An Overview of Japan’s Financial Instruments Business Regime

On 12 December 2023, the Asset Management Task Force published a report (the “Report”) outlining specific proposals for regulatory amendments. In response to the Report, several amendments are expected to be made to the Financial Instruments and Exchange Act of Japan (FIEA) and related laws, regulations and guidelines in the near future. However, in order to understand the discussions regarding the expected amendments, it is necessary to understand the current regulatory framework and recent developments. This article provides a brief overview of the financial instruments business regime in Japan.

The FIEA requires an entity to be registered as a financial instruments business operator if it intends to engage in certain regulated businesses that are considered financial instruments businesses under the FIEA. Registration would make an entity subject to business regulation, such as requiring a rule of conduct and reporting obligations. Financial instruments businesses are generally classified into four types:

There are entry requirements for registration as a financial instruments business operator. For example, an entity that does not have a personnel structure sufficient to conduct a financial instruments business in an appropriate manner cannot be registered as a financial instruments business operator pursuant to the FIEA. The guidelines issued by the FSA provide that, among others, the following matters shall be examined:

Under the FIEA and related guidelines, applicants for financial instruments business operators are not generally permitted to fully outsource operations related to accounting and compliance with laws and regulations, and must have in place the necessary governance arrangements for in-house operations. However, the Asset Management Task Force concluded in the Report that it is appropriate to relax the entry requirements for an investment management business by allowing the outsourcing of these operations.

Also, there are many other requirements, including certain minimum capital requirements for a type I financial instruments business, type II financial instruments business, and investment management business, and certain minimum net asset requirements and requirements on major shareholders for a type I financial instruments business and investment management business.

Since the above registration procedures are document-intensive and time-consuming, many non-Japanese firms rely on exemptions to the registration obligations provided in the FIEA to conduct their operations in Japan.

This exemption may be available for a general partner of a partnership-type fund for solicitation to acquire interests of a partnership-type fund and its investment management. If the general partner relies on this exemption, it is able to conduct those activities by filing a notification with the authority without registering as a financial instruments business operator. However, under this scheme, there is a limitation on the category of Japanese investors who can acquire partnership interests. At least one of the investors must be a “qualified institutional investor” (“QII”), as defined in the FIEA and its regulations, and the Japanese non-QIIs should be “eligible non-QIIs” not exceeding 49. Certain requirements should be met to become an eligible non-QII.

This exemption may be available for foreign securities firms – ie, companies governed by laws and regulations of a non-Japanese jurisdiction that engage in a securities-related business. Under this exemption, a foreign securities firm may conduct certain activities, such as solicitation of financial instruments to certain Japanese investors, such as banks and insurance companies, from overseas without registering itself.

This exemption may be available for foreign investment managers – ie, companies governed by laws and regulations of a non-Japanese jurisdiction that engage in investment management. Under this exemption, a “Foreign Investment Manager” may provide investment management services to a Japanese-registered investment manager from overseas without registering itself.

Navigating the financial instruments business landscape in Japan can be daunting. Determining whether you need a license to operate and which exemptions might apply requires a thorough examination of the complex legal framework. This framework is further evolving, with significant changes expected in response to the Report.