Guidelines for supervision are formulated and published so as to ensure the consistency of the activities of regulatory authorities such as the Financial Services Agency (FSA) and local finance bureaus of the Ministry of Finance and enhance transparency over administrative actions and foreseeability for business operators. On Sept. 30 this year, the Financial Instruments and Exchange Act, which seeks to ensure full compliance with rules concerning investor protection across various business sectors and promote financial innovation, took effect. In this context, the FSA has systematically sorted out various guidelines for supervision applicable to individual business sectors under a traditional legal framework as well as the guideline for administrative processes. In addition, the FSA established a cross-sectoral and comprehensive approach to supervision, necessary viewpoints and a suitable method of supervision in accordance with regulations specified by this act for the first time in relation to businesses and activities. The Comprehensive Guideline for Supervision of Financial Instruments Business Operators was decided and announced on July 31, after undergoing the public comment process starting in April 2007. The outline of this guideline is as explained below.

1. Sorting-out and Unification of Guidelines of Supervision

Currently, the supervisory authorities are dealing with securities companies, registered financial institutions, financial futures trading firms, investment trust management firms, and investment advisory firms based on individual laws applicable thereto and individual guidelines such as the Comprehensive Guideline for Supervision of Securities Companies, the Comprehensive Guideline for Supervision of Financial Futures Trading Firms and the Guideline for Administrative Processes (concerning points of attention in the supervision of investment trust management firms and investment corporations as well as securities investment advisory firms). Following the effectuation of the Financial Instruments and Exchange Law, these firms will be grouped together in the category of financial instruments business operators and will be, in principle, subject to uniform regulations on businesses and activities. Accordingly, the FSA has decided to sort out guidelines for supervision systematically.

First, the FSA sorted out and unified supervisory viewpoints and methods concerning these firms by formulating the Comprehensive Guideline for Financial Instruments Business Operators (hereinafter referred to as the ''New Guideline''). Furthermore, the FSA decided to make the new guideline a comprehensive one applicable across various sectors by including in it viewpoints related to firms to be subjected to supervision for the first time, such as companies engaging in fund business as well as companies that have until now been supervised based on different laws and guidelines for supervision, such as companies engaging in the sale of trust beneficiary interests and commodity fund business.

2. Basic Concept

In order to ensure that the Japanese economy will maintain sustainable development, it is important to redress its excessive dependence on indirect finance and promote a shift to direct finance and market-based indirect finance. In other words, it is important to accelerate the flow of funds from savings to investment. Such a shift is expected to contribute to the realization of a market attractive for market participants, the growth of companies and the development of the economy by bringing the following four benefits.

1) To realize a solid and advanced financial system that provides risk-sharing capability by promoting structural change in ways to enable a number of market participants to bear risks according to their respective capacity, thereby spreading the risks wide (prevention of a weakening of the financial system that may be caused by the concentration of risks in indirect finance).

2) To promote corporate innovation by ensuring smooth supply of risk money.

3) To improve the profitability of Japanese companies by realizing a market with sufficient depth for the monitoring of business managers through a shift of funds from savings to investment and thus enhancing the efficiency of capital.

4) To realize a diverse and wealthy society amid the decline of the birthrate and the aging of society by providing investors with a variety of means for asset management.

In order to achieve the above benefits, it is necessary to ensure not only that financial instruments business operators, which act as intermediaries, win the trust of people but also that financial regulators engage in appropriate institutional designing and implement adequate measures to motivate financial instruments business operators to strengthen governance with due consideration of customer protection and risk management.

3. Points of Attention in Administrative Processes Related to Supervision

(1) Policy for supervision in the early part of the program year and hearings

In the early part of each program year, the FSA will formulate and announce a guideline for supervision for the year in order to clarify priority matters concerning supervision in the year. In addition, the FSA will hold hearings focusing on earnings and comprehensive hearings covering a broad range of issues on a regular or as-needed basis.

(2) Implementation of monitoring surveys on funds

The FSA will continue the monitoring surveys concerning information related to the capital regulation ratio that it has until now been conducting on securities companies, etc. In addition, it will conduct similar surveys on investment management business operators in order to identify 1) the fund name, 2) the fund type and 3) the total amount of assets managed. These surveys will also be conducted on management firms subject to the notification requirement (A provision to this effect is included in Chapter IX. ''Evaluation Items and Procedures Concerning Supervision (special businesses for eligible institutional investors)'' of the guideline).

The purpose of the above-mentioned monitoring surveys is to grasp the actual status of funds managed in Japan. We assume that in light of the need to promote financial innovation and the global trend of supervision, some fund management firms should not necessarily be subjected to direct and rigorous supervision. On the other hand, we believe it is useful in terms of financial supervision to get a rough picture of the types and amount of funds managed in Japan, including funds managed by the aforesaid fund management firms, and to use data thus collected to promote dialogue.

(3) Warning against non-registered firms

In recent years, there have been many cases in which investors incurred financial damage after investing in unlisted stocks in response to solicitation by non-registered firms. When the FSA finds inappropriate activities by non-registered firms after receiving complaints from investors and inquiries from the investigative authorities, it is ready to warn the firms concerned in writing and take necessary actions in collaboration with police, local consumer centers, etc.

(4) Points of attention in the implementation of administrative actions

When examining the implementation of administrative actions such as the issuance of a business improvement order, a business suspension order, an order for the revocation of registration and a license in relation to an inappropriate act by an financial instruments business operators, the FSA will take account of 1) the seriousness and malicious nature of the relevant act, 2) the business management system under which the relevant act occurred and the appropriateness of the operational system and 3) attenuation factors, in order to make a final decision as to the following matters:

• whether it is appropriate to leave the implementation of improvement measures to the discretion of the financial instruments business operator concerned.
• whether it is necessary to require the firm to concentrate on improving its business for a certain period of time.
• whether it is appropriate to allow the firm to continue its business.

4. Evaluation Items and Various Procedures Concerning Supervision (general)

(1) Specification of viewpoints concerning regulations on advertisements

Regarding the business management system and the legal compliance system, the comprehensive guideline includes viewpoints related to the establishment of appropriate systems, as it previously did with regard to securities companies.

Regarding solicitation and explanations, the comprehensive guideline provides detailed viewpoints related to regulations on advertisements, concerning which the Securities and Exchange Law had no particular provision. The guideline makes it clear that the scope of regulated advertisements covers materials for solicitation, web sites, postal mail, correspondence letters, facsimile documents, e-mail, fliers and pamphlets.

In addition, the guideline calls for attention to be paid, concerning the contents of advertisements, to 1) whether important items (fees, the risk of principal loss and the risk of loss exceeding the principal) are specified, 2) the risk of principal loss and the risk of loss exceeding the principal are indicated in a clear and precise manner, with the indication made in characters with a size not significantly smaller than the largest characters in the relevant advertisement, 3) whether there is not any representation that may unduly encourage investment or mislead investors about the yield level and the loss compensation guarantee, or any exaggerated expression, and 4) whether an appropriate system is in place for screening advertisements.

Regarding the identity verification and the obligation for reporting suspicious transactions, the guideline specifies in detail matters concerning the establishment of a desirable system.

(2) Specification of viewpoints concerning eligibility of officers and employees

Regarding criteria for the eligibility of officers and employees (so-called ''fit and proper principles''), there is a requirement that the authorities should refuse registration of an applicant who ''does not have a personnel structure sufficient to conduct financial instruments business.'' As criteria for refusing registration, a Cabinet Office Ordinance stipulates that 1) the applicant should be deemed to be incapable of executing the relevant business appropriately in light of the status of securing officers and employees with sufficient knowledge and experiences and the organizational structure and 2) the applicant should be deemed to pose the risk of undermining the credibility of the financial instruments business because of the inclusion among its officers and employees of personnel whose qualifications are inappropriate in light of their backgrounds and circumstances such as their relations with organized crime groups or with members of such groups. These criteria shall be applied to companies engaging in financial instruments business excluding those engaging in investment advisory and agency business.

With due consideration of the above-mentioned rules, the new guideline for supervision specifies what kind of viewpoints and methods should be adopted when supervision of financial instruments business operators is conducted in practice.

First, the guideline calls attention to whether officers and employees of the supervised financial instrument firms have sufficient knowledge and experience concerning governance and compliance and also points to the need to make sure that officers and employees are not members (or former members) of organized crime groups, do not have close relations with organized crime groups, and do not have experience of being imposed a fine or sentenced to imprisonment or higher punishment by violating laws governing financial institutions such as the Financial Instruments and Exchange Act (Special attention should be paid to records on fraud charges.).

The supervisory authorities are required to not only check the above-mentioned points when registration is made but also, after registration, to examine whether or not there is any problem regarding these points and take administrative actions against registered firms if need be.

5. Evaluation Items and Various Procedures on Sector-by-Sector Basis

(1) Type I financial instruments business

Concerning the ''soundness of financial conditions,'' the guideline specifies points of attention with regard to the capital regulation ratio.

Concerning the ''appropriateness of business,'' the guideline specifies points of attention separately for companies engaging in securities-related business and for companies engaging in over-the-counter derivatives business. Basically, the points specified for companies engaging in securities-related business include those specified by the guideline for the supervision of securities companies plus new viewpoints that have emerged in recent years in relation to supervision and the points specified for companies engaging in over-the-counter derivatives business include those specified by the guideline for the supervision of financial futures trading firms plus some new viewpoints.

Concerning ''the exercise of an appropriate market intermediary function,'' the new comprehensive guideline provides viewpoints for supervision in relation to four themes--1) improvement in the credibility of the operations as market intermediaries, 2) the exercise of the function of checking issuers, 3) the exercise of the function of checking investors and 4) the maintenance of self-discipline as market players--in light of deliberations conducted at a consultation forum concerning the market intermediary function, etc. of securities companies'' that was held last year by the Supervisory Bureau, a summary report thereof and the measures implemented by self-regulatory organizations such as the Japan Securities Dealers Association in line with the summary report.

(2) Type II financial instruments business

With regard to second financial instruments business, the guideline specifies rules concerning persons engaging in the sale, solicitation, public offering or private placement of interests in collective investment schemes as defined comprehensively by the Financial Instruments and Exchange Act. We assume such persons include those who were not subject to supervision by the authorities before the enforcement of this act and those who deal in funds with low transparency and liquidity regarding which it is extremely difficult for investors to grasp the actual status and conduct evaluation.

Therefore, the guideline calls attention to whether financial instruments business operators, when dealing in the aforesaid interests, provide investors with sufficient explanations regarding the outline of association contracts, etc., the outline of the business actually conducted by the relevant fund, and risks involved in interests under the relevant contract.

In particular, the guideline requires that the authorities take necessary actions in collaboration with the National Police Agency and other organizations concerned in the case where the relevant fund actually engages in pyramid selling and the like or constitutes a pyramid investment scheme or an endless money chain.

(3) Investment management business

With regard to investment management business, the guideline specifies points of attention concerning discretionary investment business, investment trust management business and fund management business. As items to be added to the ''general'' category, it also specifies points of attention concerning the management and administration of assets in relation to the business execution system and points of attention concerning the prohibition of exaggerated expressions in advertisements in relation to the system for solicitation and explanations.

In addition, as points of particular attention regarding companies engaging in the management of real estate-related funds, the guideline specifies evaluation items concerning two important matters--the system for ensuring due diligence on the occasion of the acquisition and sale of real estate and the system for preventing conflicts of interest. Companies engaging in the management of real estate-related funds include various types of firms such as anonymous associations and REITs (real estate investment funds). The guideline provides common points of attention useful in the case of investment in real estate as a specific resource.

(4) Investment advisory and agency business

With regard to investment advisory and agency business, the guideline specifies additional rules concerning exaggerated expressions in advertisements.

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The Financial Services Agency (FSA) on July 31, 2007 made necessary revisions to the Guideline for Financial Conglomerates Supervision and decided to apply it from September 30, 2007, when the Financial Instruments and Exchange Act was to take effect. The outline of the revision is as shown below.

1. Background to Revision

In line with the enforcement of the Financial Instruments and Exchange Act (hereinafter referred to as the ''New Act''), the FSA partially revised the definition of a financial conglomerate based on the concept of the New Act and made necessary wording changes.

2. Contents of Revision

Previously, a financial conglomerate was defined as a financial group that includes two or more of the following categories of entities: 1) an entity engaging in banking business. 2) an entity engaging in insurance business and 3) an entity engaging in securities business, etc. The ''entity engaging in securities business, etc.'' referred to an entity engaging in securities business, investment trust management business or investment advisory business. As the enforcement of the New Act makes it necessary to revise the definition of the ''entity engaging in securities business, etc.,'' the FSA decided to revise the definition of a financial conglomerate as follows, too.

First, an entity engaging in securities business, etc. as defined previously is now defined as a ''Type I financial instruments business operator engaging in securities-related business.'' In line with the fact that fund management companies, in addition to investment trust management companies and investment advisory companies engaging in business related to discretionary investment contracts, are subject to supervision by the FSA under the New Act, said companies are categorized together under the definition of ''investment management business operators.'' It should be noted that under the New Act, an investment advisory company as defined previously is redefined as an ''entity engaging in investment advisory and agency business'' and treated separately from an entity engaging in business related to discretionary investment contracts. However, since most of the investment advisory companies that formed part of financial conglomerates as defined previously were concurrently engaging in investment trust management business, investment advisory companies are excluded as an element of the definition of a financial conglomerate in the latest revision.

Following the effectuation of the New Act, a corporate group that includes two or more of the three categories of entities--1) ''Type I financial instruments business operators engaging in securities-related business'' and an ''entity engaging in investment advisory and agency business,'' 2) an entity engaging in banking business and 3) an entity engaging in insurance business-- is defined as a financial conglomerate.

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