History and current status of administrative fines under the FIEL
Administrative fines under the Financial Instruments and Exchange Law (the FIEL) were introduced by an amendment in 2004 (the 2004 Amendment) to the Securities and Exchange Law (renamed the FIEL in September 2007) together with related amendments in 2005 (the 2005 Amendment, together with the 2004 Amendment, collectively the Current Law). The amendment to the FIEL enacted in June 2008 (the 2008 Amendment) introduces further amendments to administrative fines under the FIEL. These amendments will be implemented on or before 12 December 2008 (ie within six months after the date of proclamation, 13 June 2008).
Under the Current Law, administrative fines are applicable to unfair trades (such as those involving insider trading or market manipulation) and false descriptions with respect to a material matter in offering and continuous disclosure documentation. The 2008 Amendment provides for, among others: (i) an expansion of the coverage of administrative fines; (ii) changes to the bases for calculating the amount of administrative fines; and (iii) reductions and increases in the amount of administrative fines.
Set out below is a summary of the 2008 Amendment as it relates to administrative fines.
Expansion in the scope of the application of administrative fines
Under the 2008 Amendment, the scope of the application of administrative fines has been expanded to cover: (i) the failure to file disclosure documentation (both offering and continuous); (ii) the omission of material information in offering and continuous disclosure documentation; (iii) non-compliance with takeover bid (TOB) requirements or significant shareholding report requirements, including the failure to file a TOB registration statement or a significant shareholding report, or the inclusion of a false description in respect of a material matter or the omission of material information in a TOB registration statement or a significant shareholding report; and (iv) fictitious and collusive trades or unlawful stabilisation activity. It is noteworthy that under the 2008 Amendment mere failure to file the types of document mentioned above will also be subject to administrative fines.
Failure to file offering disclosure documentation
An issuer (or an offeror in the case of a secondary offering with respect to (ii) and (iii) below) that: (i) fails to file the relevant offering disclosure documentation before the offering is made; (ii) arranges to have the relevant securities acquired or sold before the relevant securities registration statement becomes effective; or (iii) arranges to have the relevant securities sold by way of secondary offering without delivering the required prospectus, will be subject to administrative fines of 4.5 per cent in the case of stock (2.25 per cent in the case of other securities) of the total issue price or the total sale price, as the case may be.
Failure to file continuous disclosure documentation
Failure to file continuous disclosure documentation is subject to the following administrative fines.
- Annual, semi-annual or quarterly securities reports
The amount of administrative fines for failure to file an annual securities report will be equal to the audit fees paid by such person to its accountant for the immediately preceding fiscal year (if there is no such immediately preceding fiscal year for which audit is required, the amount is set at JPY 4m). In the case of semi-annual or quarterly securities reports, the fine is one-half of the amount applicable to failure to file an annual securities report.
- Extraordinary securities reports
Failure to file an extraordinary securities report with regard to items designated by Ministerial Ordinance as having a material impact on investors’ investment judgment will be subject to an administrative fine in an amount equivalent to that applicable to a false description in an extraordinary securities report (see Increase of amount of administrative fines in relation to continuous disclosure documentation below).
Omission of material information
Under the Current Law, administrative fines are applicable to false descriptions in respect of a material matter in disclosure documentation (offering or continuous). The 2008 Amendment makes the omission of material information in such disclosure documentation also subject to administrative fines in the same amount applicable to a false description in such documentation.
Non-compliance with TOB requirements
Any purchase of securities that is required by TOB rules to be made: (i) without making any TOB commencement announcement; (ii) with a TOB commencement announcement or any amendment thereto that includes a false description with respect to a material matter or omits material information; (iii) without filing a TOB registration statement or any required amendment thereto or without filing any TOB offeror’s answer or any required amendment thereto; or (iv) with a TOB registration statement etc as listed in (iii) above, that includes a false description with respect to a material matter or omits material information, will be subject to an administrative fine in an amount equal to 25 per cent of the aggregate market value of the securities so purchased.
Significant shareholding reports
(i) Failure to file a significant shareholding report or a required change of holding report, or (ii) filing a significant shareholding report, a change of holding report or any amendment report, that includes a false description with respect to a material matter or omits any material information, will attract 0.001 per cent of the aggregate market value of the relevant securities as of the business day immediately following (a) the day by when the relevant report should have been filed (in case of (i)) or (b) the filing date (in case of (ii)).
Fictitious and collusive trade
A fictitious or collusive trade is subject to an administrative fine equivalent to that applicable to market manipulation (see Market manipulation below), as it is similar in nature.
Unlawful stabilisation activity
Unlawful stabilisation activity is also subject to administrative fines. The amount of such fine will be any profit realised during the period of the relevant unlawful stabilisation activity plus an amount determined by reference to the difference between the average market price in the period during which the relevant activity took place and the average market price in the one-month period after the relevant activity ceased.
Amendments related to bases for calculating the amount of administrative fines and criteria for application of administrative fines
Increase of amount of administrative fines regarding offering disclosure documentation
The fines applicable to false descriptions regarding material matters in offering disclosure documentation will be increased to 4.5 and 2.5 per cent, in the case of stock and other securities respectively, of the total amount of the public offering (whether initial or secondary).
Increase of amount of administrative fines in relation to continuous disclosure documentation
The amount of administrative fines applicable to false descriptions with respect to material matters in continuous disclosure documentation will be doubled for annual securities reports to the higher of: (i) 0.006 per cent of the aggregate market value of the relevant stock; and (ii) JPY 6m. For other continuous disclosure documentation (ie semi-annual, quarterly or extraordinary securities reports) it will be doubled to the higher of (i) 0.003 per cent of the aggregate market value of the relevant stock; and (ii) JPY 3m.
Dissemination of rumours and use of fraudulent means
- Under the 2008 Amendment, regarding a violation of Article 158 of the FIEL (ie the dissemination of rumours, use of fraudulent means, assault or intimidation) (an Article 158 Violation), if the violator holds a short position in the relevant shares at the time the relevant violation ceases, the amount of administrative fine will be the total of: (i) the aggregate selling prices of such shares minus the number of relevant shares multiplied by the lowest market price of such share during a one-month period after the relevant violation ceases. If the violator holds a long position in the relevant shares at the time such violation ceases, the fine will be the number of the relevant shares multiplied by the highest market price of such shares during a onemonth period after the relevant violation ceases minus the aggregate purchase price of such shares. If, during the period from the time the violation starts until one month after such violation ceases, the violator sells the shares or offers such shares by public offering or organised restructuring (as defined in the FIEL), the fine is the number of shares offered or sold multiplied by the difference between the highest price during the aforesaid one-month period and the price immediately preceding the violation. For the purpose of calculating the amount of administrative fines, a long or short position immediately preceding the commencement of such violation shall be included as well as a long or short position created during the period when the relevant violation was on-going. The relevant sale price or purchase price applied to any sale or purchase that occurred during the period the relevant violation was on-going, is the actual sale or purchase price of such securities and, as to a position that existed before the commencement of the violation, the price in effect immediately preceding such violation applies. Calculation of the amount of an administrative fine is made per each issuer of the relevant securities and any negative amount resulting from the calculation will be disregarded.
- Under the Current Law, administrative b fines come into play when a person, having committed an Article 158 Violation, has caused a fluctuation in the market prices of the relevant securities by virtue of the violation and, if such person, seeking to benefit from such fluctuation in the market prices, acquires the securities through a public offering or conducts a sale and purchase of such securities or other securities transactions (including derivative transactions) in relation to such securities at a price influenced by such violation. As a fluctuation in market prices can occur as a result of various factors, it is difficult to prove that a particular fluctuation has been caused by a particular Article 158 Violation. Under the 2008 Amendment, the requirement is relaxed to allow the flexible application of administrative fines in this context, so that administrative fines will apply if a dissemination of unfounded rumours, use of fraudulent means or other violation under Article 158 has an impact on the market price of the relevant securities.
In the case of market manipulation, the amount of administrative fine is calculated by adding: (i) any profit realised while the relevant violation remains effective; and (ii) an amount calculated in accordance with the formula set out in Dissemination of rumours and use of fraudulent means (a) (the same rule mentioned in this section of our briefing also applies).
Under the Current Law, the amount of administrative fine is calculated by reference to the closing price on the trading day immediately following the date on which the relevant material information is publicly announced. However, in many cases the impact on the market price by virtue of the announcement of material information is not confined to that day and can continue to have an effect for several trading days. Under the 2008 Amendment, if a violator sells the relevant securities based on any non-public material information, the amount of administrative fine is equal to an amount obtained by subtracting (a) the number of securities so sold multiplied by the lowest market price of such securities within two weeks after the announcement of such material information from (b) the aggregate actual sale price of such securities the violator received. If a violator purchases the relevant securities based on any non-public material information, the amount is obtained by subtracting (a) the aggregate actual purchase price of such securities the violator paid from (b) the number of securities so purchased multiplied by the highest market price of such securities within two weeks after the announcement of such material information.
Own account dealings
Under the Current Law, administrative fines would come into play if the violator sells or purchases the relevant securities or conducts other securities transactions for his or her own account. The 2008 Amendment expands the scope of applicable administrative fines to cover transactions conducted for the account of a ‘specified related person’, which includes, among others, a company in which the violator holds the majority voting rights and any family member living in the same household.
Reduction or increase in amount of administrative fines
Reduction in amount of administrative fines for informing
To encourage early discovery of a violation, if a violator informs the regulators of its violation regarding: (i) a false description regarding a material matter or an omission of material information in disclosure documentation (whether offering or continuous) or in such securities information or the issuer’s information as required by the FIEL to be disclosed to professional investors eligible to participate in a financial instruments exchange market dedicated exclusively to professional investors; (ii) a failure to file a significant shareholding report or a change of holding report; or (iii) insider trading in connection with the issuer’s purchase of its own shares or other securities, the amount of applicable administrative fines will be reduced to one-half of the amount that would otherwise have been applicable.
Increase in amount of administrative fines for repeat offenders
With respect to a person who was subject to another administrative fine within the five years preceding the relevant violation, the amount of administrative fines applicable to such violation will be increased to 150 per cent of the fine that would otherwise have been applicable.