Fund management regulation

Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

In Japan, fund management activities, including investment of fund assets and offering and marketing of fund interests, are regulated principally by the Financial Instruments and Exchange Act (Law No. 25 of 1948, as amended (FIEA)). The Financial Services Agency of Japan (FSA) has the primary responsibility for the oversight, supervision and inspection of funds and fund managers and those marketing the funds.

Under the FIEA, the scope of investment management business is considered to include provision of investment management services:

  • to counterparties (customers) to a discretionary investment management contract, pursuant to which an investment management business operator manages the assets of such parties on a discretionary basis;
  • for the benefit of investors of an investment trust established under the Laws on Investment Trust and Investment Corporation (Law No. 198 of 1951, as amended (LITIC)) as the operator of the trust;
  • to an investment corporation incorporated under the LITIC under an asset management contract between an investment management business operator and the investment corporation; and
  • for the benefit of investors of a collective investment scheme (CIS), such as an investment limited partnership formed under the Investment Limited Partnership Act of Japan.

In addition, there is also a category of business aimed at managing the assets of specific professional investors (qualified investor businesses), which was introduced in Japan in 2012. Under this category of business, an investment manager can provide services solely to qualified investors, including qualified institutional investors (QIIs) and certain other qualified pension fund, corporate or individual investors who satisfy certain criteria, with a ¥20 billion limitation on the total amount of assets to be managed.

Pursuant to the FIEA, to engage in one of the investment management businesses above, fund managers are required to register with the FSA. There is, however, an exception to the registration requirement under article 63 of the FIEA in relation to investment management services provided to CISs (the article 63 exemption). Owing to the recent amendment to the FIEA, which became effective on 1 March 2016 (the 2016 amendment), the requirements for the article 63 exemption have been tightened as outlined in question 26.

It should also be noted that, in Japan, non-discretionary investment advisory business is a separate business from the investment management business, and accordingly, those intending to provide a non-discretionary investment advisory service must be registered separately under the FIEA.

Fund administration

Is fund administration regulated in your jurisdiction?

Under the FIEA, a registered investment manager is responsible for preparing and maintaining the books and records in relation to its business, including investment management contracts entered into with the customer, statutory documents to be delivered to the customer before and upon entering into investment management contracts, investment management reports regarding the fund assets, detailed statements regarding investments and trade orders, etc. As a general rule, investment management reports must be delivered periodically to customers at least every six months. Investment managers are also required to prepare a business report annually and submit it to the FSA within three months of the end of each business year.

There are no explicit restrictions on the outsourcing by the investment manager of the foregoing fund administration business to a third-party business provider. Other than the outsourcing of application or IT businesses, however, it is not yet common in Japan to outsource the administration business. Trade settlements are, in principle, conducted through financial institutions, namely the securities company or the trust bank, with which the customer has opened an account.

Authorisation

What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

As set out in question 1, to engage in the investment management business in Japan, in principle, it is necessary to be registered with the FSA. The applicant for registration, if it is a Japanese entity, must be a joint-stock corporation incorporated under the Companies Act of Japan, with a board of directors and a corporate auditor or a committee system and a minimum capital of ¥50 million. In addition, an adequate compliance system, with sufficient staff to properly perform the business of an investment manager, must be in place. (A foreign company that has similar organisation in place is also eligible for registration, provided that it has a business office in Japan.)

The registration requirements in relation to qualified investor businesses are more relaxed. The applicant is required only to be a joint-stock corporation with a corporate auditor or a committee system and a minimum capital of ¥10 million. In addition, the compliance function can be outsourced to an affiliated company, among others.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

As a general rule, anyone who intends to perform investment management activities in Japan or provide services towards customers in Japan must register as an investment management business operator with the FSA. As an exception, however, a foreign entity licensed to conduct investment management business in its own jurisdiction may provide discretionary investment management services solely to a Japanese-registered investment manager without such registration. Similarly, a foreign entity with a licence to conduct non-discretionary investment advisory business in its own jurisdiction may provide investment advisory services solely to Japanese-registered investment management business operators. It is not permitted, however, for a foreign-licensed investment manager to provide investment management services to those who have only registered as non-discretionary investment advisers in Japan.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

A shareholder who acquires 20 per cent or more of the voting shares of an investment management business operator is required to file a notification with the FSA as a ‘major shareholder’. If the shareholding ratio becomes more than 50 per cent, the major shareholder must file a further notification as a ‘specified major shareholder’.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements except that fee-related information such as the amount, calculation method and payment timing must be specified in the disclosure documents and investment management contracts. With regard to the disclosure of the compensation of a fund manager as operator of investment trusts, more detailed information must be set forth in the investment management reports delivered to customers, such as the specific services provided as consideration for the fees and costs.

Fund marketing

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

Under the FIEA, marketing of securities, including fund interests, is generally permitted to the following registered financial instruments firms:

  • a Type I financial instruments firm that is eligible to handle marketing, solicitation, undertaking and offering of liquid securities, such as units of investment trusts or shares of investment corporations (Category I securities); and
  • a Type II financial instruments firm that is eligible to handle the marketing and solicitation of illiquid securities, such as the interests of CISs (Category II securities).

There is, however, an article 63 exemption to the above requirement in relation to the marketing of fund interests as well. Those who only intend to solicit investments in CISs with at least one QII and fewer than 50 non-QIIs are not required to register as financial instruments firms, but need only file a notification to the local finance bureau. It should be noted, however, that, because of the 2016 amendment, the scope of QIIs and non-QIIs eligible for the article 63 exemption has been narrowed (see question 26).

What marketing activities require authorisation?

Activities related to the solicitation of offers to acquire investment in securities (whether liquid or illiquid) require registration either as Type I or Type II financial instruments firms. Although no definition is provided under the law, solicitation is generally defined as inducing the acquisition or purchase of specific securities by enhancing the interest of an investor.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

As a general rule, any marketing activities conducted onshore or towards customers in Japan are regulated under the FIEA. Accordingly, any overseas entity that wishes to perform fund-marketing activities in Japan is required to register and obtain the same type of financial instruments business status as domestic firms. However, as an exception, if an overseas entity is licensed to conduct securities-related business in its own jurisdiction, it is permitted to make solicitation of securities to certain types of financial institutions (solely) from offshore.

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Foreign firms are eligible to apply for registration as Type I or Type II financial instruments firms. However, considering the time and effort it takes to complete the registration process, many foreign funds prefer to retain a locally registered Type I or Type II financial instruments firm to handle the offering and marketing of applicable fund interests.

Not all foreign funds can be marketed in Japan. The Japan Securities Dealers Association provides for the selection criteria for foreign funds that qualify for marketing in Japan under the Association’s self-regulatory rule. Member firms (registered financial instruments firms) are prohibited from offering foreign funds in Japan that do not satisfy such selection criteria.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no regulatory restrictions on the structuring of intermediaries’ compensation except that fee-related information such as the amount, calculation method and payment timing must be specified in the disclosure documents delivered to customers. In practice, there are several investment trust products in which intermediaries (ie, security companies) do not charge brokerage fees. Such investment trust products are typically called ‘no load investment funds’.

Retail funds

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

The legal vehicles most commonly used to set up a retail fund are open-ended investment trusts. For such an investment trust to be formed, the operator of the trust fund will prepare a trust deed and file its content with the Japanese regulator, and prepare and enter into a trust agreement with a trustee (normally a trust bank) to set up a trust. The fund interest will be issued to the beneficiaries of the trust. Typically, these funds are publicly offered to wide-ranging retail investors through securities companies, in which case a securities registration statement must be filed with the FSA.

A closed-ended investment corporation investing in real estate-related assets and foreign-domiciled unit trusts is also a popular investment structure for retail investors in Japan. However, for the purpose of this chapter, unless specifically stated otherwise, the explanation will be focused on publicly offered investment trusts, which are the most common type of retail funds offered in Japan.

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The FIEA primarily governs the authorisation of investment management business and regulates the activities of investment managers, acting as fund operators, who are registered under the FIEA. It also regulates the offering, placement and marketing of Category I securities, which include interests in investment trusts. The LITIC regulates domestic and foreign investment trusts as well as investment corporations formed or offered in Japan, and governs the following:

  • the structure, organisation and operation of such funds;
  • information to be included in the trust deed;
  • rights of the beneficiaries; and
  • disclosures to investors including investment management reports.

Self-regulatory organisations such as the Investment Trusts Association of Japan (ITA) also provide detailed rules in relation to the above matters.

Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

As set out in question 12, the fund operator must file a trust deed with the regulator before entering into a trust agreement with the trustee. Under the LITIC, a trust agreement must be entered into between an operator, who must be an investment manager registered under the FIEA, and a trustee, who must be a trust company authorised under the Act on Concurrent Operation, etc, of Trust Business by Financial Institutions. (In the case of a foreign investment trust established under a foreign law, a notification must be filed with the FSA before beginning solicitation of the fund interest.)

Marketing

Who can market retail funds? To whom can they be marketed?

If a registered investment manager acting as an operator of the fund intends to market the interest of such fund directly to investors, registration as a Type II financial instruments firm will also be required. However, in the case of publicly offered investment trusts, an operator will normally retain a third-party securities firm (or other registered financial institution) to handle the marketing of such fund interests. To market such Category I security, a Type I financial instruments firm registration is required (see question 7). There is no restriction on the people to whom such fund interests can be marketed.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

As provided under question 14, an operator of an investment trust must be a registered investment manager (see question 3 for the eligibility requirement to register as an investment manager with the FSA). By law, an investment manager owes a duty of loyalty and the duty of care required of a prudent manager in managing the assets of the investment trust. In addition, investment managers and their officers and employees are required to perform their duties towards their customers with sincerity and fairness. They are also subject to certain rules of conduct, such as avoiding conflicts of interest.

Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

There are certain investment and borrowing restrictions placed on a publicly offered investment trust under the FIEA, the LITIC and the self-regulatory rules of the ITA in Japan.

An investment trust may acquire no more than 50 per cent of the shares in a single issuer. Assets of the investment trust may be invested in other fund interests (but with a limitation of no more than 5 per cent of the net assets) but may not be invested in a fund of funds (an investment trust that makes investments in other investment trusts or investment corporations). An investment trust may invest in derivative instruments; however, such transaction may not be conducted when a risk equivalent amount calculated by a reasonable method (ie, any of the three methods proposed by the ITA) is expected to exceed the net assets of the investment trust. From the perspective of diversification of credit risks, no more than 20 per cent in total of the assets of the investment trust may be invested in securities of a single issuer (and no more than 10 per cent each in the stocks, bonds and derivative products of such issuer).

Borrowing of money by the investment trust is limited for the purpose of the payment of redemption amounts and, in the case of an investment trust where distributed amounts can be reinvested, the distribution of dividends, to the extent of the amount necessary to make such payments.

Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

Under the tax laws of Japan, a publicly offered investment trust is not subject to taxation with respect to the profits or income gained through the investment of trust assets. Distributions made by the investment trust to investors are subject to a withholding tax at the rate of 20.315 per cent (as of January 2019), except that distributions that are, in substance, a return of the principle, are non-taxable. Profits gained upon redemption or liquidation of interests are also generally taxable at the rate of 20.315 per cent (as of January 2019). (Tax treatment of a publicly offered foreign investment trust is generally the same as that of a domestic investment trust.)

Asset protection

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

In the case of an investment trust formed under the LITIC, an investment manager and a trustee company will enter into a trust agreement, and accordingly, it is structurally expected that the portfolio of assets be held by a trustee company. Further, to protect the assets of the trust, a trustee is obliged to segregate its own assets and those of the fund under the Trust Law of Japan.

Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

A trust deed of an investment trust must be submitted to the FSA by the investment manager before the execution of the trust agreement with the trustee. When a public offering is to be made, a securities registration statement (or a short-form statement, together with a securities report, under certain conditions) must be filed with the local finance bureau before the solicitation of fund interests, and a prospectus must be prepared and delivered to the investor. If an investor intends to acquire the fund interest, a document setting forth, inter alia, the contents of the trust deed must be delivered to the investor (unless the same information is covered in the prospectus).

With respect to the governance exercised by the holders of the fund interest, the consent of two-thirds of the voting interests is required to approve a material change to the provisions of the trust deed or a merger between investment trusts (except for mergers with a minimal impact on the interest of investors).

See question 2 for the general record-keeping requirements and question 21 for the reporting requirements of retail funds.

Reporting

What are the periodic reporting requirements for retail funds?

A publicly offered investment trust is subject to ongoing disclosure requirements after its formation. The operator of the fund must file an annual securities report to the regulator containing such information as the details of the fund, status and performance of investments, financial statements and information on the operator, as well as prepare and submit a business report for each business year to the FSA. It must also prepare the investment management reports at the end of the calculation period of the fund assets and deliver a physical short-form version and an electronic comprehensive version to the investors.

Issue, transfer and redemption of interests

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Retail funds in Japan are typically structured as open-ended investment trusts and, accordingly, redemption can be requested in principle at any time to ensure liquidity of fund interests. The operator of the fund may, however, place restrictions on the redemption or purchase of interests in such retail funds, provided that such restrictions are clearly set forth in the fund prospectus. In practice, there are often funds that, inter alia, have a limited window period, have restrictions on the volume of redemptions or are subject to suspensions or cancellations of redemptions owing to the suspension of trading on the exchange.

Non-retail pooled funds

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Among the various types of non-retail funds, an investment limited partnership (Japanese LPS) formed under the Investment Limited Partnership Act of Japan (Law No. 90 of 1998, as amended) (the LPS Act) is a legal vehicle frequently used for private equity funds. The Japanese LPS is formed upon the execution of a limited partnership agreement by and among the general partner and the limited partner in accordance with the LPS Act.

Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

The LPS Act sets out rules for a Japanese LPS, covering such matters as the role and responsibility of the general partner and the limited partner, and the investment restrictions of a Japanese LPS.

Under the LPS Act, a Japanese LPS must have at least one general partner and at least one limited partner. The general partner manages the operation of the Japanese LPS and has unlimited liability for the obligations of the Japanese LPS. The general partner shall execute the business of the Japanese LPS in accordance with due care of prudent managers. By contrast, the limited partner does not have the authority to execute the business of the Japanese LPS and is liable for the obligations of the Japanese LPS only to the extent of its capital contribution.

With respect to investment restrictions, the LPS Act provides for a wide range of asset classes in which a Japanese LPS can invest; however, the acquisition of shares, warrants, equity interests and debt securities issued by foreign corporations must be less than 50 per cent of the total amount of capital contribution.

Solicitations for the acquisition of partnership interest and the management of the fund assets are regulated by the FIEA.

Authorisation

Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The solicitation of investors for acquisition of partnership interests in a Japanese LPS is regulated under the FIEA as a Category II security. If more than half of the assets of the Japanese LPS are to be invested in securities and partnership interests are to be publicly offered (ie, the number of investors who acquire the partnership interest as a result of solicitation is expected to be 500 or more), the issuer of such interests must file a securities registration statement before solicitation of investors and must prepare a prospectus to be delivered to the investors, which can be quite time-consuming and cumbersome. Accordingly, in practice, limited partnership interests are often solicited by way of private placement.

In addition, if the general partner of the LPS wishes to solicit investors on its own initiative, it must register as a Type II financial instruments firm before such solicitation, with the following two exceptions: the first applies if the general partner delegates all of the solicitation activities to an outside firm that is registered as an operator of a Type II financial instruments business; and the second is the article 63 exemption, where the general partner can solicit investors by means of private placement after filing a certain notification with a local finance bureau in accordance with article 63 of the FIEA. (As described in question 26, the 2016 amendment applies to the article 63 exemption.)

Marketing

Who can market non-retail funds? To whom can they be marketed?

The solicitation of investors for the acquisition of a partnership interest must be made by one of the following:

  1. a general partner that has registered itself as a Type II financial instruments firm;
  2. a third party registered as a Type II financial instruments firm and that is given the entire authority to solicit investors from the general partner; or
  3. a general partner that has submitted a notification to the local finance bureau in reliance upon the article 63 exemption.

As long as a registered Type II financial instruments firm solicits investors by means of (i) or (ii), there is no express restriction on the qualification of investors. By contrast, if the general partner solicits investors using the article 63 exemption, there must be at least one QII. Among the investors being solicited, the number of non-QIIs must be no more than 49. The general partner shall not solicit investors who are included in the list of disqualified investors under the FIEA, unless otherwise exempted thereunder.

In response to scandals in which unsophisticated individuals suffered loss as a result of their investment in funds making use of the article 63 exemption, the FIEA was amended in 2015 in order to strengthen governmental supervision over general partners making use of this exemption. The key elements of the amendment are as follows:

  • limiting the scope of non-QII investors eligible for the article 63 exemption only to those particular sophisticated investors enumerated in the enforcement order of the FIEA;
  • clarification of the situation where the article 63 exemption is not available even if there is a QII investor in the fund (eg, in the event that there are no QII investors except for a Japanese LPS with net assets of less than ¥500 million);
  • a requirement of additional information at the time of filing notifications to the regulator (such as the location of the office or the place where the general partners will conduct their business in reliance upon the article 63 exemption);
  • imposing record-keeping and annual business reporting obligations on the fund operators;
  • providing eligibility requirements for the article 63 exemption and disqualifying applicants that satisfy certain conditions under the FIEA;
  • the introduction of a code of conduct equivalent to those applicable to registered financial instrument business operators; and
  • public disclosure of certain information (such as part of the notification and the annual business report).

This amendment became effective in March 2016.

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

As long as a registered Type II financial instruments firm solicits investors for the acquisition of a partnership interest, there are no express restrictions on the qualification of investors. On the other hand, if the general partner solicits investors by means of private placement in reliance on the article 63 exemption, there is a restriction on the qualification of investors as described in question 26.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

The general partner must, in principle, be registered as an operator of an investment management business if more than 50 per cent of the assets of the Japanese LPS are invested in securities or derivatives. The general partner, however, often employs one of the following exemptions to the registration requirement:

  • delegation of the entire authority to handle investment management business to an outside registered investment management firm, by entering into a discretionary investment management contract with such outside firm; or
  • relying on the article 63 exemption, where the general partner can handle investment management activities after filing a notification with a local finance bureau in accordance with article 63 of the FIEA.
Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

Under Japanese tax law, a limited partnership is treated as a non-taxable (pass-through) entity and is not subject to corporate tax. Accordingly, income and loss arising from the investment by the partnership can be allocated to each investor without taxation at the partnership level.

Foreign investors are subject to corporate tax and income tax on their income generated in Japan. The scope of the income subject to Japanese taxation depends on whether foreign investors have a permanent establishment in Japan and the type of such establishment. A prevailing view is that if a foreign investor conducts investment in Japan through a limited partnership that has a place of business in Japan, such foreign investor is deemed to have a permanent establishment because its investments in Japan are jointly carried out with other partners through such place of business in Japan. If a foreign investor has a permanent establishment in Japan, the distribution of profit from the partnership will be subject to Japanese taxation. The tax reform of 2009, however, has created an exemption in which foreign investors in a Japanese LPS will not be deemed to have a permanent establishment in Japan under certain conditions.

In addition to the foregoing, the tax reform of 2014 has established a new tax benefit to promote venture capital investment through the Japanese LPS. This new tax incentive allows corporate investors (limited partners) in a Japanese LPS to treat up to 80 per cent of their investment amount as deductible expenses if they satisfy certain requirements under Japanese tax law. Owing to a recent tax reform, this tax benefit has now become applicable only if the LPS has been accredited by the Ministry of Trade, Economy and Industry on or prior to 31 March 2019, and the applicable percentage has been reduced from 80 per cent to 50 per cent if the LPS is accredited by the Ministry of Trade, Economy and Industry after 31 March 2017.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under the FIEA, a Type II financial instruments firm shall not solicit investors for acquisition of partnership interest, unless the governing document of the Japanese LPS ensures the segregation of the funds contributed from the limited partners and the assets of the general partner. Financial institutions such as commercial banks and trust banks can serve as a custodian of the funds contributed from the limited partners. In addition to the foregoing, if the general partner is a registered investment manager, it must segregate the assets of the Japanese LPS from the assets of other clients and its own assets.

Governance

What are the main governance requirements for a non-retail fund formed in your jurisdiction?

With respect to the registration of a Japanese LPS, once the limited partnership agreement becomes effective, certain information (including the type of business and name of the Japanese LPS) must be registered with the local legal affairs bureau with jurisdiction over the location of the Japanese LPS within two weeks. If there are any subsequent changes to the registered information, the general partner must register those changes with the local legal affairs bureau within two weeks.

As regards record-keeping, the general partners must prepare the balance sheet, profit and loss statement and business report, along with their detailed attachments for the business year concerned, within three months of the end of each business year. These documents are maintained at the principal office of the Japanese LPS for five years for inspection by limited partners and creditors. In addition, if a registered investment manager handles the management of the assets contributed by the limited partners, it must provide a periodical management report to the client at least once every six months.

Unless solicitation of investors constitutes a public offering of securities, the general partner is not required to file the securities registration statement referred to in question 25. If the general partner wishes to make use of the article 63 exemption for either the private placement of a partnership interest or investment management activities, it must file a notification with the local finance bureau. In addition, by virtue of the 2016 amendment, the general partner who has made use of the article 63 exemption is now subject to ongoing bookkeeping and annual business reporting obligations (see question 26).

As previously mentioned, a Japanese LPS is composed of the general partner and the limited partner. The general partner manages the operation of the Japanese LPS and has unlimited liability for the obligations of the Japanese LPS.

Reporting

What are the periodic reporting requirements for non-retail funds?

See question 31.

Separately managed accounts

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts (SMAs) are typically structured as a discretionary investment management product, whereby an institutional investor and the investment manager enter into a discretionary investment management agreement. The investor determines the investment outline (or guideline) and risk profile of the fund and the investment manager will manage the SMA on a discretionary basis.

With regard to retail customers, in recent years a fund wrap account or an individually customised managed account have become increasingly popular.

Management fees for SMAs are typically based on the value of the asset under management.

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

To conduct a discretionary investment management service for SMAs, the fund manager must be a registered investment management business operator. However, in cases where the underlying assets of the SMA are fund interests, a securities company with a registration as a Type I financial instruments business operator in addition to the registration as an investment management business operator would provide an explanation of the details of the fund to avoid violating the solicitation rules for fund interests.

The investment management agreement would typically address the following matters:

  • the determination of the basic investment policy by the investment manager pursuant to the detailed rules of investment;
  • the grant by the investor of discretionary management authority to the investment manager;
  • the scope of service by the investment manager, such as provision of management instructions and voting rights and periodical reporting to investor;
  • the amount of assets to be managed;
  • the duty of loyalty and duty of care required of a good manager to be owed by the investment manager;
  • the management fee and its calculation method;
  • the fact that the investment manager will not be responsible for the loss incurred by, and no special benefits will be provided to, the investor by managing the fund pursuant to the agreement;
  • the effective term of the agreement; and
  • the exclusion of antisocial force
Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

As set out in question 34, the management of separate accounts is a regulated activity falling within the scope of discretionary investment management services. In order to provide such services to investors, registration as a discretionary investment management business operator is required. Marketing or promoting separately managed accounts is a regulated activity, but is included in the discretionary investment management activity. Accordingly, an investment management business operator does not need a separate registration or licence to market the SMAs.

General

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

There has been a continuing emphasis by the FSA to create a customer-oriented financial services culture in Japan, especially within the asset management community. The move is based on the understanding by the FSA that customer-oriented business conduct is essential for the steady accumulation of household financial assets in Japan, which will also contribute to the sustainable growth of the national economy and the development of the financial market. On 30 March 2017, the FSA published its ‘Principles for Customer-Oriented Business Operations’ (the Principles) applicable to financial business operators (FBOs) in Japan, including registered investment managers. The Principles set out the following seven overarching principles for FBOs, to:

  1. establish and announce the policy concerning fiduciary duty;
  2. pursue the clients’ best interests;
  3. appropriately manage conflicts of interest;
  4. clarify fees and commissions to the clients;
  5. provide important information that is easily understandable to the clients;
  6. provide services suitable for clients in the creation, sale and recommendation of financial products; and
  7. establish the framework for appropriately motivating FBO’s personnel to comply with fiduciary duties.

Principle (v) may be challenging for the investment manager, as the notes to Principle (v) state that it should be indicated to customers whether the unbundling of packaged products (ie, products such as fund of funds or fund wraps) is available, and that explanations made to customers should be proportional to the complexity of the product or services offered (including presenting information in a way that allows customers to compare similar financial products and services).

Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Exchange-traded funds (ETFs) have been fully available in Japan since 2001. Domestic and foreign ETFs can be listed on the stock exchange, but the types of fund that are eligible for listing are limited to those passively managed funds that attempt to track and replicate the performance of a specific index (such as a stock, bond or commodity index). It is also a requirement that there be at least two authorised participants for the listing of an ETF. Only authorised participants (typically, large broker-dealer firms) may subscribe to the primary offering of ETFs, and retail investors will only participate in the secondary market. Disclosure and reporting requirements of ETFs are similar to the unlisted publicly offered retail funds, except that the delivery of investment management reports to the investors is not required.

With respect to non-retail funds, it is not currently expected that partnership interests will be listed on securities exchanges in Japan and therefore no rules are in place.

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

There is no system to redomicile an overseas fund to Japan.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no specific rules from the fund management regulatory perspective.

Funds investing in derivatives

Are there any special requirements in your jurisdiction relating to funds investing in derivatives?

As set out in question 14, an operator of retail funds formed under the LITIC must be a registered investment manager. As a part of the conduct control rules, if such registered investment managers serve as operators of publicly offered retail funds, they must ensure that investments in derivative instruments will not be conducted when a risk equivalent amount calculated by a reasonable method (ie, any of the three methods proposed by the ITA) is expected to exceed the net assets of the investment trust (see question 17).