(Provisional Translation)

November 16, 2004
Financial Services Agency

Measures for Ensuring Confidence in the Disclosure System

Since the middle of October, it has been discovered that some issuers have engaged in improper treatment of the disclosure requirements stipulated in the Securities and Exchange Law (''SEL''). The Financial Services Agency (''FSA'') recognized that these incidents could shake public confidence in the Japanese disclosure system. Thus, in order to ensure confidence in the Japanese disclosure system, the FSA is to actively carry out the following measures:

1. Framework for Reviewing Statutory Disclosure Documents

(1) The authority to carry out inspection and demand submission of reports regarding the statutory disclosure documents such as annual reports will be transferred from the Kanto Local Finance Bureau to the Securities and Exchange Surveillance Commission (''SESC'') effective in July 2005. Details of the entire framework for reviewing statutory disclosure documents are to be discussed as a part of the ''FSA Overall Review Project,'' the main purpose of which is to comprehensively review and improve the overall organization and practices of the FSA.
(Note) Through the revision of the SEL which was passed by the Diet in June 2004, the functions of inspecting securities companies will be integrated into the SESC, and the authority to carry out inspection of investment trust companies and investment advisers will also be transferred from the FSA to the SESC, effective in July 2005.
(Note) The Kanto Local Finance Bureau covers the Tokyo area.
(2) The FSA is to open the ''Disclosure Hotline'' available to the public on November 16, 2004, in order to enhance information gathering regarding possible violations of disclosure requirements.
(3) The FSA is to accelerate the enhancement of the Electronic Disclosure for Investors' NETwork (''EDINET''), especially the introduction of the Extensible Business Reporting Language (''XBRL''), in order to improve the FSA's ability to analyze statutory disclosure documents. For this purpose, the FSA is to establish the ''Council for the Advancement of the EDINET'' on November 24, which is to be composed of the relevant parties involved in the EDINET system.
(Note) Through EDINET, issuers can make disclosures to meet the disclosure requirements stipulated in the SEL. The EDINET is expected to reduce the administrative cost of issuers and to allow investors fair and fast access to corporate information. The XBRL is a computer language which enables efficient processing of financial information.
(4) The FSA, through the local financial bureaus, is to instruct on November 17 all the issuers with continuous disclosure requirements to voluntarily review the information on major shareholders and related information in their disclosure documents, and to submit correction reports as soon as possible if necessary.

2. Enhancing Auditor Oversight

(1) The FSA is to consider the following additional disclosure requirements for issuers:
  • a disclosure of information concerning their auditor lineup
  • a disclosure of the length of time that their auditors have been auditing them on a consecutive basis.
(2) The Certified Public Accountants and Auditing Oversight Board (''CPAAOB'') is to pay special attention to the following considerations when monitoring the quality control review of each auditor by the Japanese Institute of Certified Public Accountants (''JICPA'');
  • whether individual accountants are conducting thorough and proper audits in accordance with the relevant laws and standards from the viewpoint of audit quality control
  • whether auditors that audit the same issuers on a consecutive basis for a long period are conducting independent and proper audits.
For this purpose, the CPAAOB is to request the JICPA to give special attention to the above considerations in its quality control review of each auditor.
(Note) The CPAAOB was established in April 2004 as the new independent auditor oversight body, through the comprehensive revision of the Certified Public Accountants Law in Japan.

3. Further Development of the Disclosure System

The FSA is to ask the Disclosure Working Group of the First Subcommittee of the Financial System Council, the third party advisory body to the FSA, to consider the following issues as a part of its current discussions from this October on the further development of the disclosure system:

(1) the introduction of the following requirements regarding internal control over financial reporting;
  • an assessment by management of the effectiveness of internal control over financial reporting
  • an auditing by CPAs or audit firms of the above assessment by management
(2) an expansion of the scope of the administrative civil money penalty system to include breaches of the continuous disclosure requirements
(Note) Through the revision of the SEL which was passed by the Diet in June 2004, the introduction of the administrative civil money penalty system for breaches of the disclosure requirements for registration statements will take effect in April 2005.
(3) an enhancement of disclosure of governance-related information (e.g. the organization, staff and procedures for conducting internal audits; the auditor lineup; the consecutive periods of auditing by the same auditor)
(Note) The disclosure of governance-related information has been required since FY 2003.
(4) an enhancement of disclosure about a parent company by a public subsidiary, in cases in which the parent company is not under the continuous disclosure requirements

4. Request to Stock Exchanges and the Japan Securities Dealers Association

The FSA is to request the stock exchanges and the Japan Securities Dealers Association, which operates the OTC market called ''JASDAQ'', on November 16 to take necessary measures, such as the amendment of listing rules, to ensure appropriate and timely disclosure of corporate information.

(Note) The JASDAQ has submitted an application for licensing as a stock exchange to the FSA.

Contact :

Financial Services Agency, Japan
(Tel +81-(0)3-3506-6000)
Yu Ozaki (ext 3651)
Senior Deputy Director, Office of
Corporate Accounting and Disclosure

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