[Primer on Financial Literacy]
''Small-claims and short-term insurance businesses'' (hereinafter referred to as ''SSIBs'') refer to businesses normally run by insurance companies such as the underwriting of life insurance, non-life insurance and medical insurance that are small in amount and short-term.
As SSIBs only engage in the underwriting of insurance in which the insurance money is small in amount and the period of insurance is short, it is deemed possible and rational to establish regulations that are different from those targeted at insurance companies, which assume the underwriting of expensive, long-term insurance. From this perspective, a framework has been established to enable even small operators to conduct a business by relaxing market entry regulations such as those on minimum capital requirements and product screening regulations, while imposing restrictions on insurance that can be underwritten by them.
The specifics of this framework are as follows.
|Category||Small-Claims and Short-Term Insurance Businesses (SSIBs)||(Reference) Insurance Companies|
|Market Entry Requirements||
|Minimum Capital, etc.||
Currently, two SSIBs are registered (as of November 29, 2006). When concluding a contract with an SSIB in the future, it will be necessary pay attention to the aforementioned differences with insurance companies when doing so, with a sufficient understanding of the terms and conditions of the contract.
In the event that an SSIB goes bankrupt, there is no safety net like the policyholder protection framework to which insurance companies are affiliated. However, SSIBs are obliged to deposit a certain amount of money in order to cover losses incurred by policyholders, etc. and to prevent the illicit use of said funds.
[Explanation of Laws and Regulations]
In conjunction with the phased enforcement of the Law for Amending the Securities and Exchange Law and Other Financial Laws (2006 Law No.65) enacted at the 164th ordinary session of the Diet, necessary amendments have been made to sections in the Enforcement Order of the Securities and Exchange Law and related Cabinet Orders in conjunction with the Take Over Bid (TOB) system and the large shareholdings reporting system.
The principal amendments are as described below.
1. Development of Take Over Bid (TOB) System
(1) Numerical Standards for ''Rapid Buy-Ups'' Based on a Combination of On-Market and Off-Market Transactions, etc. in Cases Wherein TOB is Mandatory
- A new provision was established so that ''rapid buy-ups'' would refer to cases in which more than 10% of all outstanding shares are acquired either through purchase or through the acquisition of new issues in a period not exceeding three months, provided that more than 5% of it has been acquired by such means as off-market purchase.
(2) Enhancement of Information Provided to Investors
- a. Enhancement of Disclosure in TOB Notice
- It is now a requirement to provide a more specific description of the management policies after the execution of TOB and course of action, etc. as a shareholder (including whether there is any plan to additionally acquire share certificates, etc. and whether there are any prospects for delisting, etc.). Furthermore, considering that problems may arise in the form of conflicts of interest on the part of the management team, etc. in its relationship with shareholders when the management team, etc. becomes a bidder in a management buyout (MBO) or TOB made by the parent company centered around the shares of its subsidiary, if the TOB price has actually been calculated on the basis of a TOB price calculation and appraisal form obtained from a third party, it is now a requirement to attach a copy of such TOB price calculation and appraisal form to the TOB notice.
- b. Targeted Party's Obligation to Declare Its Position
- Necessary provisions were developed with respect to specific matters to be stated in the position statement report, which is a disclosure document stating the targeted party's opinions on the TOB. Moreover, it is now a requirement to submit a position statement report within 10 business days of the public notice of the commencement of TOB.
- c. Opportunity given to Targeted Party to Ask Questions to Bidder
- Necessary provisions were developed with respect to specific matters to be stated in the position statement report (a disclosure document stating the targeted party's questions) and response to questions (a disclosure document stating the bidder's response to the targeted party's questions). Also, it is now a requirement to submit the response to questions within 5 business days of receiving the ''position statement report''.
(3) TOB Period
- a. Length of TOB Period
- The length of the TOB period, which is currently between 20 and 60 calendar days, has been changed to between 20 and 60 business days.
- b. Cases in which Target Party Requests Extension of TOB Period and Extended TOB Period
- Previously, the targeted party was able to request an extension of the TOB period if the TOB period initially set by the bidder was less than a certain period. This ''certain period'' is now stipulated as 30 business days. Moreover, the extended TOB period is now stipulated as 30 business days.
Furthermore, necessary provisions were developed for TOB notices, such as establishing a column in the ''period of purchase, etc.'' section wherein the extended period of purchase, etc. must be stated in cases where a request for extension has been received.
(4) Flexible Approach to Amendment of Terms and Conditions of TOB and Withdrawal of TOB
- a. Cases in which Reduction of TOB Price is Permissible
- The reduction of the TOB price, which is prohibited under the existing system, will soon be permissible in certain cases, namely, when the targeted party carries out a stock split, etc. or executes a gratis issue of stocks, etc.
- b. Cases in which Withdrawal of TOB is Permissible
- Withdrawal of TOB, which is only permissible in the case of merger, bankruptcy, etc. under the existing system, will also soon be permissible in cases where so-called anti-takeover measures are launched and cases where so-called anti-takeover measures are not terminated.
In regards to the reasons for withdrawal due to be added, withdrawal based on minor reasons will not be made permissible as is the case for the reasons for withdrawal that are currently accepted. Necessary provisions were developed for the criteria of minor reasons.
(5) Development of Necessary Provisions for Partial Introduction of Obligation to Purchase All Shares
- A new provision was established to oblige the bidder to purchase all shares, etc. of the targeted party if the bidder's shareholding ratio exceeds two-thirds of all outstanding shares, etc. after the TOB.
Furthermore, in cases wherein the bidder's shareholding ratio exceeds two-thirds of all outstanding shares, etc. after the TOB, it is now a TOB requirement to execute TOB with respect to all shares, etc. with voting power as a general rule.
The same TOB period must be set with respect to all shares, etc. subject to TOB. It is now also a requirement that the difference in TOB price in the column be specified as the basis of calculation of the TOB price in the TOB notice.
(6) Numerical Standards for ''Rapid Buy-up'' by Major Shareholders During Other Party's TOB Period
- A new provision was established so that such ''rapid buy-ups'' would refer to the purchasing of more than 5% of all outstanding shares, etc. during the other party's TOB period.
(7) Scope of TOB Regulations regarding Purchase of Subsidiary's Shares
- Under the existing system, TOB regulations are not applicable to cases in which shares of a subsidiary with more than 50% of the voting power are purchased from an extremely small number of shareholders. In cases wherein the bidder's shareholding ratio exceeds two-thirds after the TOB, the bidder is now obliged to engage in TOB, considering that TOB that results in delisting, etc. might put small shareholders with leftover shares in an extremely vulnerable position.
(8) Other Provisions
- Necessary provisions were developed with respect to the method of calculating the shareholding ratio, withi the exception of the prohibition of separate purchases, criteria of minor reasons concerning special parties, etc.
2. Development of Reporting System for Large Shareholdings
(1) Securities to be Reported and Expansion of Scope of Securities requiring Indication of Rights relating to Securities to be Reported
- Investment securities, etc. were added to the list of securities to be reported.
(2) Significant Proposals, etc.
- The following matters have been stipulated as significant proposals, etc. made to directors or at the general meeting of shareholders that are not subject to the special reporting system:
- Disposal or transfer of material assets;
- Large amount of debt;
- Election or dismissal of representative director;
- Material change to the directorship;
- Election or dismissal of manager or other significant employee;
- Establishment, amendment or abolition of branch or other significant organization;
- Reorganization, etc. under Japanese company law;
- Significant changes in dividend policies;
- Significant changes in policies relating to increases or decreases in capital
- Delisting, etc.; and
- Listing of subsidiary's shares, etc.
(3) Base Date for Special Report
- Institutional investors who wish to submit a notice regarding the base date for making a special reports must choose from among the following combinations of days:
- Second and fourth Monday of each month (if there is a fifth Monday in the month, then the second, fourth and fifth Monday); or
- The fifteenth day and last day of each month
(4) Purpose of Shareholding
- These necessary provisions were developed to render the disclosed information on the shareholding purpose more specific.
- These necessary provisions were developed in regards to double entries between joint shareholders that should be netted, the scope of nominal joint shareholders, the reasons for submitting amendment report, the criteria for minor reasons concerning deemed joint holders, etc.
3. Enforcement Date
(1) The revised TOB system and the section relating to significant proposals, etc. under the revised reporting system for large shareholdings came into force on December 13, 2006.
(2) The other sections of the revised reporting system for large shareholdings are scheduled for introduction on January 1, 2007. Mandatory submission of electronic reports on large shareholdings, etc. via EDINET (Electronic Disclosure for Investors' NETwork) is scheduled to come into force on April 1, 2007.
The Working Group on Information Technology Innovations and Financial Systems, Sectional Committee on Financial Systems of Financial System Council
''Towards the Establishment of an Electronically Registered Receivables Law (provisional name): Focusing on Approaches to the Establishment of an Electronically Registered Receivables Management Body''
The Working Group on Information Technology Innovations and Financial Systems, Sectional Committee on Financial Systems of the Financial System Council (hereinafter referred to as ''the Working Group'') published a report entitled ''Towards the Establishment of the Electronically Registered Receivables Law (provisional name): Focusing on Approaches to the Establishment of an Electronically Registered Receivables Management Body'' on December 21, 2006. The Working Group had been studying the implementation of an electronically registered receivables system for some time, and on July 6, 2005, published the ''Summary of Discussions on Electronic Receivable Legislation from a Financial System Perspective (Memorandum from the Chairman)''. Moreover, in consideration of the Legislative Council of the Ministry of Justice's dissemination of its studies on problems inherent in civil law related to electronically registered receivables in 2006, the joint conference of the Financial System Council compiled a report on various problems such as ensuring security in the settlement of electronically-registered receivables and customer protection. This article provides an overview of the report.
I. Overview of ''Towards the Establishment of the Electronically Registered Receivables Law (provisional name): Focusing on Approaches to the Establishment of an Electronically Registered Receivables Management Body''
1. Significance of Electronically Registered Receivables
Bills as a form of credit between companies have long served as a financing method for businesses. However, their use has been diminishing in recent years due to the inherent risks of using paper media and cost considerations. Claims payable to specific persons also have double transfer risks and problems in regards to the cost of checking the existence of receivables, etc., which results in hindering the process upon financing with the use of receivables held by businesses.
Amid the progress in the spread of IT in economic circle and throughout society in general, it is hoped that an electronically registered receivables system will be institutionalized as a new system of putting the creation of rights, etc. into effect based on electronic records and ensuring security in conducting transactions and liquidity, for the purpose of overcoming these problems and developing a business-friendly financial environment, including for small and medium-sized enterprises (SMEs).
2. Electronically Registered Receivables System and Role to be Performed by Management Body
Electronically registered receivables are expected to enter broad use as a new means of financing through the transfer of receivables by electronic means in place of bills and claims payable to specific persons. In order for this to happen, it is indispensable to overcome the challenge of ensuring the credibility of the electronically registered receivables system, and more than anything else, it is important to respond to the need to ensure the security of transactions and liquidity as well as to the need for customer protection.
In particular, a management body of the aforementioned sort would constitute an organization involved in the management of registers that would defines the nature and attribution of rights to electronically registered receivables and would enforce discipline in regards to customer transactions through operational rules, etc. Said system will need to ensure fairness and impartiality as a public organ and function as a public trust winning entity.
3. Ensuring Stability in Settlements of Electronically Registered Receivables
(1) Necessity of Synchronized Management
In an electronically registered receivables system, requests for registration of payments, etc. (deletion of records) to the management body must, as a general rule, be made by the creditor. The debtor cannot request the deletion of records unless the creditor gives approval. This prevents the risk of duplicate payments by the debtor, as the receivables are transferred in accordance with the creditor's response even if the debtor has made a payment, etc.
(2) Synchronized Management Based On Management Records
In order to prevent the risk of duplicate payments by the debtor, it would be effective to introduce a mechanism for the management body to delete the records based on its authority (synchronized management by the management body) without waiting for the creditor's request for the deletion of the registration of the receivables (request for deletion of registration) in cases where the debtor has completed the payment, etc.
(3) Method of Performing Synchronized Management by Management Body
One way for the management body to perform synchronized management through confirmation of the remittance of funds is to have the management body delete the relevant records when it is contacted by a financial institution and informed of the remittance of said funds from the debtor's account into that of the creditor.
4. Ensuring Appropriateness in Management Body's Operations
(1) Ensuring Fairness and Impartiality of Management Body
The accrual of electronically registered receivables, etc. comes into effect based on records in the register. It is extremely important that fairness and impartiality is ensured within the management body responsible for managing the register.
(2) Averting Bankruptcy of Management Body
If the management body were to go bankrupt, it would not only have a major impact on customers, but might even cause economic and social havoc in Japan. Accordingly, bankruptcy on the part of the management body needs to be prevented at all cost. It is also necessary to build a mechanism to minimize inconvenience among customers in the event that said body does go bankrupt.
(3) Ensuring Credibility of Register
If there is an error in the records of the register, there is a risk of the assignee acquiring electronically registered receivables as a result of being misled to believe that the erroneous records are correct, which might undermine the security of transactions. It is therefore necessary to design such a system in a way that ensures the credibility of the register managed by the management body.
(4) Requirements of Management Body
In consideration of the above, a management body of the above-described sort will be required to adhere to the following strictures:
- (a) Scope of Operations
It is considered appropriate for the management body to demonstrate specialization in the operations it provides in order to ensure fairness and impartiality and avert bankruptcy risks.
- (b) Financial Base
A certain financial base is required so as to be able to invest in systems, etc. and to run the management body in a stable and continuous manner.
- (c) Ability to Execute Operations
It is necessary to ensure the ability to execute operations to the extent required for the proper management of the register.
In addition to looking into building a designation system, etc. by using debenture transfer bodies, etc. similar to the management body as reference, it is necessary to develop necessary provisions for inspection and supervision to ensure the effectiveness of various regulations targeted at the management body, while properly identifying the business status of the management body.
5. Customer Protection
(1) Use by Consumers
Customer protection is also a crucial issue. Although consumers are currently protected in terms of legislation, it is important to prevent disputes from arising, as it is detrimental to them for such disputes to arise in the first place.
(2) Protection of Customer Information
The management body should be obliged to implement thorough measures to ensure confidentiality, customer identification and data security, as it oversees the management of a register of electronically registered receivables wherein customer information is compiled.
(3) Dissemination of Operational Rules to Customers, etc.
As the use of electronically registered receivables will be controlled by operation rules, etc. established by the management body, it is important to take appropriate measures to ensure that said operation rules, etc. are made common knowledge. It is also necessary to give consideration to customers' computing environments, bearing in mind that IT-related knowledge and proficiency varies from customer to customer.
6. Other Issues
(1) Relationship with Financial Instruments and Exchange Law, etc.
Electronically registered receivables have the potential to be widely traded as financial instruments, as a wide range of applications is conceivable. With this in mind, it is necessary to look into applying the regulations of the Financial Instruments and Exchange Law.
(2) Netting of Electronically Registered Receivables
It is necessary to examine what kind of approach would be appropriate in the netting of electronically registered receivables with a view to ensuring practical merits, security in settlement and customer protection.
(3) Standardization, etc.
It is the hope that a suitable approach will be taken to the standardization of technologies, etc. for exchanging electronic data held by the management body based on currently operational practices.
Upon designing an electronically registered receivables system, it will be important to not only take the view of ensuring credibility but also to attempt to ensure the growth potential of financial services through electronically registered receivables by taking a flexible approach to diverse business needs, IT innovation, etc. in the future. It is the hope that said legislation based on these views will see the widespread implementation of electronically registered receivables, and will lead to the sound progress of this system.
II. Future Approaches
In consideration of the latest report and the discussions that have held within the Legislative Council, we are currently drafting legislation in conjunction with the Ministry of Justice. We hope to submit related bills at the ordinary session of the Diet this year.
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