---

1. On June 29, 2007, the Financial Services Agency (FSA) and the U.S. Securities and Exchange Commission held their third regular high-level bilateral dialogue on securities markets in Tokyo. The dialogue was attended by senior officials including FSA Commissioner Hirofumi Gomi and SEC Commissioner Kathleen Casey.

2. In this meeting, the FSA and the SEC discussed a broad range of issues, including regulatory matters pertaining to the increasingly cross-border nature of capital markets, the cross-border integration of exchanges, the convergence of accounting standards and supervisory issues.

3. The fact that the FSA and the SEC have deepened their dialogue and mutual understanding is quite significant amid the increasingly cross-border nature of securities transactions, which has generated a number of problems that require action on the part of both parties. As there are not many occasions for officials from the FSA and the SEC to meet face-to-face, this latest meeting served as a valuable opportunity for further development of this cooperative relationship

---

1. Mr. Yuji Yamamoto, Minister for Financial Services, met with Mr. Charlie McCreevy, Commissioner for the Internal Market and Services of the European Commission (EC), in Tokyo on June 13. At this meeting, Minister Yamamoto and Commissioner McCreevy exchanged views on recent developments in the Japanese and EU capital markets, including the introduction of Japan's Financial Instruments and Exchange Law and the EU Markets in Financial Instrument Directive.

In addition, Minister Yamamoto explained Japan's efforts to enhance the attractiveness of its financial and capital market as a global financial center. Commissioner McCreevy showed a particular interest in initiatives being considered for future implemention, including measures related to the firewalls regulation.

2. Minister Yamamoto and Commissioner McCreevy also exchanged views on the convergence of accounting standards and cooperation in issues related to auditing, including audit oversight systems. Minister Yamamoto emphasized the importance of maintaining openness in the European market and explained the progress made in the convergence work implemented by the Accounting Standards Board of Japan (ASBJ). Commissioner McCreevy showed his appreciation of the progress made in this area. Both parties agreed on the need for cross-border cooperation between regulatory authorities in the area of auditing, as companies are increasingly operating on a global scale.

3. Since 2005, the EU has been requiring EU companies listed in the region to use international accounting standards in the compilation of consolidated financial statements. In addition, beginning in 2009, the EU plans to require all EU-listed companies in non-EU countries such as Japan, the United States and Canada to use international accounting standards or equivalents thereto. Therefore, the EU plans to complete by June 2008 its assessment of the equivalence of accounting standards adopted in Japan, the United States, Canada, etc. and international standards.

Regarding auditing, from the end of June 2008, the EU plans to require non-EU auditing firms that audit non-EU companies listed in the EU to subject themselves to the direct oversight of the authorities of the relevant EU countries by registering with those authorities, or to the oversight of equivalent regulatory regimes as specified in the relevant EU directive in their home countries. The EU is therefore conducting equivalence assessment in relation to this.

4. Having agreed on a framework of the Japan-EU Monitoring Meeting on Developments, Japan and the European Commission (EC) have since November 2006 been holding discussions within this framework.

The FSA plans to continue active dialogue with the EC.

---

Minister of Financial Services Yuji Yamomoto visited Singapore on July 1-4.

In Singapore, Minister Yamamoto held talks with leaders of the country's government, exchange and government-funded public investment organization, including Former Prime Minister Goh Chok Tong, who now serves concurrently as Senior Minister and Chairman of the Monetary Authority of Singapore.

During these talks, Minister Yamamoto asked the Singaporean officials about Singapore's experience in establishing itself as a financial center, and he agreed with them on a plan to strengthen collaboration between the two countries, including the establishment of a forum for regular consultations between the FSA and the Monetary Authority of Singapore.

In addition, Minister Yamamoto discussed the partnership between the Tokyo Stock Exchange and the Singapore Exchange with the relevant officials. Moreover, Minister Yamamoto asked the Singaporean officials about the trading environment at the Singapore Exchange, which handles a broad range of products, and the asset management status of Singapore's public investment organization, which has achieved risk dispersion and high returns by securing excellent human resources from around the world.

The FSA intends to take advantage of the knowledge and information gained by Minister Yamamoto during his visit to Singapore in its formulation of a plan tentatively called the ''Program for Strengthening Financial and Capital Markets'', which will be drawn up by the end of this year, and to further deepen cooperation and mutual trust between the authorities of Japan and Singapore

---

On June 20, 2006, the Act for Partial Revision of the Certified Public Accountants Act, etc. was enacted at the 166th session of the Diet (promulgated on June 27, 2006).

Since organizational audits are becoming ever more important due to the diversification and increased complexity of business activities, the increasingly complicated and advanced level of audit services, and the presence of cases where inappropriate audits have been conducted by certified public accountants, this Act revises the audit firm system and other aspects in order to better deal with the current situation.

The Act provides for revisions in the following areas:

(1) Strengthening quality management, governance and disclosure by audit firms

(2) Securing the independence and strengthening the position of auditors

(3) Reviewing the supervision on audit firms, etc. and the responsibilities of audit firms, etc.

Each area of revision is explained in more detail below.

1. Strengthening quality management, governance and disclosure by audit firms

(1) Obligating audit firms to develop a service management framework

Each audit firm must develop a service management framework that includes measures for securing the fair execution of services and formulation and implementation of policy on service quality management. (Article 34-13 of the Certified Public Accountants Act)

(2) Making persons who are not certified public accountants also qualified to become members of audit firms

- A person who is not a certified public accountant can become a member of an audit firm if he/she has obtained registration from the Japanese Institute of Certified Public Accountants as a specified member. (Article 34-4 and Articles 34-10-8 to 34-10-17 of the Certified Public Accountants Act)

- Lower limits were set for the proportion of members who are certified public accountants out of all members of an audit firm and such proportion of all members of a decision-making collegial body formed within an audit firm. (Article 34-4 and Article 34-13 of the Certified Public Accountants Act)

(3) Obligating audit firms to disclose information

Each audit firm must, in each business year, prepare explanatory documents concerning the status of business and property, keep them at its office and make them available for public inspection. (Article 34-16-3 of the Certified Public Accountants Act)

2. Securing auditors' independence and strengthening their position

(1) Establishing provisions on auditors' independence

It was provided in the provisions on the professional responsibilities that certified public accountants and audit firms must provide services from an independent standpoint. (Article 1-2 and Article 34-2-2 of the Certified Public Accountants Act)

(2) Expanding the scope of restriction on employment to the parent company and consolidated subsidiaries of the audit client company

The scope of restriction on employment for a certified public accountant who has provided audit or certification services has been expanded so as to prohibit him/her from becoming an officer, etc. of not only the audit client company, but also its consolidated companies, etc. (the parent company and consolidated subsidiaries, etc.). (Article 28-2 and Article 34-14-2 of the Certified Public Accountants Act)

(3) Introducing the ''rotation rule''

- A rotation rule with five years of consecutive audits and a five-year interval has been stipulated for the chief accountant, belonging to a large audit firm, who provides audit and certification services to a listed company. (Article 34-11-4 of the Certified Public Accountants Act)

- In the case where a certified public accountant or an audit firm has provided audit-related services to a newly listed enterprise, the rotation rule will be applied by adding to the consecutive audit period the specified accounting period(s) preceding the accounting period that includes the day on which the enterprise is to be listed. (Article 24-3 and Article 34-11-5 of the Certified Public Accountants Act)

(4) Stipulating the step to be taken when discovering a wrongful or illegal act

In the case where an auditor discovers a wrongful or illegal act that has a serious impact on financial documents, if no appropriate measure has been taken, still, after a process to encourage the audit client company to take a voluntary corrective measure, such as reporting the company auditor, etc., the auditor is required to offer an opinion to the competent authorities. (Article 193-3 of the Financial Instruments and Exchange Act)

3. Reviewing the supervision on the responsibilities of audit firms, etc.

(1) Diversifying administrative dispositions

- The authorities are to issue necessary instructions or dispositions in the case where operation of services by a certified public accountant has been found to be grossly inappropriate. (Article 31 and Article 34-2 of the Certified Public Accountants Act)

- The following were added to the types of administrative dispositions against audit firms:

(a) Order to improve the service management framework (Article 34-21 of the Certified Public Accountants Act)

(b) Order to prohibit any members who are found to be seriously responsible for illegal conduct from participating in all or part of the services or decision-making of the relevant audit firm (Article 34-21 of the Certified Public Accountants Act).

(2) Introducing an order for payment of a surcharge

When a certified public accountant or an audit firm has intentionally made a false certification or made a serious false certification in negligence of due care, a surcharge* in an amount corresponding to the profit will be imposed from the viewpoint of appropriately deterring illegal conduct. (Payment of the surcharge is not ordered when it is found inappropriate to issue such an order in some cases where an admonition is issued, suspension of services is ordered, registration is cancelled or dissolution is ordered.) (Article 31-2 and Article 34-21-2 of the Certified Public Accountants Act)

* When intentional: 1.5 times the amount of audit fees received during the accounting period pertaining to the false certification-

When being negligent of due care: An amount corresponding to audit fees received during the accounting period pertaining to the false certification

(3) Introducing a system of audit firms in the form of limited liability organizations

- A system of audit firms in the form of limited liability organizations was introduced, wherein the members bear the responsibility of paying liabilities to the extent of the value of their capital contribution. (Articles 34-24 to 34-34 of the Certified Public Accountants Act)

- The following requirements have been set for limited liability audit firms:

(a) Minimum amount of capital (Article 34-27 of the Certified Public Accountants Act)

(b) Deposit money (all or part of it can be replaced with liability insurance) (Article 34-33 and Article 34-34 of the Certified Public Accountants Act)

(c) Disclosure of financial statements (an audit report must be attached in the case of an audit firm exceeding a certain scale) (Article 34-32 of the Certified Public Accountants Act)

(4) Revising the scope of delegation of authority to collect reports and conduct on-site inspections to the Certified Public Accountants and Auditing Oversight Board

Of the general authority of the Commissioner of the Financial Services Agency to collect reports from and conduct on-site inspections of audit firms, those related to reports of quality management reviews by the Japanese Institute of Certified Public Accountants had been delegated to the Certified Public Accountants and Auditing Oversight Board. However, while maintaining such a basic framework, a revision has been made in consideration of the practices to date. This revision alters the scope of delegation of authority so as to allow the Board to collect reports and conduct on-site inspections without using the quality management review in limited, exceptional cases, such as the following:

(a) When the audit firm is new and has not undergone a quality management review

(b) When there is a problem in the report of the quality management review results due to such reason as the audit firm being uncooperative in the review

(Article 49-4 of the Certified Public Accountants Act)

(5) Introducing a system of notification of foreign audit firms, etc.

- It was provided that the authorities must be given advanced notification when a foreign audit firm provides audit and certification services pertaining to securities reports or other financial documents to be submitted by a foreign company, etc. (such notified foreign audit firm shall be referred to as a ''foreign audit firm, etc.''), and necessary provisions concerning the system of notification of foreign audit firms, etc. were established. (Articles 34-35 to 34-39 of the Certified Public Accountants Act)

- The authority (necessary instructions, collection of reports and on-site inspections) of the authorities against foreign audit firms, etc. has been stipulated. (Article 34-38 and Article 49-3-2 of the Certified Public Accountants Act)

4. Effective Date

The revising provisions shall take effect from the date specified by a Cabinet Order within a period not exceeding one year from the day of promulgation.

* For details, access the ''Bill Submitted to the Diet (166th Session of the Diet)'' (Japanese only) from ''Bills Submitted to the Diet, etc.'' on the Financial Services Agency website.

---

The ''Study Group on the Internationalization of Japanese Financial and Capital Markets,'' which was established on January 30, 2007 under the Financial System Council's Sectional Committee on Financial System, held 14 meetings by June this year and published its ''interim summary of discussions (first report)'' on June 13 based on the deliberations thus far conducted.

The Financial Services Agency (FSA) intends to conduct further deliberations on specific matters pertaining to the issues covered by the interim report. Regarding issues that require the implementation of institutional measures in particular, including legislative matters, the FSA will conduct deliberations at the Financial System Council. In addition, the FSA plans to draw up a plan tentatively called the ''program for strengthening financial and capital markets'' by the end of 2007.

---

Next Page