(Provisional Translation)
June 29, 2012
Securities and Exchange Surveillance Commission
Pursuant to Article 20(1) of the Act for Establishment of the Financial Services Agency (FSA), on June 29, 2012, the Securities and Exchange Surveillance Commission (SESC) made a recommendation that the Prime Minister and the Commissioner of FSA order the payment of an administrative monetary penalty and take administrative action against Japan Advisory LLC (hereinafter "the Company"). This recommendation is based on the findings of the inspection of insider trading by the Company, whereby the following violations of laws and ordinances were identified.
(1) Violation of insider trading regulation
Whereas the Company was registered by the Prime Minister to engage in investment advisory and agency business, the Company was recognized to have substantially engaged in managing the investments of customer assets without being registered as an investment management business. Acting under the initiative of its representative partner, the Company actively solicited a number of securities companies in Japan to provide it with information. Having assessed and rated such securities companies based on the frequency and value of information provided, the Company presented its ratings to securities companies and determined the volume of orders placed and commission rate based on these ratings. In so doing, the Company increased its influence over such securities companies by causing them to compete amongst each other, thereby inducing them to provide it with a variety of information, including undisclosed corporate information. Whereas the Company was substantially engaged in managing two hedge funds domiciled in a foreign country, on August 20, 2010, an employee of the Company involved in managing the said hedge funds received information from Employee A of a securities company negotiating a securities underwriting agreement with Nippon Sheet Glass Co., Ltd. indicating that a decision had been made by the executive decision-making body of Nippon Sheet Glass to launch a public offering of its stocks. This information had been gained by Employee A in the course of his/her duties and through Employee B and others of the same securities company who were informed of the negotiations. Whereas this information was announced on August 24, 2010, the Company acted prior to the announcement to sell a total of 2,653,000 shares of Nippon Sheet Glass on August 20, 2010, on the account of the said foreign-domiciled hedge funds for the total amount of 541,786,532 yen.
This act of the Company was recognized as falling under the definition of having "conducted . . . Sales and Purchase, etc. set forth in Article 166(1) in violation of the provisions of Article 166(1) or (3)" as stipulated under Article 175(1) of the Financial Instruments and Exchange Act.
Pursuant to the Financial Instruments and Exchange Act, the administrative monetary penalty applicable to the above violation is 370,000 yen.
Details of the calculation are presented in the Attachment.
(2) Engaging in investment management business without registration
The Company was registered by the Prime Minister to engage in investment advisory and agency business, and has claimed that it entered into an investment advisory contract with an investment management company domiciled in a foreign country and subsequently provided the said investment management company with investment advisory services pertaining to the assets of two hedge funds domiciled in a foreign country and other customers that had been placed under the discretionary investment management of the said investment management company and for which necessary powers had been duly delegated to the said investment management company. However, in reality, whereas the Company was not registered with the Prime Minister as an investment management business, it was recognized that the powers of discretionary investment management had been transferred to the Company from the said investment management company and that a contract had been concluded transferring necessary powers for undertaking discretionary investments on behalf of the said foreign-domiciled hedge funds and other customers. Based on this contract and beginning no later than in June 2010, the representative partner of the Company and several employees in charge of investment management in the Company managed the assets of the said foreign-domiciled hedge funds and other customers and engaged repeatedly and continuously in transactions involving listed equities.
It was recognized that the conduct of the Company falls under "investment management business" as specified under Article 28(4) of the Financial Instruments and Exchange Act. Whereas the Company had not obtained registration of change as stipulated under Article 31(4) of the Financial Instruments and Exchange Act, the Company acted systematically and under the initiative of its representative partner to circumvent the law under the guise of providing investment advisory services and to repeatedly and continuously engage in the investment management business without registration. It was recognized that by reason of these acts, the Company had violated the provisions of Article 29 of the Financial Instruments and Exchange Act.
(3) Failure to implement necessary and appropriate measures to prevent unfair transactions involving the use of undisclosed corporate information
Following the findings that the Company's internal control systems for managing undisclosed corporate information was not functioning and that the Company was using undisclosed corporate information in its advisory services, the Director-General of the Kanto Local Finance Bureau issued an Order to Improve Business Operation on December 12, 2008, instructing the Company to institute proper internal control systems related to the management of undisclosed corporate information and to submit its plan to make necessary improvements. Responding to the Order, the Company submitted a business improvement report on January 16, 2009 stating that the "record of advice given shall be verified daily to confirm that transactions are not undertaken based on undisclosed corporate information."
However, even after the submission of the said report, the Company acted in violation of laws and ordinances by failing to compile and maintain a record of advice given by telephone and means other than the Company's internal systems. Because of this failure to properly compile records of advice given, it is substantially impossible to confirm whether or not the Company engaged in transactions based on undisclosed corporate information. As seen here, the Company completely failed to implement the improvements that it had pledged to make in its business improvement report, thereby exhibiting an attitude of gross disregard for the Financial Instruments and Exchange Act and relevant ordinances, and the Order to Improve Business Operation issued by the authorities. Given that the improvements in its internal control systems for managing undisclosed corporate information remained grossly inadequate, it was recognized that the Company continued to engage in transactions while the possibility that transactions were being undertaken based on undisclosed corporate information was in no way eliminated.
The business operations of the Company described above were recognized to fall under "circumstances where it is recognized that necessary and appropriate measures have not been taken to prevent unfair transactions involving the use of undisclosed corporate information" as stipulated under the provisions of Article 123(1)(v) of the Cabinet Office Ordinance on Financial Instruments Business, etc., based on Article 40(ii) of the Financial Instruments and Exchange Act.
Therefore, the SESC recognizes (a) that the Company has circumvented the law to engage in investment management business under the guise of providing investment advisory services; (b) that as a result of (a), the Company has maintained an appearance of not formally violating the prohibition of insider trading, while in reality increasing its influence over various securities companies and inducing them to provide undisclosed corporate information and various other information and therewith engaging in insider trading, which is recognized to exhibit serious maliciousness; and (c) that the Company has exhibited an attitude of gross disregard for the Financial Instruments and Exchange Act and relevant ordinances, and the Order to Improve Business Operation issued by the authorities by continuing in its failure to implement necessary and appropriate measures to prevent unfair transactions involving the use of undisclosed corporate information. Taking the above matters into consideration, it is recognized that these circumstances seriously undermined fairness and reliability in Japan's markets and must be urgently rectified from the viewpoint of the public interest and protection of investors.
(1) Pursuant to Article 175(1)(iii) of the Financial Instruments and Exchange Act and to Article 1-21(1)(i) of the Cabinet Office Ordinance on Administrative Monetary Penalty Provided for in Chapter VI-II of the Financial Instruments and Exchange Act, a person who has, for the purpose of investing assets under management, engaged in transactions specified under Article 175(1)(iii) of the Financial Instruments and Exchange Act (hereinafter referred to as "Violator") may be ordered to pay an administrative monetary penalty in the amount calculated as follows: (a) The total amount of money or other property paid or payable to the Violator as remuneration for the investment of the assets under management for the month in which the said transactions were executed (b) is multiplied by the highest value reached by the total amount of the issue included in the assets under management that was transacted during the period between the day on which the said transactions were executed and the last day of the month in which the said transactions were executed and (c) is then divided by the total value of the assets under management as of the last day of the month in which the said transactions were executed.
In the present case, the transactions in question involved the investment of two groups of assets under management. Therefore, the administrative monetary penalty is calculated separately for each group of assets under management and added together to obtain the total amount of administrative monetary penalty payable.
Assets under management (A):
(a) 37,083,375 yen × (b) 397,488,000 yen ÷ (c) 55,354,310,770 yen = 266,288 yen
Assets under management (B):
(a) 16,033,222 yen × (b) 154,336,000 yen ÷ (c) 22,723,585,720 yen = 108,895 yen
Total:
266,288 yen + 108,895 yen = 375,183 yen
(2) Pursuant to the provisions of Article 176(2) of the Financial Instruments and Exchange Act, the fraction less than ten thousand yen contained in (1) above shall be rounded down.