An Overview of Japan’s Financial Instruments Business Regime
Nobuharu Onishi and Keita Nakano of Mori Hamada & Matsumoto look at the current regulatory framework for financial instruments businesses in Japan, including registration requirements, exemptions often relied upon by non-Japanese fund managers, and the upcoming amendments expected in response to the Asset Management Task Force report. This understanding is crucial for navigating the complex legal landscape and determining whether registration or exemptions apply to specific activities.
Introduction
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.
Financial Instruments Business Regime in Japan
Overview
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:
- type I financial instruments business: a collection of sales and trading, broker-dealer-type business, underwriting and other businesses, with respect to traditional securities, such as shares, bonds, units and derivatives;
- type II financial instruments business: similar to type I financial instruments business, except that it deals with interests in partnership-type funds and other less liquid financial instruments;
- investment management business: includes entering into a contract where one party has discretion to make investment decisions for the other party based on an analysis of the value of financial instruments; and
- investment advisory and agency business: includes giving advice on the value of financial instruments for a fee.
Entry requirements and relaxation
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:
- whether senior managers are sufficiently qualified to conduct related business activities in a fair and appropriate manner, in terms of background and capability; and
- whether directors understand the governance principles stipulated in the FIEA and various other laws and regulations, and have sufficient knowledge and experience for governance and compliance and risk management to conduct a financial instruments business in a fair and appropriate manner.
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.
Exemptions Often Relied Upon by Non-Japanese Fund Managers
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.
QII-targeted fund exemption
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.
Foreign securities firms exemption
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.
“Determining whether you need a license to operate and which exemptions might apply requires a thorough examination of the complex legal framework”.
Foreign investment managers exemption
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.
Conclusion
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.
Mori Hamada & Matsumoto
