1. Recommendation Issued
Pursuant to Paragraph 1 of Article 20 of the FSA Establishment Act, on 31st May 2006, the Securities and Exchange Surveillance Commission (hereinafter referred to as "SESC") issued a recommendation that the Prime Minister and the Commissioner of the Financial Services Agency (hereinafter referred to as "FSA") take administrative disciplinary action and any other appropriate measures against Merrill Lynch Investment Managers Co., Ltd. (located in Nihonbashi Chuo-ku, Tokyo; Seiichi Fukuyama as the Representative Director and the President; capitalized at 2,670 million yen; staffed with approximately 190 employees/directors; hereinafter referred to as "MLIM"). This recommendation is based upon the results of the inspection of MLIM, whereby the following breach of the laws and regulations by the company was detected.
2. Breach Found
(1) Instructions to conduct reciprocal transactions between investment assets
(a) From 14th April 2003 to 31st August 2005, while managing investment assets, MLIM instructed the trustee company to execute six reciprocal transactions between the investment trust assets and other investment trust assets, that are managed by MLIM in order to adjust the ratios of stocks incorporated into the investment trust assets.
(b) From 14th April 2003 to 31st August 2005, while managing investment assets and assets under discretionary investment agreements, MLIM conducted 38 reciprocal transactions between assets under the separate discretionary investment agreements, or between the investment trust assets and assets under the discretionary investment agreement, which are managed under separate agreements, in order to adjust the ratios of stocks incorporated into the assets, without disclosing to its clients he adjustments and without obtaining their written consents with respect to the adjustments.
The act described in (a) constitutes a breach of Item 2, Paragraph 1 of Article 15 of the Law concerning Investment Trusts and Investment Corporation (hereinafter referred to as "LITIC".) Among the acts described in (b), instructing the reciprocal transactions between the separate assets under the separate discretionary investment agreements conducted without disclosing to its clients and without obtaining their written consent constitutes a breach of Article 5.a. of the Decision by the Executive Board of the Japan Securities Investment Advisors Association "Standard for management of the business (the "Standards")." Among the acts described in (b), instructing the reciprocal transactions between the investment trust assets and the assets under discretionary investment agreements without disclosing to its clients and without obtaining their written consent constitutes a breach of Article 5.b. of the Standards.
The business status of MLIM which allowed the acts mentioned above meets the condition for issuance of a business improvement order stated in Paragraph 1 of Article 40 of the LITIC. The order is supposed to be issued "when measures for ensuring the sound and appropriate business management of an investment trust company and protection of the investors are necessary".
(2) Noncompliance with the duty of the care of a good manager
On 25th March 2004, MLIM, in managing assets under the discretionary investment agreement (Asset A), assumed that MLIM instructed the execution of sell orders of stocks incorporated in the assets by conducting a reciprocal transaction between Asset A and the other asset under a different discretionary investment agreement (Asset B); however on 29th March 2004, MLIM became aware that the transaction was executed between Asset A and an entirely different investment trust asset (Asset C) by error order. On 30th March 2004, it therefore amended the error by conducting corresponding transaction between the sell order of Asset A and the buy order of Asset C.
The error order was placed without sufficient examination of the account that the sell order was supposed to be placed. This lack of the sufficient examination resulted in the error transaction; however, MLIM conducted an amendment of the error transaction mentioned above without conducting a good analysis of the effect of the transaction on the asset C. MLIM made the beneficiaries of Asset C bear the loss originating from the amendment deal, which must be borne by MLIM itself primarily. In addition, MLIM failed to provide the beneficiaries of Asset C with explanations about the occurrence of the error transaction and the amendment deal.
The above mentioned business status of MILM constitutes the breach of Paragraph 2 of Article 14 of the LITIC.
(Provisional translation of related provisions of laws and regulations)
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