TAKEO TAKAHASHI
New Chairman
INAUGURAL ADRESS

Securities & Exchange Surveillance Commission
23rd July 2001

Contents

Takeo Takahashi
Inaugural Address

Tokyo, 23^rd July 2001

1. Mission of the SESC

'Ensure the Fairness of Securities Transactions, and Maintain Investors' Confidence in Markets' is the Mission of the Securities & Exchange Surveillance Commission. I believe that to maintain investors' confidence in markets will lead to the development of securities markets, ultimately to that of the national economy. The development of the national economy necessitates properly functioning securities markets, where ordinary investors are willing to participate. As a corollary, in order that those investors are willing to join the markets, the fairness of each securities transaction must be ensured.

It is enormously being argued that direct financing through capital markets, in addition to indirect financing through bank loan, should be developed in order to invigorate the sluggish Japanese economy. The Emergency Economic Package announced by the Government in April shows various policies such as tax incentives to invite individual investors into securities markets. Let me say that the most important is, inter alia, to enhance steady confidence of investors in the markets. For, no matter how open and international the markets should be, without the confidence in the fairness of the markets, nobody would be willing to participate in such partial markets.

The SESC is, therefore, bearing responsibility more than we have ever borne. I fully recognise the significance and the importance of the Chairmanship in this critical hour, and hereby assure to do my best for the accomplishment of our mission.

2. Our Views over Current Securities Markets

Do investors trust in the Japanese securities markets? I cannot answer in the affirmative, unfortunately. For, the markets are infested with the following 'three distrusts'.

• Distrust in Market Intermediaries
  Firstly, let me begin with individual investors' deep-rooted distrust in securities brokers. For instance, 'aren't they recommending unnecessary short-term transactions only for brokerage commission?', or 'don't they force to buy complicated investment products involving derivatives, which would end up with individual investors' loss?'.
  
  It is regrettable for us that, although securities brokers take an important role as intermediaries between investors and markets, misconduct by brokers is going on and on in decades.

• Distrust in Market Participants
  Secondly, individual investors feel distrust in some market participants. For instance, 'can't only those who have insider information gain profit out of markets?', or 'aren't the markets always manipulated by professional speculators or offshore funds?'.
  
  Without equally provided information and assurance that stock prices are formed with integrity, individual investors would be daunted to participate in the markets.

• Distrust in Market Regulators
  Last but not least, there is distrust in ourselves, i.e. market regulators. While the SESC is rightly proud of 36 accusations filed with the prosecutor and 188 recommendations of administrative disciplinary action since its foundation of 1992, we listen humbly to criticism that, partly due to limited human resources, we have overlooked some of illegal cases or our enforcement action is not prompt enough.
  
  The SESC is yet to show such presence as to convince markets that securities fraud would, beyond doubt, face our enforcement action.

I, at the helm, carefully consider and analyse those reality the Japanese markets contain; let us sail across the rough markets, steering for the following directions.

3. What I am aiming to achieve as the New Chairman

I shall devote myself, inter alia, to advocate individual investors. For, as the above-mentioned three distrusts show, our mission, i.e. to maintain investor's confidence in markets, can be best achieved by the protection of individual investors, whose information and funds are relatively lesser than those of professional market participants.

Made clear that individual investors are the object of protection, the Commission staff will realise for whom we should serve, and will promptly response to the needs of individual investors.

Here I use the word of 'individual investors' for ordinary, good individual investors both current and potential; whereas 'malicious' individual investors will face our enforcement action. Committing ourselves to advocate good individual investors, we go forward to achieve the integrity of markets.

4. Strategic Objectives

In order to champion the cause of individual investors, I set up the following three strategic targets.

• Objective I: Kick out Rogue Broker-Dealers
  Firstly, our compliance inspections will kick out such malicious market intermediaries as to sacrifice the interests of individual investors to their own. Some securities companies are yet to observe legal obligation for genuine and fair transactions, and to carry out internal control, at the satisfactory level. We inspect those rogue securities companies, and ask the Financial Services Agency to take
  disciplinary actions against them. We can, in consequence, not help some brokers' being expelled from markets.

• Objective II : Sweep out Securities Crimes
  Secondly, our criminal investigations will sweep out such shenanigans as market manipulation and insider dealing, which deceive a raft of individual investors and mar the integrity of markets. Especially, market manipulation prevents markets from forming prices genuinely, and thus will should our strict enforcement actions.

• Objective III: Show up our Presence
  Thirdly, with a view to raise the presence of the SESC, we shall take timely enforcement actions promptly in response to the needs and interests of both individual investors and the general public. Aiming to establish the SESC as a force de frappe against market shenanigans, we also commit ourselves to enhance public recognition through a variety of publicity works.

5. Policies to fulfil the Targets

The operations and competency of the SESC must be strengthened in order to fulfil those strategic objectives. I therefore propose the following specific policies.

• Reinforce Human Resources
  Currently, the total of 250 staff are serving for the SESC and its regional offices. However, considering such new tendencies as the rapid development of new investment products including a Reverse Convertible Bond and the accelerated penetration of the Internet, we need further reinforcement of human resources, for the duly protection of individual investors.

• Strengthen Information Collection & Analysis Capabilities
  Not to mention the headcount, the capacity of each staff should be maximised for effective inspections and investigations. It would be indispensable to improve the Commission staff's capacity to collect information and thereafter to analyse the information. These intensification can be attained by the injection of new Commission staff from the private sector, e.g. an experienced derivative-dealer, as well as training programmes.
  
  Moreover, we shall promote automatic data processing including a system to analyse corporate financial reports.

• Teamwork with Related Domestic Authorities
  Currently some are arguing that Japan should introduce a single securities regulator modelled after the U.S. Securities & Exchange Commission; as a matter of fact the functions enjoyed by the U.S. SEC are, in Japan, spread over the Financial Services Agency, Regional Finance Bureaux and the SESC. While admitting the necessity to discuss how the regulatory structure to be, I remark that what we should consider now is how effectively the SESC itself can function together with those institutions.
  
  We need to take the initiative for further co-operation with the related authorities, for instance, simultaneous on-site inspections with the Inspections Bureau of the FSA.

• Teamwork with Overseas Fellow Regulators
  Our penultimate policy is close co-operation with overseas fellow regulators as well as domestic authorities. The globalisation of financial transactions and the penetration of the Internet make us difficult to solve problems within one jurisdiction; in the concrete, spreading rumours on the Internet by way of overseas Internet servers, and market manipulation by way of overseas brokers or investment funds. Those cross-border misconduct will be caught in full co-operation with overseas fellow regulators.

• Close Touch with Investors
  Lastly, I believe that one of the most effective ways to protect investors so that they can protect themselves. As our main function is ex post facto enforcement, each individual investor may as well learn and understand investments and markets, if an investor were not to be involved in securities fraud.
  
  Therefore, let us support self-defence activities by individual investors. For instance, investors are welcomed to provide information as a source for investigative leads. In return, we shall regularly publicise useful information including a selection of past violation cases and, moreover, encourage stock exchanges and the Securities Dealers Association to promote investor education.

6. Conclusion

Let us introduce our new home page and logotype. We define our home page (www.fsa.go.jp/sesc/index.htm) as a strategic tool to support individual investors, and expect to call wide public attention. You will also find our renewed logotype and motto, 'for investors, with investors' ; its two overlapping ovals express securities markets and financial futures markets as well as our partnership with fellow regulators and, of course, investors.

Concluding my inaugural address as the third Chairman of the SESC, I hereby assure you to try my best, according to the above-mentioned objectives and policies, to advocate individual investors.

Takeo TAKAHASHI
Chairman, SESC

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