January 27, 2006
Financial Services Agency
Government of Japan
Administrative Actions on State Street Trust and Banking Company, Limited
I. Description of the Administrative Actions
Order based on Article 26 (1) of the Banking Law and Article 8 (2) of the Law for Trust Business in Financial Institutions
(1)Operations for engaging in a new trust business associated with the management of trust assets must be suspended from February 6, 2006 to March 5, 2006 (excluding business with existing customers).
(2)In order to realize fair and proper operations as a trust bank, proper governance and compliance systems (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 commitment by management regarding compliance with laws and regulations, construction of responsible management and checking of systems by directors and auditors of State Street Trust and Banking Company (hereinafter referred to as the ''Bank''), and re-evaluation of the organization, framework and operational methods to unfailingly realize such goals.
(ii)Creation and development of independent governance and internal control systems and establishment of a clear system of responsibility at the Bank, predicated upon a fundamental re-evaluation of the present state of managerial involvement and monitoring of the Bank by the Bank's major shareholders, etc. (the financial holding company and the parent bank in the U.S.).
(iii)Thorough understanding of and compliance with laws, regulations and rules by officers and employees.
(iv)Creation of segregation of business and the establishment of firewalls required in operations among the Bank's major shareholders, etc. and the affiliates of the State Street group in Japan, and introduction of a proper customer information management and control system.
(v)Development and reinforcement of a system to ensure proper operations and processing pertaining to the management, settlement and clearing of trust assets and agency affairs in accordance with the extent of the development of IT system and staffing, etc., and establishment of a clear system of responsibility.
(vi)Development and reinforcement of a system to ensure unfailingly proper identification of the operational failures, operational errors, customer complaints, etc. in operations, investigation of the causes and prevention of such problems from recurring, establishment of a clear system of responsibility, and creation of a system to respond properly to concerns of trustors, etc. and provide explanations to them.
(vii)Development of a system to properly conduct audits, and implementation of proper audits and follow-ups.
(3)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 report ordered based on Article 24-(1) of the Banking Law, including violations of laws and regulations, must be clarified.
(4)A plan to improve business operations pertaining to (2) and (3) described above, as well as matters that are described in the notice of inspection results and the report ordered 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 a clear assignment of responsibilities to ensure the effectiveness of the plan.)
(5)Subsequent to the implementation of (4) 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. Governance System and Handling of Customer Information
(1)The on-site inspection (notified on June 29, 2005) conducted by the Financial Services Agency (hereinafter referred to as the ''FSA'') and a subsequent reporting order revealed that the Bank's financial holding company and the parent bank in the U.S. had established a Japan Branch (Tokyo) of a company registered in the State of Delaware in the U.S. out of FSA's scope of authority for inspection and supervision, appointed a representative who was given the title of Representative in Japan and Chief Executive Officer (hereinafter referred to as the ''Representative in Japan'') to be used externally, and primarily made the Representative in Japan substantially gain the management and control of the businesses of the Bank, the investment trust and advisory company, the operational service company belonging to the affiliates of the group in Japan from outside.
Harmful results of the aforementioned peculiar management structure and the existence of the Representative in Japan were identified in the Bank, in the form of the authority and responsibility of each director and the oversight in responsibility which should essentially be assumed by the Board of Directors, etc. being undermined. The Bank was also found to have problems in running trust operations resulting in the following basic violations of laws and regulations and breach of trust of customers, as managerial and operational monitoring and checking functions did not work properly while no audits were conducted by the auditor.
(2)The Representative in Japan of the Japan Branch of the company is found to have held a group-wide meeting, named the Executive Committee Meeting, assembling the top management, fund managers, etc. of the Bank and the investment trust and advisory company belonging to the group in Japan, shared a significant amount of undisclosed information on the Bank's customers including major trustors on a regular basis without their consent, shared information on the portfolio and the investment status of trust assets and other confidential information with the affiliates of the group in Japan in order to promote asset management services, etc., which constitutes a violation of the trust confidentiality agreement concluded with certain major customers which obliged the Bank to maintain the confidentiality of such information, etc.
(3)The Bank has failed to properly develop a control system for IT system management required for the secure management of customer information (including the review of internal control policy and procedure, introduction of monitoring and checking functions, and staffing required for the proper implementation of such control system). Therefore, the Bank also shares data including undisclosed customer information relating to trust investments, etc. with the affiliates of the group in Japan, the U.S. parent company, etc., and allows access to such data without limitation to each other.
Furthermore, the Bank is found to lack the ability to accurately acknowledge or take proper action in consideration of the impact on customers in the event that information is shared or leaked, which constitutes a breach of the confidentiality agreement, due to the failure of the Bank to introduce a system for supervising and controlling contractors who handle customer information, and the failure of the Bank and the operational service company of the group undertaking the aforementioned system management to develop a system for handling undisclosed information and material information on customers and checking that such information is being taken outside.
2. Violations of Laws and Regulations and Compliance System
(1)The Bank violates Article 20 of the Trust Law (which stipulates the duty that trustees should exercise sufficient caution when managing trust assets) concerning operations of the management, settlement and clearing of trust assets, as a result of many years of lax administration and operations, funds which should have been returned to trustors are being left unprocessed due to the lack of oversight and control by the top management, operations managers, etc. in regards to verifying the balance and managing the withdrawals and deposits of foreign-currency asset accounts, and necessary administrative procedures, verification, etc. have not been properly carried out for claiming and managing refunds of foreign taxes.
Moreover, even though the existence of many complaints, findings and inquiries from customers relating to operational incidents, etc. have not been passed on to control departments, etc. there has been no involvement by the Bank's management.
(2)With regard to the operation of stock lending as assets in trust, the Bank's services are continued via the security lending department of the Tokyo branch of State Street Banking and Trust Corporation in the U.S., which is being operated in breach of the obligation of banks to refrain from engaging in non-banking operations (Article 12 of the Banking Law). In addition, basic administration of dividend processing for stock lending is not properly executed.
(3)The Bank engaged in global custody sales and marketing activities with Japanese customers on behalf of a foreign bank (the parent bank in the U.S.) out of the jurisdiction of regulatory oversight under the Banking Law, and the Trust Law, etc., thereby breaching the obligation of banks to refrain from engaging in non-banking operations set forth in Article 12 of the Banking Law.
3. Accountability with respect to Trustors, etc.
Cases in which the Bank provided documents which were misleading to customers and contained misrepresentations in its written apologies and written background explanations issued to certain major customers such as trustors of pension funds have been confirmed. The Bank is found to have given explanations that undermine the trust of trustors, etc, and have problems in its control system. (Internal checking functions are not working.)
4. Auditors and Board of Auditors
The Bank is found to have problems in that the auditors and the board of auditors--whose basic duty is to ensure the Bank's sound and sustainable growth--are not properly functioning, due to the management structure involving the Japan Branch of the company and the existence of the Representative in Japan. In particular, no operational audits are being conducted with respect to the execution of duties by directors.
5. Response to Supervisory Authority
It took more than six months to make a final response to the reporting order after the completion of the inspection by the FSA, as its system of managerial responsibility has been undermined and is unable to make proper and prompt responses to the supervisory authority.
For further information, please contact:
Banks Division I, Supervisory Bureau
Tel: +81-(0)3-3506-6000 (ext. 3751, 3752)
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