Administrative Actions against Société Générale Private Banking Japan Ltd.

I. Description of Administrative Actions

Orders based on Article 26(1) of the Banking Act and Article 9 of the Act on Provision, etc. of Trust Business by Financial Institutions

• 1. Suspend business operations related to the trust business in the corporate division (excluding business operations related to the management, administration, and return of trust assets accepted under existing contracts concluded on or before October 22, 2012, business operations necessary for the implementation of the following business improvement order, and business operations specifically approved by the Financial Services Agency (FSA)), from October 23, 2012, to January 22, 2013.

• 2. Suspend business operations related to the trust business in the private banking division (excluding business operations related to the management, administration, and return of trust assets under existing contracts concluded on or before October 22, 2012, business operations necessary for the implementation of the following business improvement order, and business operations specifically approved by the FSA) and business operations related to the proactive solicitation (including advertising and sales campaigns) and acceptance of money regarding risky assets, such as foreign currency-denominated deposits and structured deposits, from October 23, 2012, to November 22, 2012 (however, this shall not preclude the acceptance of money [including the explanation of products] in cases where there are voluntary manifestations of intention by customers and where such manifestations of intention can be objectively recognized).

• 3. Take the following measures in order to ensure sound and appropriate business operations as a trust bank.

  • (1)Clarify the responsibility of the management

  • (2)Review the governance system

  • (3)Strengthen the functions of the audit committee and the internal audit division

  • (4)Drastically restructure the compliance system and the customer protection management system, including the review of the management systems regarding the pension trust business and the private banking business and steady implementation of revisions.

  • (5)Make sure that all executives and employees fully understand and comply with laws, regulations and rules, and train, retain and appropriately allocate personnel necessary for the company's business operations.

  • (6)Formulate a business improvement plan to implement the measures specified in (1) to (5) above and to deal with the matters pointed out in the notification of the inspection results and the order for the submission of a report, and promptly implement the plan.

• 4. Submit the business improvement plan concerning 3. (6) above (including the development of a governance system that ensures steady implementation of the business improvement plan and the clarification of the division of responsibilities for ensuring the effectiveness of the plan) by November 16, 2012, and then immediately implement it.

• 5. Sum up the progress and implementation of the business improvement plan and the status of improvements through December 31, 2012, and report on the findings by the 15th day of the following month (1st report), and subsequently submit similar reports every three months by the 15th day of the respective following months, until the business improvement plan is completed.

II. Reasons for the Administrative Actions

As a result of onsite inspection conducted by the FSA (notified on September 21, 2012) and a report submitted by the company based on Article 24(1) of the Banking Act and Article 42(1) of the Trust Business Act as applied mutatis mutandis pursuant to Article 2(1) of the Act on Provision, etc. of Trust Business by Financial Institutions, the following serious violations of laws and regulations were recognized. In addition, regarding the governance system, the compliance system, and the customer protection management system, serious problems that may impede sound and appropriate business operations were recognized.

• 1. Violations of Laws and Regulations

  • (1)Violation of the duty of due care in the pension trust business

    The company is investing in investment limited liability partnerships (hereinafter referred to as "Partnerships") that are investing in unlisted stocks. However, as described below, the company failed to conduct the management processes that pension asset trustees undertaking specified management are required to conduct. This constitutes a violation of the duty of due care as specified under Article 28(2) of the Trust Business Act as applied mutatis mutandis pursuant to Article 2(1) of the Act on Provision, etc. of Trust Business by Financial Institutions.

    • a)When the company made initial investment in Partnerships investing in unlisted stocks, it became aware of the need to conduct due diligence examination regarding Partnerships in which it invests and general partners (hereinafter referred to as GPs) thereof, who are asset managers, because of a written legal opinion prepared by an outside lawyer, etc. However, the company failed to clarify the authority over and the method of screening the acceptance of money, and allocated the responsibility for conducting due diligence examination regarding the scope of Partnerships' investment targets and GPs' asset investment experience and capabilities entirely to sales personnel instead of fund managers, who are responsible for asset investment. In addition, the company did not have internal control divisions, such as the legal affairs division and the compliance division, conduct verification.

    • b)When the company made additional investment in Partnerships, it did not conduct due diligence examination regarding the Partnerships and GPs as it had not developed the management framework that pension asset trustees undertaking specified management are required to develop.

    • c)The company has not developed systems to perform the duty to continuously monitor business operations by GPs in its capacity as a pension asset trustee undertaking specified management. Therefore, although the managers of the sales division and the business administration division were aware that the unlisted companies in which the Partnerships were investing included companies which might be unsuitable as investment targets, such as companies about which auditing firms had expressed an adverse opinion, they did not take appropriate actions, such as requiring the rectification of problems in business operation. The company overlooked this problem for a long time.

  • (2)Violations of laws and regulations in the private banking business

    The company has not developed an appropriate system of checks-and-balances over the private banking division, and as a result, the following violations of laws and regulations were recognized.

    • a)When the company provided explanations to customers before conducting transactions that included a hedge fund within the same group in trust assets, it did not compile and provide an explanatory document for customers that indicated the presence of conflicts of interest involved therein. This constitutes a violation of Article 29(3) of the Trust Business Act as applied mutatis mutandis pursuant to Article 2(1) of the Act on Provision, etc. of Trust Business by Financial Institutions.

    • b)In some cases where the company concluded a contract on specified deposits, etc., it did not provide a pre-contract document that should have been provided to customers for explanation, as the executive officer in charge were aware of the legal requirement for the provision of the said document but judged that the provision may be omitted upon his own approval. This constitutes a violation of Article 37-3 of the Financial Instruments and Exchange Act as applied mutatis mutandis pursuant to Article 13-4 of the Banking Act.

    • c)In some cases where the company concluded a contract on specified deposits, etc., it made false statements in a pre-contract document provided to customers for explanation with regard to important items such as the conditions for pre-maturity redemption, the at-maturity redemption amount and the interest amount. This constitutes a violation of Article 37-3 of the Financial Instruments and Exchange Act as applied mutatis mutandis pursuant to Article 13-4 of the Banking Act.

    * "Specified deposits, etc." refer to deposits whose principal amount may fall below par, such as derivative deposits, foreign currency-denominated deposits, and currency option deposits.

• 2. Problems Related to Governance System

  • (1)The representative executive officer has neither clarified nor appropriately delegated authority in light of his own capabilities, knowledge and experiences, or the professional expertise of the heads of relevant divisions and departments. As a result, the exercise of functions by the representative executive officer, etc. has been insufficient. Under these circumstances, the board of directors, the representative executive officer, and other executive officers have executed pension trust and private banking businesses without allocating personnel who have sufficient knowledge and experience concerning trust-related domestic laws and regulations, thereby causing violations of laws and regulations, among other serious problems related to governance.

  • (2)The audit committee overlooked inappropriate decisions made by executive officers, as an appropriate system to audit them had not been developed. In addition, the internal audit division overlooked such problems as violations of laws and regulations that were recognized through the recent inspection, as they did not conduct risk assessment in light of the actual circumstances of business operations.

• 3. Problems Related to Legal Compliance and Customer Protection Management Systems

  As the company has not developed management systems that pension asset trustees undertaking specified management are required to develop, the violations of laws and regulations described in 1. above were recognized. In addition, checks on the appropriateness of settlors who wish to invest in unlisted stocks were inadequate. Moreover, the company has not allocated personnel to the right positions in light of professional expertise concerning trust-related laws and regulations.

  Besides, the company has not developed a system of checks-and-balances over the sales division's external relations activity, including checks on the provision of explanations to customers, leading to the violations of laws and regulations described in 1.(1) above. In addition, due to the absence of explanations about the risks involved in securities that cannot be cashed upon the expiry of trust contracts, a large number of complaints have arisen.