June 3 2003 Securities-Related Regulations Amended White & Case | Banking & Financial Services - Japan Banking & Financial Services Major Shareholder Regulations Direct Participation Without Licence On March 14 2003 the Financial Services Agency (FSA) submitted to the National Diet (Parliament) a bill amending the Securities Exchange Law, the Securities Investment Advisory Business Law and the Investment Trust and Investment Company Law, among others. According to the FSA, the amendments are intended: to reflect recent changes in domestic and international financial markets; to accelerate the restructuring of the Japanese securities market; to improve investor confidence in the securities market and market participants (ie, securities brokers, investment advisers and investment trust management companies); to strengthen the international competitiveness of Japanese stock exchanges; and to provide better liquidity opportunities for capital transactions. This update examines the key points of the proposals. Major Shareholder Regulations Reporting requirements For the purposes of the securities-related regulations, 'major shareholders' are shareholders who own 20% or more of the issued and outstanding voting rights of a company or other entity. Under the proposed amendments, the major shareholders of a company licensed as a securities broker-dealer will be required to file notifications with the Prime Minister's Office disclosing: the percentage of the issued and outstanding voting rights owned by the filer; the purpose of such ownership; and any other information required by a relevant Cabinet order. These regulations will also apply to major shareholders of (i) discretionary investment managers (DIMs) and investment advisers under the Securities Investment Advisory Business Law, and (ii) investment trust management companies (ITMCs) under the Investment Trust and Investment Company Law. However, as currently drafted, the reporting requirements do not apply to Japanese registered branch offices of foreign securities broker-dealers regulated by the Foreign Securities Broker-Dealer Law. Under the proposed amendments, shareholders of foreign DIMs, investment advisers and ITMCs with Japanese registered branches are subject to the reporting requirements if they are major shareholders of such foreign entities. Removal of shareholders Under the bill the Prime Minister's Office may order a securities broker-dealer, DIM, investment adviser or ITMC to take all necessary measures within three months of the date of the order, to terminate the shareholding of any major shareholder which (i) has had its securities-related licence terminated or revoked by the relevant regulators in the relevant jurisdiction of such shareholder during the past five years (measured at the time of the order), or (ii) has had to pay a fine for a violation of a securities-related regulation in the relevant jurisdiction governing the shareholder, within the past five years (measured at the time of the order). Inspection The proposed amendments will enable the Prime Minister's Office, pursuant to its authority to act at its discretion to protect investors and the public, to require major shareholders to submit additional reports and other materials detailing their business and financial affairs in connection with their shareholdings in the relevant securities broker-dealer, investment adviser, DIM or ITMC. In addition, in the case of inspections of major shareholders of a DIM or ITMC, the relevant Japanese regulators will have the authority to enter the premises of the major shareholders and inspect any material relating to any business or financial affairs in connection with their ownership of the DIM or ITMC.Direct Participation without LicenceAnother novel proposal would, in certain circumstances, allow offshore participants in securities transactions to participate in the Japanese market without obtaining securities broker-dealer licences, which normally involves substantial time and expense. Permitted businesses The proposed amendments would allow a foreign securities broker-dealer, excluding Japanese registered branches of foreign securities broker-dealers, to participate in securities transactions, stock-index futures transactions and stock-option transactions traded on stock exchanges without a securities broker-dealer licence, after obtaining permission from the Prime Minister's Office. Criteria In order to obtain the necessary permission from the Prime Minister's Office to engage in these transactions without a securities broker-dealer licence, the following criteria must be met: The applicant must be a stock corporation which is equivalent to a kabushiki kaisha (joint stock company) organized under the Japanese Commercial Code; The applicant must hold a securities broker-dealer licence, granted by an authority of the jurisdiction where the headquarters of the applicant is located, which is equivalent to the securities broker-dealer licence granted pursuant to the Securities Exchange Law; The applicant must have conducted stock exchange transactions for more than three years; The applicant must be a member of a stock exchange which is duly established and operating under the laws of the relevant jurisdiction; The applicant must have a stated capitalization of Y100 million; The applicant must have net assets of Y100 million; The applicant must not have had a securities broker-dealer licence terminated or revoked due to a violation of a securities regulation in the relevant jurisdiction within the past five years; The applicant must not have had a fine imposed as a penalty in relation to a violation of a securities regulation in the relevant jurisdiction within the past five years; The other businesses conducted by the applicant must be consistent with Japanese public policy; The applicant must have sufficient human resources to conduct transactions on stock exchanges; The foreign regulator in the relevant jurisdiction governing the securities broker-dealer activities of the applicant must agree to cooperate with the FSA's inspection of the applicant; and There must be an agreement for the exchange of information in connection with the applicant between the relevant offshore stock exchange in which the applicant normally trades and the stock exchange in Japan in which the applicant intends to participate. Inspection The Prime Minister's Office may from time to time, pursuant to its authority to act upon its discretion to protect the public interests of Japan and Japanese investors, require foreign dealers granted permission to conduct securities transactions without a securities broker-dealer licence to file necessary reports and other materials, and may inspect the business and financial status of such foreign dealers.These amendments are currently only a part of a bill, and are subject to debate and modifications in the National Diet. For further information on this topic please contact Koichiro Ohashi at White & Case LLP by telephone (+81 3 3259 0200) or by fax (+81 3 3259 0150) or by email ([email protected]).