Press Conference by FSA Commissioner Takafumi Sato
April 28, 2008
[Opening Remarks by Commissioner Sato]
I have one matter to report to you. Please look atthe paper the paper distributed to you.
As you know, a securities company employee was arrested on April 22 for suspected insider trading, and the incident is quite regrettable.
Securities companies play the role of mediator when investors and companies that raise funds, or securities issuers, participate in the market, and this role has a public nature. In light of the nature of their role, securities companies must establish a more rigorous system for ensuring compliance with laws and regulations and proper internal control than other participants in the financial and capital markets. Also, their officers and employees must recognize the public nature of their role and engage in business with an enhanced sense of the need for compliance with laws and regulations and with a high level of work ethics and self-discipline. In order to ensure this, it is essential to establish an effective internal control environment as financial transactions and individual companies' business operations become increasingly diverse.
From this viewpoint, the Financial Services Agency (FSA) has strived to properly supervise securities companies' systems for corporate governance and business execution. In light of the case of insider trading I mentioned, the Supervisory Bureau today issued a written request for Type I financial instruments business operators, which engage in securities-related businesses, to take prompt action with regard to the five matters I will mention.
First, securities companies should identify officers and employees who are in a position to obtain corporate information and grasp the status of their securities transactions.
Second, securities companies should review their information management system and take necessary improvement measures.
Third, securities companies should review their internal rules, verify the effectiveness of the rules and take necessary improvement measures.
The fourth point is that securities companies should provide training and education to their officers and employees so as to ensure thorough compliance with laws and regulations.
The fifth point is that in light of the latest case of insider trading, securities companies should consider measures necessary for preventing the recurrence of similar incidents.
I hope that the top management of securities companies will exert their leadership in implementing these measures promptly and strive to improve public confidence in the fairness and transparency of Japan's financial and capital markets.
As you know, the Japan Securities Dealers Association (JSDA) on April 25 announced a decision to establish a working group on the internal control for preventing insider trading in order to start a study on internal control systems regarding handling of corporate information by member companies. Meanwhile, the Tokyo Stock Exchange today issued a document titled "Request for Trading Participants in Relation to Thorough Prevention of Insider Trading," asking the top management of securities companies to ensure the prevention of insider trading by reviewing information management systems and providing training and education to officers and employees.
I hope that securities companies will continue efforts to establish proper internal control systems in accordance with the requests made by the self-regulatory bodies.
This is all I have to say.
[Questions and Answers]
I will ask you about the Nomura Securities insider trading case you mentioned. So far, three people have been arrested in this case. In some past cases in which employees were arrested for misconduct relating to information management, administrative action was taken against the companies concerned, if I remember correctly. What action will the FSA consider regarding Nomura Securities' information management?
First, I will stress again that it is quite regrettable that this incident has occurred at a securities company whose role has a public nature. Meanwhile, I would like to refrain from commenting on what action to take in this case as investigation by the investigative authorities and the Securities and Exchange Surveillance Commission (SESC) is ongoing.
Generally speaking, in past cases in which problems were found in securities companies' business operations, the FSA has taken appropriate action as necessary in accordance with relevant laws and regulations, after examining the details of those cases. This stance remains unchanged.
As I told you earlier, we asked all securities companies today to take measures such as reviewing their internal control systems. I hope that securities companies will continue efforts to establish proper internal control systems so as to prevent incidents like this, as they play the role of mediator in the market, which is of a public nature.
I will ask you about a notice of an inspection of Shinginko Tokyo, which was published on the FSA's website on Friday. Although it may be difficult for you to talk about an individual bank, I would appreciate if you would tell me about the key points of the inspection, as this is a matter of great interest for the general public.
We notified Shinginko Tokyo on Friday, April 25, of our intention to conduct on-site inspection based on the Banking Act.
Meanwhile, I would like to refrain from commenting on the key points of inspection as this concerns an individual bank. Generally speaking, in our inspections, we examine systems for corporate governance, compliance with laws and regulations and risk management in accordance with the inspection manuals. Anyway, in conducting inspection, we will examine necessary items properly based not only on information and data gathered by supervisors but also on various information provided by outside sources.
I will ask you two questions concerning the case of insider trading by a Nomura Securities employee. When a criminal indictment was filed against a former Nomura employee around 2002 or 2003, the FSA did not take administrative action. My first question is: why did the FSA decide against taking administrative action and what was the background to this decision? This time, a similar incident occurred as prevention efforts failed. How does the FSA reflect on its response to that case? Did the regulatory authorities pay sufficient attention to prevention efforts by Nomura? Does the FSA feel administrative responsibility for failing to act in that case? And how does the FSA think it should respond to this new case?
If I am to reply to you in general terms, the FSA has responded to past cases of problems found in securities companies' business operations by examining the cases closely and taking action as necessary in accordance with the relevant laws and regulations with due consideration of the seriousness and maliciousness of the misconduct concerned and the appropriateness of the underlying institutional environment such as an internal control environment for corporate governance and business operations, and this stance remains unchanged. In an insider trading case involving Nichimen Infinity shares in 2003, we acted from this viewpoint. Anyway, I believe that, given the highly public nature of securities companies' role as mediator in the market, it is important for them to establish proper internal control systems including an internal control environment for ensuring compliance with laws and regulations.
As for the case of the former Nomura Securities section chief in 2003, the FSA issued an order for the submission of a report under law in the same year based on an indictment filed by the SESC, and we made our decision concerning this case in light of the contents of the report submitted.
As I told you earlier, we respond to cases like this by examining them closely and considering whether it is appropriate to leave it to the companies concerned to take improvement measures on a voluntary basis and what kind of administrative action is necessary with due consideration of the seriousness and maliciousness of the misconduct concerned and the appropriateness of the underlying institutional environment such as an internal control environment for corporate governance and business operations.
Another question about the case of 2003. Was some kind of administrative document issued in the name of the Director-General of the Supervisory Bureau or other officials in that case, too? Or is your response to the latest case unusual?
As I am not aware for the moment whether a similar document was issued in that case, I will check later. However, I do not think that such an action was not taken then. After checking on the records, I will inform you if it was found that any such document had been issued then.
As for the five items referred to in the paper issued today, it seems to me, frankly speaking, that they are all only stating the obvious. In short, I suppose that securities companies are already doing the things this urges them to do. Does this mean that there is a possibility that they are failing to do these things? I suppose that the SESC is already checking on these matters in its inspection, but is it in fact not checking on these matters?
As for your first question-are they not only stating the obvious?-, the issue of institutional systems for business operations and internal control cannot be seen simply in black and white terms, unlike cases in which we should simply judge whether or not a certain incident has happened. The key issue is whether individual securities companies have put in place a mechanism for ensuring compliance with laws and regulations and managing information in ways to maintain the firewall properly in light of the nature of their businesses and the organizational structure. In this regard, securities companies' business operations have become increasingly diverse, with some of them relying heavily on investment banking activities such as services related to M&A deals and tender offers. I believe that it is essential to check whether their internal control environment for corporate governance and business execution is suited to the diversified and sophisticated businesses in which they engage.
Regarding inspection, we have already been examining whether there is not a serious deficiency in the internal control environment for business execution as a check item in our inspection and supervision. Article 51-if I remember correctly-of the Financial Instruments and Exchange Act, which was established as a revision of the Securities and Exchange Act, has introduced a new legal framework that provides for the implementation of administration action when a problem is found in a company's internal control environment for business execution. Under the framework of the former Securities and Exchange Act, the principal focus was on regulating activities and emphasis was placed on whether a specific activity is illegal or not. Meanwhile, the Financial Instruments and Exchange Act not only gives consideration to this viewpoint but also enables the regulatory authorities to take action from the viewpoint of whether or not securities companies and other financial instruments business operators have a proper internal control environment for business execution.
I understand that through the paper issued today, you have ordered the submission of reports. By when and in what form should the report be submitted and how will the findings be sorted out for publication?
The paper distributed to you does not require the submission of reports, as you can see. This is a request for securities companies to promptly study what should be done with regard to these five matters, grasp and examine their status with regard to these matters and, if necessary, take measures to establish proper systems and provide training.
As I told you earlier, the JSDA, a self-regulatory body of the securities industry, plans to start working on relevant voluntary rules, while the Tokyo Stock Exchange also issued a request related to a similar matter as a self-regulatory body. In cooperation with self-regulatory bodies such as the JSDA and the TSE, we, the regulatory authorities, will encourage action in this regard. This is the purpose of our request today.
Is this paper a directive as specified by law?
As I cannot judge for now whether the term "directive" in the legal sense is applicable to this paper, I would like you to check with the Supervisory Bureau. Anyway, since this has been issued with a serial document number in the name of the Director-General of the Supervisory Bureau, I can assure you that this is an official document.
In short, this is a request from the administrative authorities, and so I think that it is slightly different from a document relating to the exercise of authority based on law.
[Supplementary Remark by Commissioner Sato]
As for the authorities' response to the case of Nichimen Infinity shares in 2003, which you asked me about, we have checked just now. A request like the one we made today was not issued in that case.
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