On May 14, 2014, the Financial Services Agency of Japan (the “Japan FSA”) published the proposed amendments (“Proposed Amendments”) to the regulations with respect to the “Special Business Activities for Qualified Institutional Investors” (the “Article 63 Exemption”) as set forth under Article 63 of the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended or supplemented from time to time, the “FIEA”).
The Article 63 Exemption is an exemption from the business registration requirements available for the “manager” of a Collective Investment Scheme.1 With respect to offshore investment funds, as a general matter, those investment funds formed as limited partnerships are regarded as Collective Investment Schemes under the FIEA and those investment funds formed as unit trusts or investment companies are not classified as Collective Investment Schemes.
Under the Article 63 Exemption, for a fund established as a limited partnership (an “LP Fund”), the general partner (a “General Partner”) of such LP Fund may be exempt from the registrations required for: (1) engaging in a “self-offering” (jiko boshu) in Japan of the partnership interests of the LP Fund; and (2) engaging in “self-management” (jiko unyo) of the assets of Japan limited partners subscribed to the LP Fund.
Since being enacted on September 30, 2007, the Article 63 Exemption has allowed foreign managers to avoid costly and burdensome business registration requirements under the FIEA when marketing LP Funds to Japan investors. As of March 31, 2014, there are over 2,500 entities that have made filings with Japanese regulators under the Article 63 Exemption.
However, recent scandals involving significant losses and damages to unsophisticated Japan individual investors that had subscribed to investment funds marketed under the Article 63 Exemption have resulted in significant criticism of the “loophole” in investor protection provided thereunder. In response, the Japan FSA has proposed several measures to narrow and limit the circumstances in which the Article 63 Exemption can be utilized as described below.
New Requirements for Non-Qualified Institutional Investors.
Under the current laws and regulations, one of the requirements for the application of the Article 63 Exemption is that at least one Qualified Institutional Investor2 must be subscribed to the applicable LP Fund at all times. Furthermore, provided that at least one Qualified Institutional Investor is subscribed to the LP Fund, up to 49 non-Qualified Institutional Investors3 may subscribe to the LP Fund with no specific requirements on the non-Qualified Institutional Investors.
However, under the Proposed Amendments, going forward, the types of non-Qualified Institutional Investor will be limited to the following types of investors (each a “Permitted Non-QII”):
- an entity that is a registered financial instruments business operator such as a Type 2 Financial Instruments Business Operator or an Investment Advisor4;
- a fund manager of a Collective Investment Scheme (a “Fund Manager”);
- a person that has a close relationship with a Fund Manager (e.g., officer, employee, parent company);
- a listed company;
- a stock company with a capital amount of over JPY50 million;
- a government affiliated corporation (tokushu houjin) or an independent administrative institution (dokuritsu gyousei houjin);
- a special purpose company incorporated under the Act on Securitization of Assets (tokutei mokuteki kaisha);
- an employees’ pension fund (sonzoku kousei nenkin kikin) or corporate pension fund (kigyou nenkin kikin) that is expected to hold investment assets (as defined by the regulations) of JPY10 billion or more and meets certain other requirements;
- a foreign entity;
- an individual that is expected to hold investment assets (as defined by the regulations) of JPY100 million or more and who has maintained his/her account for securities and/or derivative trading for over a year;
- an individual who is a general partner of a partnership or a business operator of an anonymous partnership and foreign equivalent and is expected to hold investment assets (as defined by the regulations) of JPY300 million or more for and on behalf of such partnership or anonymous partnership; or
- an entity similar to any of the categories listed in 1 through 11 above as prescribed under the Proposed Amendments, including (1) an entity that is expected to hold investment assets (as defined by the regulations) of JPY300 billion or more, (2) an entity that is a general partner of a partnership or a business operator of an anonymous partnership and is expected to hold the investment assets (as defined by the regulations) of JPY300 million or more for and on behalf of such partnership or anonymous partnership, (3) a subsidiary and affiliated company of a registered financial instruments business operator, listed company, or stock company that has capital amount of over JPY50 million, and (4) a family office5 that meets certain requirements as prescribed thereunder.
Duty to Confirm and Record Keeping.
The Proposed Amendments also include changes to the Comprehensive Guidelines for the Supervision of Financial Instruments Business Operators, etc. (the “Supervisory Guidelines”) in relation to the operation of General Partners under the Article 63 Exemption.
Specifically, under the Proposed Amendments, the following items for supervision over General Partners operating under the Article 63 Exemption have been added:
- that the General Partner operating under the Article 63 Exemption has taken affirmative steps to confirm: (a) the status of each Qualified Institutional Investor and each non- Qualified Institutional Investor; and (b) the number of non-Qualified Institutional Investors subscribed to the LP Fund does not exceed 49; and
- that the General Partner has properly kept records of the steps taken in relation to the foregoing confirmation and maintains custody of such records.
Although there is no clear legal obligation for a General Partner to perform the above confirmation or maintain records under the language of the FIEA, the Supervisory Guidelines are the standards by which the Japan regulator supervises financial instruments business operators, and therefore all General Partners operating under the Article 63 Exemption will be expected to comply with the above.
Anticipated Effective Date.
The anticipated effective date of the Proposed Amendments is August 1, 2014.
With respect to the application of the Article 63 Exemption to existing and future applicants, please kindly note that:
- those General Partners that have filed under the Article 63 Exemption prior to August 1, 2014 will be no longer able to engage in self-offering activities vis-a-vis non-Qualified Institutional Investors that are not Permitted Non-QIIs on or after August 1, 2014; and
- those General Partners that engage in self-management activities as of August 1, 2014, under the Article 63 Exemption may continue to engage in such self-management activities vis-a-vis non-Qualified Institutional Investors that were subscribed to the LP Fund prior to August 1, 2014 until the conclusion of the same activities (i.e., until the LP Fund is dissolved, or all the Qualified Institutional Investors withdraw from the LP Fund, etc.).
The Japan FSA is currently soliciting comments from the public with respect to the Proposed Amendments and will be accepting comments until June 12, 2014. Bingham Sakai Mimura Aizawa is happy to assist its clients or any foreign asset manager that wishes to submit comments and to respond to any questions regarding compliance with the Proposed Amendments.