On March 1, 2016, amendments to the regulations on certain partnership-type funds in Japan, known as Special Exempted Business for Qualified Institutional Investors, etc. (“SEB” or Tekikaku Kikan Toushika Tou Tokurei Gyoumu), became effective. The amendments apply the Japanese suitability doctrine to previously exempt SEBs, limit target investors to sophisticated investors only and contain more onerous continuous disclosure and filing obligations, including an annual report.
Before the amendments, the SEB was a convenient option to target Japanese investors without requiring a securities business license to conduct business in Japan. Following the amendments the procedure to register the SEB is now similar to the more burdensome procedure for obtaining a financial instruments and exchange business license in Japan. The amendments also require existing SEBs to submit a new notification and attachment documents to the Japanese Financial Services Agency. As a result, existing SEBs must decide whether to abolish their business in Japan (i.e., stop marketing activities to Japanese investors and providing with investment management service to Japanese investors) or re-register under the new regulations. Many foreign fund managers previously relying on the SEB structure have chosen to abolish their business set up under the previous regulations.
Abolishment of the SEB
In order to abolish the SEB entity, it is necessary to submit a Notice of Abolishment to the Kanto Local Finance Bureau of Japan (the “KLFB”).
The deadline to submit a Notice of Abolishment was August 31, 2016. However, it seems that the KLFB is still issuing alerts on the new rules to foreign SEB fund managers and continuing to accept the Notice of Abolishment.
Under the new rules applicable to existing SEBs, entities that filed to register as an SEB before March 1, 2016 are required to submit either:
- a new registration (similar to obtaining a financial instruments and exchange business registration); or
- a Notice of Abolishment.
Failure to file either a new registration for the SEB or a Notice of Abolishment will be treated as a violation of Japanese law. Therefore, if fund managers or general partners of partnership-type investment funds that have filed a registration for the SEB before March 1, 2016, have not submitted a new registration, they should consider submitting a Notice of Abolishment.
If a partnership-type fund has accepted investment from Japanese investors, a general partner of the fund will be treated as providing an investment management service to such Japanese investors. This generally requires an investment management business license in Japan.
The SEB provides an exemption from licensing obligations for solicitation of fund interests and for providing investment management services to Japanese investors.
In order to abolish business undertakings under the SEB, the fund will be required to provide evidence to the KLFB that certain exemptions from the registration obligation of the investment management business have been met. In addition, if certain matters stated in the original registration document have changed, it is necessary to file an amendment to the registration and submit a notarized affidavit to the KLFB. Thus, before filing a Notice of Abolishment, it is recommended to review and address these issues.