[Explanations of Laws and Regulations]

1.Introduction

The Act for the Amendment of the Financial Instruments and Exchange Act (Act No. 58 of 2009) incorporates the development of institutional frameworks needed to build reliable and vibrant financial and capital markets, and was enacted on June 17 and promulgated on June 24, 2009. In response, the Cabinet Order for the Establishment of Relevant Cabinet Orders Following Enforcement of the Act for the Amendment of the Financial Instruments and Exchange Act, which is necessary to enforce the revised act, was decided by the Cabinet on December 22 and promulgated on December 28, 2009.

In principle, the effective date of the revised act is stipulated as “a date specified by a Cabinet Order, which may not exceed one year from the date of promulgation (June 24, 2009) of the Act for the Amendment of the Financial Instruments and Exchange Act (Act No. 58 of 2009).” Specifically, April 1, 2010 was made the effective date. (The Cabinet Order specifying the said effective date was also decided by the Cabinet on December 22 and promulgated on December 28, 2009.)

The cabinet orders and cabinet office ordinances pertaining to the revised act will, in principle, also be enforced from April 1, 2010.

However, the following provisions will be enforced from the dates as indicated:

• Under the introduction of regulations on credit rating agencies, those provisions pertaining to restrictions on solicitations that use credit ratings provided by unregistered credit rating agencies; and under the creation of a financial ADR system, those provisions pertaining to the use of designated dispute resolution bodies by financial institutions: October 1, 2010;

• Of the provisions pertaining to the mutual trading of products between financial instruments exchanges and commodity exchanges, those provisions pertaining to the actual mutual trading between exchanges: July 1, 2010, being the later of the “in-principle” effective date (April 1, 2010) and the effective date pertaining to the relevant provision of the revised Commodity Exchange Act (July 1, 2010);

• Of the provisions pertaining to the mutual trading of products between financial instruments exchanges and commodity exchanges, those provisions for the mutual trading of central counterparties (CCPs): within 18 months of the date on which the revised Commodity Exchange Act was promulgated (July10, 2009), which is the effective date of the revised Commodity Exchange Act (on or before January 9, 2011)

Following are the main revisions pertaining to the recently developed cabinet orders and cabinet office ordinances.

2. Introduction of regulations on credit rating agencies

Under the revised act, credit rating agencies which establish operational control systems to conduct their credit rating business fairly and adequately may obtain registration from the Prime Minister. The revised act has established a regulatory and supervisory framework for those credit rating agencies that have obtained registration (“CRA”)

Through the recently developed cabinet orders and cabinet office ordinances, measures have been taken, including:

(1) Prescribing as requirements for the development of operational control systems by CRAs:

• Quality control of the ratings process, ensuring of independence and fairness (securing personnel who have expert knowledge and skills, ratings determination by credit rating committees, and rotation of members, etc.)

• Prevention of conflicts of interest, legal compliance, dealing with complaints, and establishment of a supervisory committee

(2) As details of prohibited acts on CRAs, prescribing the prohibition on a credit rating analyst in charge from receiving money or goods from the issuer, etc. of the rated product

(3) Prescribing the requirements of ratings policies, etc. items to be contained in explanatory documents, which are subject to information disclosure

(4) As an explanatory obligation of a financial instruments business operator, etc. when providing the credit rating provided by unregistered credit rating agencies, prescribing (1) an outline of the policies and method used in determining the credit rating, and (2) the assumptions, significance and limitations of the credit rating, etc.

3. Establishment of an alternative dispute resolution system in the financial sector (financial ADR system)

The revised act puts in place a new legal framework for financial alternative dispute resolution (ADR) which provides a fast and simple out-of-court means for resolving problems relating to financial products and services. Specifically, a corporation or organization to process complaints and resolve disputes (dispute resolution body) is designated by the competent minister, and, while ensuring the neutrality and fairness of the dispute resolution, it has been decided to ensure the effectiveness of the dispute resolution by imposing financial instruments business operators, etc. with the obligation to comply with procedures, respect the outcomes and so on.

Through the recently developed cabinet orders and cabinet office ordinances, in connection with the designation of dispute resolution bodies, measures have been taken to hold explanatory hearings pertaining to the operational rules, and to prescribe the requirement that the ratio of financial institutions opposed to the operational rules shall be no more than one-third.

4. Revision of procedures for switching classification between professional investor and general investor

With respect to the procedures for switching investor classification between professional and general, the revised act has put in place such measures as:

(1) Making the effect of the change from professional to general investor effective until such time as the customer requests otherwise;

(2) While a change from general to professional investor will continue to remain in effect for one year, the customer shall be able to revert to a general investor earlier than this if they so request.

Given that customers need to make decisions with appropriate timing, measures have been taken through the recently developed cabinet orders and cabinet office ordinances, such as allowing an investor, who has previously changed classification from general to professional, to apply to renew their professional classification from as early as one month before the renewal deadline.

5. Introduction of the obligation for segregated management for securities-related OTC derivative transactions

Given the increase in securities-based CFD transactions and the like made with individual customers, under the revised act, securities-related over-the-counter (OTC) derivatives have been made subject to the obligation for segregated management related to margins deposited by customers. This excludes any derivatives, such as those traded between financial institutions, which are found not to impede investor protection.

Through the recently developed cabinet orders and cabinet office ordinances, measures have been taken, including prescribing transactions that are not subject to the obligation for segregated management, such as those transactions where the other party is a type I financial instruments business operator, a registered financial institution (banks, etc.), a qualified institutional investor (corporations that have a balance of securities of at least 1 billion yen, etc.), or a stock company with capital of at least 1 billion yen. In relation to this, margin regulations have also been adopted for securities-related OTC derivative transactions made with individuals.

6. Mutual trading of products between financial instruments exchanges and commodity exchanges

For the purpose of developing a fair and highly convenient market infrastructure, the revised act enhances the framework enabling the establishment of a commodity market through financial instruments exchanges and the establishment of a financial instrument market through commodity exchanges.

Through the recently developed cabinet orders and cabinet office ordinances, measures have been taken to restrict the voting rights held in financial instruments exchanges, including the development of provisions to equally treat either cases where a financial instruments exchange or a commodity exchange is the shareholder.

7. Revision of disclosure regulations

In the revised act, from the perspective of revising disclosure regulations pertaining to the “secondary distribution of securities,” the phrase “on the same conditions” has been removed from the definition of “secondary distribution of securities.” In addition, with respect to soliciting for the sale of already-issued securities, disclosure regulations have been put in place, requiring statutory disclosure, provision of simplified information or exemption from disclosure, according to the forms of sale (whether primary trade or secondary trade in substance), the nature of the securities (government bonds issued by major countries, listed securities on major overseas exchanges, and the like) and the attributes of investors (whether only qualified institutional investors, or a small number or large number of individual investors, etc.). Furthermore, it was decided to review the shelf registration system for corporate bonds and so forth, and to approve the description of “maximum outstanding balance” instead of “planned amount of issue” as one of the items to be listed on the shelf registration statement.

Through the newly developed cabinet order and cabinet office ordinances, the following measures have been taken as revisions of the disclosure regulations pertaining to the ‘secondary distribution of securities”:

• The secondary distribution of securities: the exemption from statutory disclosure when the information of the price and the issuer of the securities is easily available. (e.g. foreign government bonds and foreign listed stocks)

• Provided that, however, the information of foreign securities shall be provided as the content (e.g. information of an issuer) and the manner (e.g. via internet) are set out. Furthermore, the following measures have been taken as revisions to the prospectus system:

*For further details, please refer to the Results of public comments on the draft government ordinance and draft cabinet office ordinance, etc. on the 2009 partial revision of the Financial Instruments and Exchange Act etc. (December 22, 2009) and Results of the public comments on the draft cabinet office ordinances, etc. pertaining to those parts of the 2009 partial revision of the Financial Instruments and Exchange Act, etc. regarding the corporate information disclosure system (December 28, 2009) in the “Press Releases” section of the FSA website. (Japanese only)

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