On October 16, 2012, the Financial Services Agency of Japan (the "FSA") announced administrative sanctions against an investment manager (a two month business suspension order and a business improvement order) and a trust bank (a three months business suspension order and a business improvement order). On the same day, the Kanto Local Finance Bureau also announced similar administrative sanctions against another investment manager (a one month business suspension order and a business improvement order).1
These companies were all sanctioned in connection with asset management services provided to one particular pension fund client. According to news reports, this pension fund had delegated investment authority with respect to JPY 6.8 billion to the three sanctioned companies, directing them to invest in certain limited partnerships (toushi jigyou yugen sekinin kumiai) which would in turn, invest into unlisted shares. Upon such direction from the pension fund and without conducting any substantive review, these companies, each acting as an asset manager, made investments into such limited partnerships. When the investments eventually proved to be unsuccessful, the pension fund incurred losses of JPY 4.6 billion. It should also be noted that this particular pension fund suffered significant losses in the recent AIJ scandal.
While the specific facts that the FSA found and considered differ across the cases (for a summary of the relevant facts, please see the table below), the common findings by the FSA across the cases were the (i) insufficient due diligence of prospective investments prior to the decision to invest in a limited partnership which invests in unlisted shares and (ii) insufficient monitoring of the limited partnership after the initial investment had been made.
The FSA determined that these insufficiencies in each of the three cases were due to a breach by each asset manager of its "duty of care" to its client. Investment managers are subject to the duty of care under the Financial Instruments and Exchanges Law (Law No. 25 of 1948, as amended), while trust banks are subject to the duty of care under the Act on Engagement in Trust Business by A Financial Institution (Law No. 43 of 1943, as amended). The FSA found that conducting due diligence before an investment is made and continuing to monitor such investments afterwards are both requirements under these duties of care.
Throughout these cases, the FSA emphasized the importance of asset managers and trust banks meeting their respective duties of care. The FSA also expressed its expectation that in managing the assets of clients, assets managers and trust banks are required to continually investigate and assess the appropriateness of target investments, the qualification of the operator of any contemplated investment scheme and all other relevant factors in order to meet their duties of care, regardless of whether their client directs any particular investments.
Click here to view the tables.
These cases are the first to explore the scope of the "duty of care" by investment managers and trust banks in the aftermath of the AIJ Scandal. As such, not only do these cases bear on the facts in that scandal, these cases also merit close study by all firms engaged in asset management (and other service providers) in respect of Japanese pension fund monies and investors generally. While the "duty of care" has for a long time been explicitly provided in the law, some observers in the Tokyo financial community view these decisions as having "raised the bar" considerably with respect to the scope of the duty of care applicable to asset managers and trust banks.