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1. Introduction

The Financial Services Agency (FSA) on July 9, 2007, revised the Inspection Manual for Financial Holding Companies and issued a notification to this effect in the name of the Director-General of the Inspection Bureau (notification No. 272, July 7, 2007).

The outline of the revised Inspection Manual for Financial Holding Companies is as shown below.

2. Background to Revision of Inspection Manual for Financial Holding Companies

The Inspection Manual for Financial Holding Companies (formulated in July 2003) is intended for use by inspectors when inspecting financial holding companies. The contents of this manual are based on the Inspection Manual for Deposit-Taking Institutions (hereinafter referred to as the Financial Inspection Manual''), the Inspection Manual for Insurance Companies and the Inspection Manual for Securities Companies, and it lists check items for each of the lines of business covered by financial conglomerates in a structure similar to the manuals used as references. However, as the Inspection Manual for Insurance Companies and the Financial Inspection Manual underwent sweeping revisions in June 2006 and February 2007, respectively, the FSA revised the Inspection Manual for Financial Holding Companies mainly regarding the Checklist Concerning Bank Holding Companies and the Checklist Concerning Insurance Holding Companies. The FSA announced the revised Inspection Manual for Financial Holding Companies on July 9, 2007, after subjecting the draft thereof to the public comment process.

The revised manual is to be applicable starting with inspections conducted in Program Year 2007 (in July and thereafter).

Note: Regarding the Checklist Concerning Securities Holding Companies, the FSA made no revision considering the fact that the Securities and Exchange Surveillance Commission was in the process of formulating the Inspection Manual for Financial Instruments Business Operators.

3. Structure of Revised Manual for Financial Holding Companies

The revised manual is comprised of chapters entitled ''Basic Concept'' concerning the inspection of financial holding companies, ''Checklist for Group Business Management (Governance) System'', ''Checklist for Group Capital Management System'' and ''Checklist for Group Comprehensive Risk Management System. ''

4. Outlines of Checklists

Note: When examining the above-mentioned management systems, the inspector shall refer to the relevant sections of the Financial Inspection Manual and the Inspection Manual for Insurance Companies as necessary, in addition to the Inspection Manual for Financial Holding Companies, in light of the roles and responsibilities of the financial holding company inspected.

5. Conclusion

The Inspection Manual for Financial Holding Companies was formulated in light of the actual status of financial holding companies in ways to enable inspectors to deal with a variety of cases, and financial holding companies and their group companies do not necessarily have to meet all of the requirements of this checklist. The FSA hopes that financial holding companies will implement measures in a manner suited to the size and characteristics of their businesses under the principle of self-responsibility in light of this manual by fully exploiting their resourcefulness and creativity.

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On December 8, 2006, the Trust Act (Act No. 108 of 2006) and the Act on Coordination, etc. of Related Acts Pertaining to Enforcement of the Trust Act (Act No. 109 of 2006) (hereinafter referred to as the ''Coordination Act'') were approved and enacted at the 165th session of the Diet, and were promulgated on December 15, 2006. In order to provide appropriately for matters pertaining to the revision of the Trust Act, the Trust Business Act was revised by the Coordination Act, which was submitted by the Ministry of Justice and which made various revisions of Acts that had become necessary as a result of the revision of the Trust Act.

In line with this, the Financial Services Agency (FSA) invited public comments on the Cabinet Order on Coordination of FSA Related Cabinet Orders Pertaining to the Enforcement of the Trust Act and the Act on Coordination, etc. of Related Acts Pertaining to Enforcement of the Trust Act (Draft) and the Cabinet Ordinances, etc. for Partial Revision of the Ordinance for Enforcement of the Trust Business Act, etc. (Draft) on April 4, 2007 and published the results thereof on July 13, 2007.

The day of the enforcement of these Acts, Cabinet Orders and Cabinet Ordinances is September 30, 2007, which is the day of the enforcement of the Trust Act (Act No. 108 of 2006).

The revisions of the Trust Business Act and the related Cabinet Order and Cabinet Ordinance pertaining to the revision of the Trust Act are outlined below.

1. Basic Concept

In line with the revision of the Trust Act, discussions were also held on the revision of the Trust Business Act at the sessions of a joint meeting between the Second Subcommittee, Sectional Committee on Financial System, Financial System Council and the Trust Working Group which started on November 16, 2005. On January 26, 2006, the joint meeting compiled a report entitled ''Review of the Trust Business Act Pertaining to the Revision of the Trust Act.'' In this report, the joint meeting indicated the following concept with regard to the revision of the Trust Business Act pertaining to the revision of the Trust Act:

(1) The framework of the Trust Business Act prior to revision shall be maintained in principle regarding the need for protection of settlors and beneficiaries and how trust business should be regulated.

(2) Protection of beneficiaries shall be ensured by establishing the appropriate requirements for the market entry of businesses handling new categories of trust and having such businesses assume the same obligations of trustees as those of trust companies.

(3) Provisions on the obligations of trustees shall be established for parts of the Act that are practically causing inconvenience, while taking into consideration the demand for protection of beneficiaries.

The work to revise the Trust Business Act was carried out based on this concept.

2. Obligations of Trustees Related to Management and Administration

Under the new Trust Act, the provisions on the due care of a prudent manager and duty of loyalty regarding trustees have been changed into discretionary provisions, allowing for a reduction of such obligations through a contract between the parties concerned. Under the Trust Business Act, however, the due care of a prudent manager and duty of loyalty continue to be imposed on trust companies as mandatory provisions. This is because, if the level of the due care of a prudent manager is to be left to a contract between the parties concerned, the contract would be excessively advantageous for the trust company due to a gap in access to information between the trust company and the customer, and would put customer protection at risk. Another reason is that there is a need to prevent trustees from abusing their authority or causing conflicts of interest and to ensure that they perform their obligations fully.

With regard to the prohibition of acts that cause conflicts of interest, such as self-dealing, the cases in which such acts are considered not to hinder beneficiary protection have been specified in the Ordinance for Enforcement of the Trust Business Act so as to clarify the permissible categories of trade, in order to define clearly the requirements for cancellation of the prohibition. In addition, the scope of interested persons with whom trade is restricted has been reviewed by referring to the scope of persons having a specified relationship under the Banking Act.

As for the entrustment of trust businesses to a third party, the new Trust Act provides that a trustee may, in principle, entrust trust affairs to a third party based on the due care of a prudent manager even when such entrustment is not prescribed in the deed of trust. On the other hand, the Trust Business Act maintains the conventional framework in which a trust company cannot, in principle, entrust trust businesses to a third party unless such entrustment is prescribed in the deed of trust and the same due care of a prudent manager and duty of loyalty as those of the trust company are imposed on the entrusted party.

However, it was provided that entrustment is possible, even when such entrustment is not prescribed in the deed of trust, to the extent that it is not problematic in terms of beneficiary protection with regard to certain acts that are specified by the Ordinance for Enforcement of the Trust Business Act including the following: (1) businesses pertaining to the preservation of trust property; (2) businesses aimed at using or improving trust property to the extent that the nature thereof does not change; and (3) acts that are ancillary to the performance of businesses of the trust company. When the entrusted party is not considered to have the same function as the trust company, there would be no need to impose the same obligations on the entrusted party, so the scope of the obligations to be imposed on the entrusted party is to be limited in such a case.

3. Regulations on New Trust Categories under the Trust Business Act

Under the new Trust Act, the following four new categories of trust were introduced: a trust issuing a beneficiary certificate, a trust created by the method set forth in Article 3(iii) of the Trust Act (a declaration of trust), a trust that does not specify the beneficiary (a purpose trust), and a limited liability trust.

Among these, the conventional regulations on market entry and acts for trustees of ordinary trusts are imposed, in principle, on trustees of a trust issuing beneficiary certificates, a limited liability trust and a purpose trust, while additionally imposing the duty to explain and/or other obligations that would be necessary according to the trust category. For example, since a purpose trust does not specify the beneficiary, there is no need to consider beneficiary protection. A trustee is to assume the duty to explain and the duty to deliver documents to the settlor. Meanwhile, unlike an ordinary trust, a limited liability trust is subject to property distribution regulation. Therefore, a trustee of a limited liability trust is to assume the ordinary duty to explain as well as the duty to explain property distribution regulation to the settlor.

On the other hand, new rules were created for the declaration of trust based on an idea that it should be regulated by rules separate from those for a trust business. Even if an entity executes a declaration of trust for a business purpose, it would not correspond to a trust business, but when it executes a declaration of trust for a large number of beneficiaries, it needs to obtain the registration set forth in Article 50-2(1) of the revised Trust Business Act. The details of a case that corresponds to the case of executing a declaration of trust for a large number of beneficiaries are prescribed in concrete terms in the Order for Enforcement of the Trust Business Act; a large number of beneficiaries is regarded as being 50 beneficiaries or more.

An entity that executes a declaration of trust assumes the same obligations of a trustee related to management and administration as those of an ordinary trust company, in principle. However, the requirements for registration of a declaration of trust differ from those for the license/registration of a trust company, although they have many points in common. For example, the minimum amount of stated capital required for registration of a declaration of trust is 30 million yen, and an entity that is not a stock company can also obtain the registration as long as it is a company that has been established under the Companies Act. The entity is not required to be dedicated to such business alone, but it is required to secure the soundness of its other businesses objectively in terms of ordinary profit and loss and amount of net assets. Furthermore, in the case of a declaration of trust, an entity must assume an additional legal obligation of investigation by a third party such as a lawyer or a certified public accountant regarding the status of the property to be placed in trust, in order to prevent the sale of beneficial interest in a dummy property or an overvalued property to a large number of investors. The detailed contents of the regulation on engagement in additional business and the actual matters for investigation concerning a third-party investigation are specified by the Ordinance for Enforcement of the Trust Business Act.

The provisions of the Trust Act concerning a declaration of trust shall not be applied until the day on which one year has elapsed from the day of the enforcement of the Trust Act. Likewise, the provisions of the Trust Business Act concerning a declaration of trust shall not be applied until then.

4. Exclusion from Trust Business

A trust business is defined as an ''operation accepting trusts.'' However, apart from the case of simply concluding trust contracts, sometimes there are cases where a trust is created in a manner that is not expected by the parties concerned when depositing money in accordance with another contract. Since it is not reasonable to apply the Trust Business Act to such unexpected cases, the following acts have been specified by the Order of Enforcement of the Trust Business Act as acts that are excluded from a trust business: (1) the receipt of a deposit of money by a lawyer, etc. for the purpose of using it for the expenses necessary for the services of the lawyer or any other receipt of a deposit of money by a mandatary under a mandate contract for the purpose of using it for the expenses necessary for the mandated affairs; and (2) the receipt of a deposit of money by a contractor for the purpose of using it for the expenses necessary for his/her work.

The only types of acts excluded from a trust business under the Trust Business Act are those where a trust is created in a manner that is unexpected even by the parties concerned as a result of concluding another contract. It should be noted that the excluded act is not the act of concluding the trust contract itself.

Similarly, with regard to a declaration of trust, certain cases, where the declaration is considered not to hinder beneficiary protection (such as cases where a servicer declares a trust over money, etc. it has collected from debtors), have been specified by the Order/Ordinance for Enforcement of the Trust Business Act as exceptions to the registration of a declaration of trust.

The revisions of the Trust Business Act and the related Cabinet Order and Cabinet Ordinance pertaining to the revision of the Trust Act have been briefly outlined above. In addition to the matters already mentioned, many other necessary revisions have been made pertaining to the revision of the Trust Act. For further details, access ''Results of Public Comments on the Cabinet Order on Coordination of FSA Related Cabinet Orders Pertaining to the Enforcement of the Trust Act and the Act on Coordination, etc. of Related Acts Pertaining to Enforcement of the Trust Act (Draft) and the Cabinet Ordinances, etc. for Partial Revision of the Ordinance for Enforcement of the Trust Business Act, etc.

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The Securities and Exchange Surveillance Commission (SESC) on July 27 announced the ''Basic Policy and Plan for Securities Inspections in Program Year 2007,'' thus clarifying its implementation policy concerning the inspections of securities companies and the number of companies to be inspected. The outline of the Basic Policy and Plan for Securities Inspections is as explained below.

In accordance with its basic mission of securing the fairness of transactions and maintaining investors' confidence in the market, the SESC aims to establish a fair and highly transparent market for financial instruments and enhance investors' confidence in the market, with particular emphasis on the protection of individual investors.

In this context, the SESC intends to take a flexible approach to inspections based on the basic policy stated below while paying constant attention to market conditions from a broad perspective. At the same time, it will endeavor to conduct inspections in an effective and efficient manner so as to identify the essential nature of problems at the companies inspected with a view to enabling voluntary activities of the companies such as internal control to function appropriately and encouraging the companies to deal with customers and the market sincerely.

Furthermore, based on the results of the inspections, the SESC intends to recommend administrative actions by the Financial Services Agency as necessary and pay attention to and take appropriate actions, such as presenting proposals, regarding the establishment of new market rules.

1. Priority Matters in Administrative Operations for Ensuring Efficient Inspections

The SESC will formulate inspection plans in accordance with risks faced by the companies inspected by taking account of a variety of information and documents, concerning matters such as the position of the companies in the market and their problems, in a comprehensive manner. In addition, it will conduct special inspections as necessary based on specific information or cross-sectoral themes.

Furthermore, the SESC will collaborate with the inspection section of the Ministry of Finance's local finance bureaus, inspect financial conglomerates concurrently with the Financial Services Agency's Inspection Bureau, and exchange information with self-regulatory organizations, supervisory bureaus and foreign securities industry regulatory authorities regularly or on an as-needed basis.

It should be noted that by the time the Financial Instruments and Exchange Act comes into force, the Basic Policy for Securities Inspection and the Securities Inspection Manual will be revised.

2. Priority Matters in Implementation of Inspection for Ensuring In-Depth and Effective Inspections

The SESC will conduct comprehensive analysis of the relationship among various information and documents so as to ensure in-depth inspections. Regarding companies that are not familiar with regulations on financial instruments business, including companies inspected for the first time, the FSA will focus its inspection on their institutional culture.

In addition, the SESC will not only examine activities that could prevent fair pricing but also look closely into the transaction management system of the companies inspected. Furthermore, it will conduct in-depth examination of internal control, since the status of internal control is a key factor for judging the attitude of the companies inspected.

It should be noted that the SESC will continue to focus its inspection of investment management business operators on the status of compliance with legal requirements such as duty of loyalty and duty of prudence.

Under the Basic Plan for Securities Inspection in the current program year, a total of 135 Type I financial instruments business operators (including 115 to be inspected by local finance bureaus, etc.) and 60 companies engaging in investment management business and in investment advisory/agent business (including 30 to be inspected by local finance bureaus, etc.) will be inspected. In addition, self-regulatory organizations and Type II financial instruments business operators, which are included in the list of companies subject to inspection for the first time, will be inspected as necessary.

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