Article 129 of the Cabinet Office Ordinance on Financial Instruments Business, etc.); an act of scalping (Article 42-2(iii) of the FIEA); a transaction under terms and conditions that are different from ordinary terms and conditions (Article 42-2(iv) of the FIEA); a transaction conducted based on the account of the business operator by using investment information (Article 42-2(v) of the FIEA); and Compensation of Losses, etc. (Article 41-2(vi) of the FIEA). In addition, Cabinet Office Ordinance provides for prohibited acts (Article 42-2(vii) of the FIEA; the items of Article 130(1) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
4.: Thirdly, with regard to entrustment of authority of investment, the FIEA provides that the authority can be entrusted to “another Financial Instruments Business Operator, etc. (limited to those that engage in Investment Management Business) only if required matters have been stipulated in a contract, etc. in advance (Article 42-3(1) of the FIEA; Article 16-12 of the FIEA Enforcement Order; Article 131 of the Cabinet Office Ordinance on Financial Instruments Business, etc.). However, the FIEA prohibits entrustment of the entire authority of investment with regard to all Investment Property (Article 42-3(2) of the FIEA).
5.: Fourthly, the FIEA provides for the obligation of separate management of Investment Property for the case where a Financial Instruments Business Operator, etc. conducts self-management of a collective investment scheme (Article 42-4 of the FIEA; Article 132 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
6.: Fifthly, with regard to Discretionary Investment Management Business, the FIEA provides for prohibition of receiving deposits of money or Securities, etc. in principle (Article 42-5 of the FIEA; Article 16-9 and Article 16-10 of the FIEA Enforcement Order) and prohibition of loans, etc. of money or Securities in principle (Article 42-6 of the FIEA; Article 16-13 of the FIEA Enforcement Order).
7.: Sixthly, the FIEA provides for the obligation to deliver investment reports (Article 42-7 of the FIEA; Article 134 and Article 135 of the Cabinet Office Ordinance on Financial Instruments Business, etc.). With regard to investment of investment trusts managed under the instructions of the settlor, the Act on Investment Trusts and Investment Corporations has its own system to obligate delivery of investment reports (Article 14(1) of said Act), so it excludes such investment from application of such obligation provided under the FIEA (Article 14(4) of said Act).

Q52.: In what kind of cases is self-dealing, etc. or a transaction between investment properties possible with regard to Investment Management Business?
A1.: The FIEA explicitly prohibits self-dealing, etc. (Article 42-2(i) of the FIEA) and transactions between investment properties (Article 42-2(ii) of the FIEA) by Financial Instruments Business Operators conducting Investment Management Business, since the risk of conflict of interest is considered to be particularly high. However, acts that are categorized as such but are found to involve no problem from the viewpoint of protecting investors and securing fairness of transactions are excluded from such prohibition (the proviso to Article 42-2 of the FIEA).
2.: Firstly, prohibition of self-dealing, etc. is not applied to an act of making an investment intended for brokerage of sales or purchase of Securities or Derivative Transactions pertaining to Investment Property as Type I Financial Instruments Business, Type II Financial Instruments Business, or Registered Financial Institution Business (Article 128(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
3.: Secondly, prohibition of transactions between investment properties is not applied to an act that falls under any of the following and that makes an investment intended for conducting “sales and purchase or other transactions of target Securities, etc.” such as sales and purchase, etc. of listed Securities conducted at a “fair price” (Article 129(1)(i), (2) and (3) of said Cabinet Office Ordinance):

(i)

the case of conducting an act for terminating investment of an Investment Property;

(ii)

the case of conducting an act for making payment of cancellation money/refunds;

(iii)

the case of conducting an act to avoid exceeding the limitations on the holding amount/ratio of assets subject to investment; or

(iv)

the case where conducting the transaction is found to be necessary and reasonable for the Investment Property of both parties in light of the investment policy, the amount of Investment Property, and the market status.
4.: Thirdly, neither prohibition is applied to an act of making an investment intended for conducting either of the following transactions (Article 128(ii) and (iii) and Article 129(1)(ii) and (iii) of said Cabinet Office Ordinance):

(i)

sales or purchase of listed Securities, etc., Market Transactions of Derivatives, or Foreign Market Derivatives Transactions, or transactions conducted at a price calculated by a reasonable method in the case of having explained the contents of the transaction and the reason therefor to all Right Holders and obtained the consent of all those Right Holders for each transaction; or

(ii)

transactions for which the approval of the authorities has been obtained.
5.: With regard to 4(i) above (Article 128(ii)(a) and Article 129(1)(ii)(a) of said Cabinet Office Ordinance), considering that there are cases of conducting self-dealing, etc. or transaction between investment properties for the purpose of securing the interests of all Right Holders, self-management of a collective investment scheme is excluded from the prohibition pertaining to such transaction even without the contents of all Right Holders, if certain requirements are satisfied. Such requirements include that the consent of not less than half of the Right Holders holding not less than three-quarters of all rights has been obtained and rights of Right Holders who have not given their consent have been purchased at their request.

Q53.: What kind of regulation is provided for with regard to entrustment of authority of investment for Investment Management Business?
A1.: The FIEA permits entrustment of authority of investment for Investment Management Business to a third party (Article 42-3(1) of the FIEA; Article 131 of the Cabinet Office Ordinance on Financial Instruments Business, etc.) only if required matters have been stipulated in (i) an entrustment agreement on asset management of an investment corporation (Article 42-3(1)(i) of the FIEA), (ii) a Discretionary Investment Contract (Article 42-3(1)(i) of the FIEA), (iii) an investment trust contract (Article 42-3(1)(ii) of the FIEA), or (iv) a contract pertaining to a self-managed collective investment scheme (Article 42-3(1)(iii) of the FIEA). However, the FIEA prohibits entrustment of the entire authority of investment with regard to all Investment Property, as representation of the self-executing obligation (Article 42-3(2) of the FIEA).
2.: The authority of investment can only be entrusted to (i) another Financial Instruments Business Operator, etc. (limited to those that conduct Investment Management Business) or (ii) a foreign juridical person that conducts Investment Management Business in a foreign state (Article 42-3(1) of the FIEA; Article 16-12 of the FIEA Enforcement Order). The entrusted operator is subject to duty of loyalty to Right Holders and duty of due care of a prudent manager (Article 42 of the FIEA) as well as the regulation of prohibited acts (Article 42-2 of the FIEA) (Article 42-3(3) of the FIEA).
3.: The FIEA also provides that Financial Instruments Business Operators, etc. must not entrust authority of investment without taking measures for ensuring that the entrusted operator does not make further entrustment of the entrusted authority (excluding further entrustment of a part of the entrusted authority (limited to the case where measures have been taken to ensure that the further entrusted operator does not make further entrustment of the entrusted authority)) (Article 42-2(vii) of the FIEA; Article 130(1)(x) of the Cabinet Office Ordinance on Financial Instruments Business, etc.). This regulation is construed to prohibit further entrustment of the entirety of entrusted authority of investment and yet further entrustment of the entirety or a part of further entrusted authority of investment with regard to Investment Management Business, but allow further entrustment of a part of entrusted authority of investment (see Article 131(i) of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Regulation on activities concerning Securities, etc. Management Business

Q54.: What kind of regulation is provided for with regard to Securities, etc. Management Business?
A1.: As regulation on activities applied to the case where a Financial Instruments Business Operator, etc. conducts Securities, etc. Management Business, the FIEA firstly provides for duty of due care of a prudent manager toward customers (Article 43 of the FIEA).
2.: Secondly, with regard to Securities-Related Business (Article 28(8) of the FIEA), the FIEA requires the business operator to separately manage the following Securities from its own property by “a method for managing property in a reliable and orderly manner” (Article 43-2(1) of the FIEA; Article 136 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the Securities deposited to the business operator from a customer as clearing margins (limited to those relating to Transactions of Securities-Related Derivatives (Article 28(8)(vi) of the FIEA)) or as collateral Securities for margin trading (Article 43-2(1)(i) of the FIEA); and

(ii)

the Securities possessed by the business operator based on the account of a customer or Securities deposited to the business operator from a customer with regard to transactions pertaining to Securities-Related Business, etc. (excluding some Over-the-Counter Transactions of Derivatives/Foreign Market Derivatives Transactions, etc.) (Article 43-2(1)(ii) of the FIEA; Article 16-15 of the FIEA Enforcement Order).
3.: Thirdly, the FIEA requires the business operator to separately manage the following money/Securities by the method of “trusts for the separate management of money and Securities” (Article 43-2(2) of the FIEA; Articles 138 through 141-3 of the Cabinet Office Ordinance on Financial Instruments Business, etc.):

(i)

the money deposited to the business operator from a customer as clearing margins (limited to those relating to Transactions of Securities-Related Derivatives) or as a security deposit for margin trading (Article 43-2(2)(i) of the FIEA);

(ii)

the money belonging to the account of a customer or money deposited to the business operator from a customer with regard to transactions pertaining to Securities-Related Business, etc. (excluding some Over-the-Counter Transactions of Derivatives, etc.) (Article 43-2(2)(ii) of the FIEA); and

(iii)

the Securities listed in (i) or (ii) of 2. above that have been furnished as security (Article 43-2(2)(iii) of the FIEA).
4.: Furthermore, while assuming application of such high-level obligations of separate management and taking into account that the Investor Protection Fund system is in place to complement such obligations, the FIEA obligates Financial Instruments Business Operators to undergo external audit with regard to the state of such separate management (Article 43-2(3) of the FIEA; Article 142 of the Cabinet Office Ordinance on Financial Instruments Business, etc.). However, Registered Financial Institutions are not subject to the external audit obligation, given that they are not subject to the Investor Protection Fund system (Article 79-20(1) of the FIEA).
5.: Fourthly, with regard to Derivative Transactions, etc. (excluding Transactions of Securities-Related Derivatives, etc.), the FIEA provides for the required obligation of segregated management (Article 43-3 of the FIEA; Articles 143 through 145 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).
6.: Fifthly, the FIEA provides for regulation to restrict such acts as furnishing a customer’s Securities as security, etc. (Article 43-4 of the FIEA; Article 146 of the Cabinet Office Ordinance on Financial Instruments Business, etc.).

Supervision

Q55.: What provisions are there regarding the issuance of an order to improve business operation to a Financial Instruments Business Operator, etc.?
A1.: From the perspective of quickly and appropriately ensuring adequate protection of investors, the FIEA does not limit the requirements for the issuance of such an order to cases of violation of laws and regulations, etc. when the Financial Instrument Business Operator’s business operation or the status of its property is inappropriate. Under the FIEA, the general requirement for issuing the order is “when the Prime Minister finds it necessary and appropriate for the public interest or protection of investors, with regard to a Financial Instruments Business Operator's business operation or the status of its property” (Article 51 of the FIEA). This is basically also the same for the issuance of an order to improve business operation to a Registered Financial Institution, although in this case, the focus is only on “business operation” while there is no provision regarding the “status of property” (Article 51-2 of the FIEA).
2.: It should be kept in mind that the issuance of an order to improve business operation to a Financial Instruments Business Operator, etc. which is a registered business operator is a measure taken “within the limit necessary” and that it does not necessarily grant the FSA broad discretion.
3.: In relation to the above, it is stipulated that when considering administrative dispositions against Financial Instruments Business Operators, etc., the FSA should take account of the following factors, etc. (II-5-2 of the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.):

(i)

seriousness and maliciousness of acts (degree of damage to public interests, extent of damage to users, maliciousness of acts, duration and repetitive nature of acts, intentionality, institutional involvement, presence or absence of cover-up actions and involvement of anti-social forces);

(ii)

appropriateness of control environment for governance and business operation; and

(iii)

attenuation factors.

Q56.: Why does the FIEA provide for an order for the production of reports and inspection to be issued against a person who has received entrustment of business from a Financial Instruments Business Operator, etc.?
A1.: As persons who are subject to an order for the production of reports and inspection, the FIEA prescribes a Financial Instruments Business Operator, etc., a person who conducts transactions with such business operator, a Subsidiary Specified Juridical Person or a Holding Company of a Financial Instruments Business Operator, etc., as well as a person who has received entrustment of business from a Financial Instruments Business Operator, etc. (Article 56-2 of the FIEA).
2.: In recent years, Financial Instruments Business Operators, etc. have come to outsource their operations more than before in order to improve the efficiency of business. However, given that various problems occur in relation to outsourcing of operations, such as system troubles and leaks of customer information, it may not be possible to take adequate measures for protecting public interests and investors by merely being able to issue an order for the production of reports and inspection against the Financial Instruments Business Operator, etc. alone. Therefore, the FIEA provides that an order for the production of reports and inspection can be issued also against a person who has received entrustment of business from a Financial Instruments Business Operator, etc.
3.: Based on the same intention, the FIEA has additionally introduced provisions on an order for the production of reports and inspection against a person who has received entrustment of business from any of the following persons: an Authorized Transaction-at-Exchange Operator (Article 60-11 of the FIEA); a Specially Permitted Business Notifying Person engaging in Specially Permitted Businesses for Qualified Institutional Investor, etc. (Article 63(7) and (8) of the FIEA); an Authorized Financial Instruments Firms Association (Article 75 of the FIEA); a Recognized Financial Instruments Firms Association (Article 79-4 of the FIEA); an Investor Protection Fund (Article 79-77 of the FIEA); a Financial Instruments Exchange (Article 151 of the FIEA); a Foreign Financial Instruments Exchange (Article 155-9 of the FIEA); a Financial Instruments Clearing Organization (Article 156-15 of the FIEA); or a Securities Finance Company (Article 156-34 of the FIEA).

Foreign Business Operators

Q57.: How are Foreign Business Operators treated?
A1.: When Foreign Business Operators conduct Financial Instruments Businesses as agents of residents in Japan or with them as counterparties, they are in principle required to be registered just as domestic business operators are (Article 29 of the FIEA).
2.: However, in some cases, special treatment may be provided to Foreign Business Operators from the perspective of their special characteristics and the clarity of regulatory application.
3.: First, Foreign Securities Brokers (Article 58 of the FIEA) do not need to be registered for Financial Instruments Business when the counterparties with which they conduct transactions are Financial Instruments Business Operators engaged in Securities-related business, for example (the proviso to Article 58-2 of the FIEA).
4.: Next, Foreign Securities Brokers are subject to the permission system when they conduct Underwriting Business or Transaction-at-Exchange Operation (Articles 59 and 60 of the FIEA).
5.: Foreign juridical persons and individuals domiciled in a foreign state who conduct Investment Advisory Business in a foreign state do not need to be registered as Financial Instruments Business Operators when the counterparties with which they conduct the Investment Advisory Business are limited to Financial Instruments Business Operators engaged in Investment Management Business, etc. (Article 61(1) of the FIEA). Foreign juridical persons who conduct Investment Management Business in a foreign state based on Discretionary Investment Contracts do not need to be registered, either, when the counterparties with which they do so are limited to Financial Instruments Business Operators engaged in Investment Management Business, etc. (Article 61(2) of the FIEA).
6.: In addition, while collective investment scheme-type Investment Management Business (so-called self-management) is treated as Financial Instruments Business under the FIEA (Article 2(8)(xv) of the FIEA), foreign juridical persons who conduct self-management business in a foreign state do not need to be registered, either, when the counterparties with which they do so are limited to Financial Instruments Business Operators engaged in Investment Management Business, etc. as in the case of the abovementioned exceptions related to Investment Management Business based on Discretionary Investment Contracts (Article 61(3) of the FIEA).

Q58.

In what kinds of cases is a Foreign Securities Broker exempted from the requirement to be registered?

A1.

In the following cases, Foreign Securities Brokers are permitted to conduct Securities-related business without being registered (the proviso to Article 58-2 of the FIEA; Article 17-3 of the FIEA Enforcement Order):

(1)the case where a Foreign Securities Broker conducts acts from a foreign state with a person in Japan who is found to have sufficient knowledge and experience, such as a Financial Institution, a trust company, or a Financial Instruments Business Operator conducting Investment Management Business, as the counterparty (Article 17-3(i) of the FIEA Enforcement Order; Articles 209 through 212 of the Financial Instruments Business Ordinance);
(2)the case where a Foreign Securities Broker conducts acts from a foreign state, without soliciting domestic customers, (i) by receiving orders from domestic customers, or (ii) through agency or intermediary services of a Financial Instruments Business Operator conducting Securities-related business (limited to a person registered as an operator of Type I Financial Instruments Business) (Article 17-3(ii) of the FIEA Enforcement Order; Article 213 of the Financial Instruments Business Ordinance);(note) and
(3)the case where a Foreign Securities Broker only holds discussion for fixing the contents of the Wholesale Underwriting Contract in Japan with the Issuer or holder of the Securities (excluding the case where Secondary Distribution of Securities or handling of Public Offering, Private Placement, and Secondary Distribution is conducted in Japan) (Article 17-3(iii) of the FIEA Enforcement Order; Article 214 of the Financial Instruments Business Ordinance).

(Note)

In both of the cases in (i) and (ii) above, with regard to acts concerning oOver-the-Counter Transactions of Securities-related Derivatives, the domestic customers to be counterparties are limited to Financial Instruments Business Operators, etc., Qualified Institutional Investors, and stock companies, etc. with a capital amount of one billion or more (Article 17-3(ii)(a) and (b) and Article 1-8-6(1)(ii)(a) and (b) of the FIEA Enforcement Order; Article 15(1) and (2) of the Definition Ordinance).

2.: When a Foreign Securities Broker conducts Underwriting Business or Transaction-at-Exchange Operation, the broker does not need to be registered, but needs to obtain permission for such act (Articles 59 and 60 of the FIEA).

Q59.

In what kinds of cases is a person Conducts Investment Advisory Business or Investment Management Business in a foreign state exempted from the requirement to be registered?

A1.

The FIEA does not require registration in the following cases:

(1)the case where a foreign juridical person or an individual domiciled in a foreign state who conducts Investment Advisory Business in a foreign state engages in Investment Advisory Business with only a domestic Financial Instruments Business Operator Investment Management Business or a domestic registered financial institution conducting Investment Management Business as the counterparty (Article 61(1) of the FIEA; Article 17-11(1) of the FIEA Enforcement Order); and
(2)the case where a foreign juridical person conducting Investment Management Business based on a Discretionary Investment Contract (Article 2(8)(xii) of the FIEA) in a foreign state engages in the Investment Management Business with only a domestic Financial Instruments Business Operator Investment Management Business or a domestic Registered Financial Institution conducting Investment Management Business as the counterparty (Article 61(2) of the FIEA; Article 17-11(2) of the FIEA Enforcement Order).

2.

Also, while the FIEA treats Investment Management Business in the form of a collective investment scheme (Article 2(8)(xv) of the FIEA) as a Financial Instruments Business, as in the case of Investment Management Business based on a Discretionary Investment Contract, it requires neither registration nor notification in the following case:

(3)the case where a foreign juridical person conducting Investment Management Business in the form of a collective investment scheme in a foreign state engages in the Investment Management Business with only a domestic Financial Instruments Business Operator Investment Management Business or a domestic Registered Financial Institution conducting Investment Management Business as the counterparty (Article 61(3) of the FIEA; Article 17-11(1) of the FIEA Enforcement Order).

3.

Furthermore, the FIEA requires neither registration nor notification for a foreign fund operator conducting an act of Investment Management in the form of a collective investment scheme (Article 2(8)(xv) of the FIEA) who satisfies such requirements as follows: (1) the equity investors in Japan (direct equity investors/indirect equity investors) are limited to less than ten Qualified Institutional Investors or Specially Permitted Business Notifying Persons, and (2) the amount of contribution by these equity investors is not more than one-third of the foreign fund's total amount of contribution (the principal sentence of Article 2(8) of the FIEA; Article 1-8-3(1)(iv) of the FIEA Enforcement Order; Article 16(1)(xiii) of the Definition Ordinance).

Q60.: How is establishment of a representative office, etc. of a foreign business operator treated under the FIEA?
A1.: Under the FIEA, when a Foreign Securities Broker, a person who conducts Investment Advisory Business in a foreign state (excluding a registered business operator in Japan), or a person conducting the same type of business as the business of a trust company in a foreign state intends to establish a representative office, etc. in Japan in order to collect and provide information of the Securities market or the market of Financial Indicators pertaining to Securities, such person must give notification of the contents of the business, the location of the facility, and other matters in advance (Article 62(1) of the FIEA; Article 233(1)(iii) of the Financial Instruments Business Ordinance). Also, an order to submit a report or materials concerning the business may be issued against such persons (Article 62(2) of the FIEA).
2.: Moreover, the FIEA has similar provisions for a person conducting Investment Management Business in a foreign state (excluding a registered business operator in Japan). Since the business of forming collective investment schemes, etc. and investing funds mainly as an investment in rights pertaining to Securities or Derivative Transactions (so-called self-management) is also included in the scope of Investment Management Business (Article 2(8)(xv) of the FIEA), the FIEA also applies the abovementioned provisions on the obligation of notification and the order to submit a report or materials to a person conducting the business of self-management in a foreign state (Article 62 of the FIEA).
3.: In addition, the FIEA has similar provisions for a person conducting the business of self-offering (Article 2(8)(vii) of the FIEA), the business of receiving deposits of money or Securities (excluding the business of receiving deposits of money from customers in connection to business other than Securities-related business) (Article 2(8)(xvi) of the FIEA), or the business of transfer of corporate bonds, etc. (Article 2(8)(xvii) of the FIEA) in a foreign state (Article 233(1)(i) and (ii) of the Financial Instruments Business Ordinance).
4.: The matters to be included in the notification are as follows: (1) the contents of the business; (2) the location of the facility; (3) the trade name or name; (4) the location of the head office or principal office; (5) the contents of the business operations; (6) the amount of stated capital or the total amount of contribution; (7) the title and the name of the officer who has the authority of representation; (8) the name of the domestic facility, the name and address of the representative person in Japan, the reason for the establishment of the facility, the number of employees, and the planned date of establishment of the facility (Article 62(1) of the FIEA; Article 233(2) of the Financial Instruments Business Ordinance).

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