The law for amending the Securities and Exchange Law and other
financial laws (2006 Law No.65) and the law for abolishing and
amending the related laws to implement the law for amending the
Securities and Exchange Law and other financial laws (2006 Law
No.66) were promulgated on June 14, following the approval and
passage of the respective bills at the 164th Diet session held
on June 7, 2006.
More specifically, the legislations can broadly be divided into
the following four basic elements:
||(1) Development of a cross-sectoral legal system to
protect investors regarding financial instruments with
strong investment characteristics (legal system based on
so-called ''Investment Services Law'');
(2) Enhancement of the disclosure system;
(3) Reinforcement of self-regulatory functions of stock
(4) Strict approach to unfair trading, etc.
Part 1 reviewed the following subjects in ''1. Building a
Cross-sectoral Legal System to Protect Investors regarding
Financial Instruments with Strong Investment Characteristics
(Legislation ''Investment Services Law'')'':
||1) Transition from Securities and Exchange Law to
Financial Instruments and Exchange Law;
2) Expansion of scope of regulated products;
3) Regulated cross-sectoral operations; and
4) Relaxation of restrictions on market entry according
to nature of operations.
|This part also reviews ''1. Building a Cross-sectoral Legal
System to Protect Investors regarding Financial Instruments with
Strong Investment Characteristics (Legislation ''Investment
* The Securities Exchange Law and the Financial
Instruments and Exchange Law are hereinafter referred to as
''SEL'' and ''FIEL'', respectively.
1. Building a Cross-sectoral Legal System to Protect
Investors regarding Financial Instruments with Strong Investment
Characteristics (Legislation ''Investment Services Law'')
||5) Reorganizing regulation on conduct of
financial instruments business
The FIEL stipulates many rules of conduct for financial
instruments firms primarily for the purpose of investor
a) Rules of Conduct relating to ''Sales and
Financial instruments firms should comply with the
following rules in conducting ''sales and solicitation''
for securities and derivative transactions.
|- Indicate that the advertiser is
a financial instruments firm and the registration number.
- Concerning profit prospects, an advertisement should not make claim that
differ significantly from the truth or in a way that may mislead people.
|Obligation to issue
documents before signing contract
|- Indication that the firm is a
financial instruments firm, and the registration number.
- Outline of contract, brief description of fees, etc. must be included.
- ''Possibility of incurring losses'' and ''possibility that the loss may
exceed the value of deposit received from customers'' must be stated, if any.
|Obligation to issue
documents at a time of contract
|- The terms and conditions, etc.
of the contract for financial instruments transactions must be stated.
|- Solicitation by making false
statements or by providing decisive judgments on uncertain matters is
|- Solicitation of customers who
have not requested such solicitation by making visits or phone calls is
prohibited (a ban on unwanted solicitation).
|- Solicitation without confirming
the customer's intention to accept solicitation in advance (Obligation to
confirm customer's acceptance of solicitation).
|- Continued solicitation of
customers who have once indicated that they do not wish to enter into a
contract is prohibited (a ban on re-solicitation).
compensation of losses
|- Guarantee against losses,
guarantee of yields, subscription of loss compensation and execution of loss
compensation are prohibited.
(Item 1, Article 40)
|- Efforts must be made to avoid
business situations in which inappropriate solicitation could result in lack
of investor protection in light of the customer's knowledge, experience,
asset position and purpose of signing a contract.
||b) Rules of Conduct relating to ''Investment
Advisory'', ''Investment Management'' and ''Customer
||- Financial Instruments firms should comply with,
for example, the duty of loyalty and fiduciary duty
(Articles 41 and 42), etc. in conducting ''investment
advisory'' or ''investment management''.
- Financial instruments firms should comply with
fiduciary duty and the obligation of segregation of
assets (Article 43 through Article 43-3) in conducting
''customer asset administration''.
6) Flexible Regulation according to Customer
Rules of conduct based on the existing SEL, etc. are
applied across the board regardless of the categories of
investors. In contrast, the FIEL has established the
following systems to facilitate the supply of risk
capital while assuring customer protection.
a) Classification of Professional Investors and
||- Investors corresponding with qualified
institutional investors, the Japanese government, the
Bank of Japan, and corporations to be designated by
cabinet office ordinances are regarded as professional
investors (paragraph 31, Article 2 of FIEL).
- Among them, corporations to be designated by cabinet
office ordinances (public companies are presumed) are
eligible to be treated as general investors (Article
- Corporations corresponding with general investors are
eligible to be treated as professional investors
- All individuals are basically regarded as general
investors. However, individuals who meet certain
criteria to be designated by cabinet office ordinance
may be treated as professional investors (Article 34-4).
b) Exceptions for Professional Investors
Sales and solicitation to professional investors are
exempt from rules of conduct set for correction of the
information disparity will be exempt (Article 45. On the
other hand, the dealer will not be exempt from the rules
of conduct set for market integrity such as the
prohibition of compensation of losses, etc.).
|(Reference) Reporters of special business
Under the FIEL, financial instruments firms are required
to register for self-offering for interests in
collective investment schemes and self-management of
properties of collective investment schemes (refer to 2)
and 3) ). However, in order to promote financial
innovation through the sound development of funds
dealing with professional investors, registration is not
Instead, notification in the form of ''Reporters of
special business activities'' is required for firms
dealing with such funds (concretely funds dealing only
with qualified institutional investors as well as
general investors with less number of investors than the
number to be designated by government ordinances).
Limited rules of conduct such as the prohibition of
compensation of losses, etc. (Article 63) will be
7) Treatment of Deposits, Insurances, etc. with Strong
The latest legislation aims to build a cross-sectoral legal
system for customer protection through the revision of other
financial laws in addition to the FIEL, based on the view that
the same customer protection rules should be applied to
financial instruments with the same economic functions.
|| Deposits, Insurances, Trusts, etc.
- Among financial instruments, deposits are
regulated by the Banking Law, insurance by the
Insurance Business Law and trusts by the Trust
Business Law. Therefore, they are not directly
subject to regulation by FIEL, but the
respective financial laws have been amended to
apply the same rules of conduct as those under
FIEL to ''sales and solicitation'' of deposits,
insurances, trusts, etc. with strong investment
- For example, the Banking Law applies the same
rules of conduct in the FIEL mutatis mutandis to
''sales and solicitation'' for ''contracts on
specific deposits, etc.'' (deposits, etc. with
the risk of diminishing the principal due to
fluctuations in the interest rate, exchange
rate, etc. to be designated by cabinet office
ordinances) concluded by banks, etc. (Article
13-4 of the revised Banking Law).
|| Real Estate Syndications
- Real estate syndications are excluded from the
scope of regulations under the FIEL as they will
continue to be regulated by the Real Estate
Syndication Business Law, which stipulates many
regulations unique to real estate (paragraph
2-5-c of Article 2 of the FIEL). On the other
hand, the Real Estate Syndication Business Law
has been amended to apply the same rules of
conduct as those under FIEL.
|| Commodities Futures Transactions
- The FIEL explicitly states that commodities
futures trades will continue to be regulated by
the Commodity Exchange Law and will not be
subject to the FIEL due to their aspects as a
commodities market system (paragraphs 24-4 and
25-3 of Article 2 of the FIEL). On the other
hand, the Commodity Exchange Law has been
amended to apply the same rule of conduct as
those under the FIEL.
8) Development of Other Systems for Customer Protection
||a) Financial Instruments Sales Law
The Law on Sales of Financial Products (''Financial
Products Sales Law'') established in 2000 sets forth
special provisions on damages under the Civil Code
relating to the sale of a wide range of financial
instruments, including deposits, insurances and
securities. The Financial Products Sales Law provides
for matters to be explained by dealers to customers when
selling financial instruments, and stipulates that
dealers are liable for damages if they fail to provide
necessary explanation upon the sale of a financial
instrument, the firm will bear liability for damages,
whether at fault or not, with any losses incurred on the
principal being presumed to be losses to be compensated
The latest legislation amended the Financial Products
Sales Law to enhance user-protection. For example, the
scope of duty to provide explanations of financial
instruments firms have been enhanced (Article 3 of the
revised Financial Products Sales Law), including:
||- ''Possibility of incurring losses beyond
the original principal'' was added to the matters
to be explained, in addition to ''possibility of
loss to principal'' which is designated in the
- ''Important part of schemes of financial
instruments'' was added to the matters to be
- The criteria for determining whether or not a
financial instruments firm has fulfilled its
duty to provide an explanation must be based on
the method and depth of explanation required to
suit the customer's knowledge, experience, asset
position and purpose of signing the contract, by
incorporating the requirement for suitability.
b) Other (Recognized Investor Protection Association
In addition to the above, the FIEL has developed various
systems for investor protection, including developing a
system of ''recognized investor protection associations''
(Article 79-7 onwards) as a framework for the government
to recognize private organizations that resolve
complaints and mediate disputes relating to financial
instruments businesses other than so-called
self-regulatory organizations (SROs) and enhance the
reliability of such businesses.
The next edition (Part
3) will review other provisions amended under the FIEL.