November 28, 2008
Financial Services Agency
Administrative Action on BNP Paribas Securities(Japan) Limited
The Financial Services Agency (FSA) found the following problematic practices at BNP Paribas Securities (Japan) Limited (hereinafter referred to as "the Branch"), as a result of the administrative orders that had been issued based on Article 56-2, paragraph 1 of the Financial Instruments and Exchange Act (hereinafter referred as "FIEA").
Ο The case that both the Branch's business management control system and internal control system had serious defects, which includes cases of overlooking inappropriate business operations
(1) In June 2008, the sales staff of the capital market solutions department (hereinafter referred to as "the CMS") proposed the following financing scheme to a client based the client's request:
1) The client would issue a new share warrant in the form of convertible bonds (hereinafter referred as "CB") to the headquarters of BNP Paribas in France (hereinafter referred as "Headquarters").
2) Based on the swap transaction contract between the client and Headquarters, the client would:
• Pay the amount of proceeds by CB issuance to Headquarters, and
• Receive a floating amount linked to the stock price, etc. from Headquarters at future dates, which were not pre-determined since the timing and amount of cash receipt depends on stock price fluctuations.
(2) In submitting the legal disclosure documents related to the financing, the client was supposed to disclose the above swap transaction contract to such an extent that would enable investors to assume by themselves that all of the issuance proceeds would not be directly used for loan repayment and to make their own investment decisions accordingly. For its part, the branch should have advised that the client make such appropriate disclosure with regard to the swap transaction contract.
However, sales staff of the CMS asked the client not to disclose information on the swap transaction contract, since his priority was to gain a higher profit from this scheme for the BNP Paribas group. Furthermore, because internal checks against the sales staff mentioned above did not work at all, because the person in charge of the client's due diligence also belonged to the CMS.
(3) Additionally, the management and internal control section of the Branch in a position to supervise and check business operations of the CMS from the viewpoint of appropriate management of conflicts of interest.
However, the management and control section of the Branch did not have the function to prevent the arbitrary actions of the sales section, and the internal control section, including the compliance division, did not perform effective internal checks on the sales division. Furthermore, sufficient discussions about the disclosure of the swap transaction contract did not take place at the final decision-making body regarding the implementation of the financing scheme, due to lack of their awareness of the need for customer and investor protection.
(4) Information about the swap transaction contract was not disclosed in the legal disclosure documents the client submitted on June 26 and 30, 2008. In this situation, the Branch sold the client's stocks mechanically as part of the implementation of the swap transaction contract with the Headquarters, from June 27, 2008. The management and internal control staff were supposed to examine the appropriateness of stock sales in terms of compliance, but they were not sufficiently aware of the need at that time.
As stated above, it is recognized that the Branch conducted inappropriate business operations, which are based on the lack of awareness of the need to ensure fairness in the securities market, and disregard of the interests of both its client and ordinary investors. It is recognized that the business management and internal control systems of the Branch, which overlooked these serious problems that could significantly threaten market confidence, have serious defects. Therefore, this situation is recognized to meet the requirements for applying Article 51 of the FIEA, which applies to situations where issuing a business improvement order is "appropriate and necessary for the public interest or protection of investors, with regard to a business operation of a Financial Instruments Business Operator."
In addition, the stock sales stated in (4) above constitute a breach of Article 117, paragraph 1 (xvi) of the Cabinet Office Ordinance Concerning Financial Instruments Business, etc., which prohibits "trade based upon undisclosed corporate information."
Accordingly, the FSA issued today the following administrative action to the Branch based on Article 51 of the FIEA:
Ο Business Improvement Order
1) To clarify the locus of responsibility for this problem.
2) To develop and implement preventive measures against recurrence of this problem, in particular to set up a business management system from the viewpoint of assuring appropriateness of autonomous business operations, along with "The Principles in the Financial Services Industry," and to restructure the internal control system in order to appropriately manage various issues, including conflicts of interest, from the viewpoint of customer and investor protection.
3) To make the management and staff aware of their social responsibility as market intermediaries and enhance compliance through conducting training and other necessary measures.
4) To submit reports to the FSA on the implementation of the above-mentioned measures by January 7, 2009 and at any other times as needed.
Financial Services Agency, Government of Japan
Tel +81-(0)3-3506-6000 (main)
Securities Business Division, Supervisory Bureau (ext. 3370, 3356)
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