January 27, 2006
Financial Services Agency
Government of Japan
Administrative Actions on State Street Bank and Trust Company, Tokyo Branch
I. Description of the Administrative Actions
Business Improvement Order based on Article 47 (2) and (3) and Article 26 (1) of the Banking Law
(1)An internal control system for compliance (including adequate staffing and the construction of a proper organization and structure) must be established with due emphasis on the following points:
(i) An unequivocal statement of the management's commitment and responsibilities with respect to compliance with laws and regulations.
(ii) Reinforcement of functions of legal and compliance departments.
(iii) Thorough understanding of and compliance with laws, regulations and rules by officers and employees.
(iv) Enforcement of legal and proper branch operations (i.e., prevention of recurrence of unlawful operations).
(v) Development of basic control policies and procedures, etc. and development of an internal control system for branch operations.
(vi) Creation of segregation of business among the affiliates of the State Street group in Japan and introduction of a proper customer information management and control system.
(vii) Fundamental re-evaluation of the audit methods implemented for the purpose of ensuring proper operations in compliance with laws, regulations and rules, and execution of operational audits and follow-ups.
(2)Responsibilities of the officers and employees who gave rise to the problems described in ''II. Reasons for the Administrative Actions'' hereunder and the matters stated in the notice of inspection results and the reporting order based on Article 24-(1) of the Banking Law, including violations of laws and regulations, must be clarified.
(3)A plan to improve business operations pertaining to (1) and (2) described above, as well as matters that are described in the notice of inspection results and the reporting order based on Article 24-(1) of the Banking Law, must be submitted by February 27, 2006 and implemented promptly. (The improvement plan must encompass the development of a governance and internal control system to ensure the implementation of the plan, as well as clear assignment of responsibilities to ensure the effectiveness of the plan.)
(4)Subsequent to the implementation of (3) described above and until the plan to improve such operations is fully carried out, a summary outlining the progress and implementation of the plan, etc. and the status of improvement must be prepared every three months, starting at the end of June 2006, to be submitted by the 15th day of the following month.
II. Reasons for the Administrative Actions
(1)The on-site inspection (notified on June 29, 2005) conducted by the Financial Services Agency (hereinafter referred to as the ''FSA'') and reports from State Street Bank and Trust Company, Tokyo Branch (hereinafter referred to as the ''Tokyo Branch'') under the provision of Article 24 (1) and Article 48 of the Banking Law revealed that the Tokyo Branch acted as a stock lending operator by establishing a trading desk specializing in stock lending on behalf of the Tokyo Branch's head office in the U.S. and conducted operations such as sales and solicitation, negotiation and conclusion of contracts, and execution of actual stock lending transactions between overseas institutional investors, State Street Trust and Banking Company, Limited, etc. as stock lenders and mainly foreign-affiliated securities firms, etc. as securities borrowers. The abovementioned operations breached the obligation of banks to refrain from engaging in non-banking operations under Article 12 of the Banking Law.
(2)Furthermore, the Tokyo Branch was found to have continued such a basic violation of the Banking Law as stated in (1) above without being aware of it within the Tokyo Branch until being inspected by the FSA, as a result of the bias towards business-line-oriented operations under the connections with the business division in the head office and the failure to assign legal and compliance managers and develop necessary internal control organization and structure for years. In addition, the Tokyo Branch was found to have basic problems in its internal control system, including the failure to develop basic control policies and procedures and a customer information management system for branch operations.
For further information, please contact:
Banks Division I, Supervisory Bureau
Tel: +81-(0)3-3506-6000 (ext. 3751, 3752)
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