Limited Type 1 Dealer Registration – An update on the 2025 Amendments to the FIEA

Introduction

This alert is supplementary to the authors' other publications on the recent amendments to the Financial Instruments and Exchange Act of Japan (FIEA) that took effect as of 1 May 2025 (the Amendments). 

A summary of the key aspects of the Amendments is as follows:

1. the removal of the restriction on registered Discretionary Investment Management Business Operators (DIM) from outsourcing certain core functions to third parties – specifically, the compliance officer function – and the creation of a new regulatory regime requiring those service providers wishing to perform such outsourced core functions for DIMs to register with the Japan regulator under this new regime; and   
2. the creation of a new sub-set of the Type 1 Financial Instruments Business Operator (the Type 1 Dealer) registration which reduces the various requirements to register, but in turn, has limitations on the scope of permitted businesses (the Limited Type 1 Dealer).

While it is anticipated that both of these changes will have a significant impact on the investment funds industry in Japan in the coming years, this alert will specifically focus on the Limited Type 1 Dealer registration.  Since the original announcement of the Limited Type 1 Dealer registration and recent enactments of the Amendments, the Limited Type 1 Dealer registration has generated much interest among new entrants to Japan as well as existing fund managers already operating in Japan.

This alert provides a comprehensive overview on the Limited Type 1 Dealer registration based on the information known at this time. 

In particular, this alert covers a wide range of aspects of this new registration, from its market background, the permitted scope of activities under the Limited Type 1 Dealer registration, the relaxed requirements compared to the original Type 1 Dealer registration and commentary on its overall use.

 

Overview of the FIEA Registrations on Capital Raising

To properly frame any discussion on the Limited Type 1 Dealer registration, this alert will first provide a broad overview of the Japan regulatory regime.

Firstly, entities engaged in a “financial instruments business” in Japan or directed to a Japan client, must be registered with the Financial Services Agency of Japan (Japan FSA) as a financial instruments business operator. 

The four main types of financial instruments business registrations that are available under the FIEA are set forth below:

1. the Type 1 Dealer registration;
2. the Type 2 Financial Instruments Business Operator (the Type 2 Dealer) registration;
3. the DIM registration; and
4. the investment advisory and agency business operator (the IAA) registration.

Of the four main registrations referred to above, the registrations that permit the marketing of securities to Japan investors (i.e., distribution/capital raising registrations) are the Type 1 Dealer registration and the Type 2 Dealer registration.

To understand the distinction between the Type 1 Dealer registration and the Type 2 Dealer registration, it is important to first note that there are two types of “securities” covered under the FIEA:

1. those financial instruments defined as “securities” under Paragraph 1 of Article 2 of the FIEA (Paragraph 1 Securities).  Paragraph 1 Securities include financial instruments such as shares of capital stock companies, bonds, commercial paper and, as applicable to investment funds, this would include shares of investment corporations or units of investment trusts (e.g., shares of a Cayman Islands exempted company and units of Cayman Islands unit trust); and
2. those financial instruments defined as securities under Paragraph 2 of Article 2 of the FIEA (Paragraph 2 Securities).  Paragraph 2 Securities are generally more illiquid securities and, as applicable to investment funds, this would include interests in limited partnerships, limited liability partnerships, limited liability companies, etc. (e.g., interests of Cayman Islands limited partnerships).

Subject to various exemptions, as a general matter, any entity wishing to engage in the marketing of Paragraph 1 Securities to Japan investors must be registered as a Type 1 Dealer, while those seeking to market Paragraph 2 Securities to Japan investors must be registered as a Type 2 Dealer. 

From an investment funds perspective, fund managers that wish to market interests of corporate or trust type funds to Japan investors (i.e., Paragraph 1 Securities) would be required to appoint or register their own Type 1 Dealer and similarly, fund managers that wish to market interests of limited partnership funds to Japan investors (i.e., Paragraph 2 Securities) would be required to appoint or register their own Type 2 Dealer.

 

The Current Type 1 Dealer Registration

Permitted Activities

As previously discussed, as a default rule, any entity that wishes to engage in the marketing of Paragraph 1 Securities to Japan investors is required to be registered as a Type 1 Dealer.

However, it is notable that the Type 1 Dealer registration is not limited to the marketing of Paragraph 1 Securities but also covers a wide range of other activities in relation to Paragraph 1 Securities. 

Other regulated activities permitted by a Type 1 Dealer include the following:

1. trading in Paragraph 1 Securities, or engaging in domestic/foreign market derivative transactions of Paragraph 1 Securities;
2. intermediation, brokerage or acting as an agent in the trading of Paragraph 1 Securities or in engaging domestic/foreign market derivative transactions of Paragraph 1 Securities;
3. intermediation, brokerage or acting as an agent in the ordering of trading Paragraph 1 Securities or engaging in market derivative transactions of Paragraph 1 Securities on domestic/foreign financial instruments markets;
4. brokerage of securities clearing with respect to Paragraph 1 Securities;
5. engaging in secondary public offerings of Paragraph 1 Securities;
6. handling a primary or secondary public offering of Paragraph 1 Securities, or handling the private placement of Paragraph 1 Securities;
7. engaging in OTC derivative transactions, intermediation, brokerage or acting as an agent in the OTC derivative transactions;
8. underwriting of Paragraph 1 Securities;
9. the business of operating a proprietary trading system; and
10. a securities administration business.

Based on the full range of permitted activities that is possible by a Type 1 Dealer in relation to the Paragraph 1 Securities, a Type 1 Dealer may be viewed similar to an investment bank or securities company. Given this wide range of activities and the scope and the nature of activities permitted, the Type 1 Dealer has the highest requirements (e.g. personnel, capital, etc) of all of the financial instruments business operators under the FIEA. 

Minimum Requirements of a Type 1 Dealer

While not intended to be an exhaustive list of the requirements, the requirements that must be met by an applicant to register with the Japan FSA as a Type 1 Dealer include the following:

1. having JPY 50 million or more in capital and in net assets;  
2. having a capital adequacy ratio of 120% or more (in practice, approximately 200% is common);
3. being a member and contributing to the Japan Investor Protection Fund;
4. joining the Japan Securities Dealers Association (the JSDA);
5. the registered entity must be either (a) a Japan branch of a foreign company¹; or (b) a Japanese stock company (kabushiki kaisha);
6. personnel requirement that sets forth that at least two full-time staff with more than three years of experience being employed at a Type 1 Dealer; and
7. other extensive personnel requirements, such as:

• the need to have at least three directors on the board of directors, and the appointment of a statutory auditor;
• retention of a full-time compliance officer and such compliance officer must be independent of the marketing division;
• meeting the various personnel requirements of the JSDA, such as:
  
  -retaining one internal controller (naibukanri toukatsu sekininsha), with a general expectation that this individual is also acting as a director of the registered entity;
  -at least one internal manager (naibukanri sekininsha), with a general expectation that this individual has the internal manager license issued by the JSDA²;
  -at least one sales manager (eigyo sekininsha), with a general expectation that this individual has passed either the sales manager license or the internal controller license issued by the JSDA; and
  -anyone that engages in the marketing of Paragraph 1 Securities must have the securities sales representative license issued by the JSDA.

From a practical standpoint, given its demanding requirements, the Type 1 Dealer registration is certainly the most challenging registration to obtain among the four financial instruments business registrations.  As a result of these requirements, many foreign fund managers that have only sought to engage in capital raising activities, have historically viewed the Type 1 Dealer registration as an impractical option for Japan.   

Furthermore, there is a significant difference between the requirements of a Type 1 Dealer registration and the Type 2 Dealer registration.  As can be noted based on the requirements described above, the Type 1 Dealer registration is exponentially harder to register with the Japan regulators in comparison to the Type 2 Dealer registration.  A review of the market and the foreign fund manager entrants in Japan in the past 20 years will immediately make clear the disparity between the number of foreign fund managers that have registered as a Type 2 Dealer versus a Type 1 Dealer. 

 

Overview of the Limited Type 1 Dealer Registration

Pursuant to the Amendments, the Limited Type 1 Dealer registration appears to be a solution to the high barrier of entry in relation to the Type 1 Dealer registration for fund managers that simply sought to engage in capital raising activities towards Japan investors for their funds classified as Paragraph 1 Securities. By significantly limiting the activities of the Limited Type 1 Dealer, the Japan FSA has made large concessions as to the minimum requirements and requisites that will need to be met by applicants seeking this registration.

Permitted Activities of a Limited Type 1 Dealer

A Limited Type 1 Dealer’s permitted activities are significantly reduced compared to a Type 1 Dealer as a Limited Type 1 Dealer may only engage in the handling of private placements or handling the secondary offerings of unlisted securities to Japan investors.  Furthermore, any such marketing activities by a Limited Type 1 Dealer may only be directed towards Japan investors who are Professional Investors (as defined in Article 2, Paragraph 31 of the FIEA)³.

While this appears to be restrictive, it is not expected that most foreign fund managers that seek to raise capital in Japan will be impacted by these limitations – particularly considering that the marketing to insurance companies, banks, DIMs (i.e., gatekeepers to pension funds) would be permitted within this scope.

Requirements of a Limited Type 1 Dealer

As previously mentioned, the requirements for the Limited Type 1 Dealer registration are significantly more relaxed than the Type 1 Dealer registration.  Specifically, the reduced requirements as applicable to the Limited Type 1 Dealer registration are as follows:

• a capital and net asset requirement of JPY 10 million – as opposed to the JPY 50 million requirement for a Type 1 Dealer;
• entire removal of any requirement in relation to the applicant meeting any capital adequacy ratios;
• no requirement of the applicant to become a member and contribute to the Japan Investor Protection Fund;
• at least one full-time staff who has at least one year of experience of being employed at a Type 1 Dealer – as opposed to the requirement for Type 1 Dealers, which require at least two individuals or more with more than three years of experience in engaging as a Type 1 Dealer; and
• unlike the Type 1 Dealer, if the Limited Type 1 Dealer is engaging in a “notifiable business” and/or “approval business” under the FIEA, there is no requirement to notify and/or seek approval from the Japan FSA.

However, the Limited Type 1 Dealer will still need to meet many of the same minimum requirements as that of a Type 1 Dealer, such as:

• the need to be a Japan branch of a foreign company⁴ or a Japanese stock company (kabushiki kaisha);
• joining the JSDA; and
• meeting the other extensive personnel requirements discussed above.

 

The Registration Process for a Limited Type 1 Dealer

The final part of this alert will discuss the practical aspects of the Limited Type 1 Dealer registration itself.

Paths to Registration

First of all, there are two paths an applicant can take in order to register as a Limited Type 1 Dealer: (i) the original registration route via the Kanto Local Finance Bureau (the KLFB); or (ii) registration via the Japan FSA Market Entry Office (as defined below).

As each path presents their own unique benefits and potential challenges, prospective applicants should consider which option would be most suitable to their particular circumstances.

• The KLFB Route

The first route is to complete the registration process through the KLFB, whereby all documents and communications are in Japanese. While not an explicit or stated benefit, as a practical matter, there is a potential benefit of this route in that this application is the “norm”. In other words, both the KLFB and the JSDA are familiar with the Type 1 Dealer registration process which may reduce inefficiencies in the Japan regulator, particularly as it relates to language.  

• The Japan FSA Market Entry Office Route.

As covered in past articles, registration via the Japan FSA Market Entry Office is a relatively new program established by the Japan FSA as part of its efforts to attract foreign business and promoting the investment management industry of Japan (the Japan FSA Market Entry Office).

The main benefit of registering through the Japan FSA Market Entry Office is the ability for the applicant to liaise and submit all documentation in English to the Japan regulators – which in practice, eases the documentation process for most foreign applicants.  Furthermore, tied to the foregoing, applicants that successfully enrol in the Japan FSA Market Entry Office program will have ongoing English language support and assistance not only for their Limited Type 1 Dealer registration, but other registrations which may already be held by the applicant.

Furthermore, applicants that apply for registration via the Japan FSA Market Entry Office may be eligible for certain subsidies, though it is strongly recommended that applicants use caution and care in handling these subsidies.  

The Japan Securities Dealer Association

At this time, it is important to note a special feature of registering as either a Type 1 Dealer or a Limited Type 1 Dealer – the requirement to be a member of the JSDA. While each of the other financial instruments registrations may require the applicant to become a member of a self-regulatory organization, the process differs significantly in relation to the JSDA.

For other self-regulatory organizations, it is common that the application for membership commences subsequent to the applicant's completion of its financial instrument business registration.  However, it should be noted that for both the Type 1 Dealer registration and the Limited Type 1 Dealer registration, applications to the JSDA are made simultaneously with the applications to the relevant Japan regulator (i.e., the KLFB or the Japan FSA Market Entry Office).

Furthermore, for those who seek registration through the Japan FSA Market Entry Office, based on discussions to date, it is important to note that the JSDA will require that the contact person for the applicant be fluent in Japanese, as all communications will be conducted in Japanese. In addition, while the documentation in terms of the membership application may be submitted in English, this ability only applies to the membership application process.  After membership has been approved, any subsequent documentation will need to be submitted in Japanese.

 

Conclusion and Final Thoughts

Without a doubt, the establishment of the Limited Type 1 Dealer registration addresses a longstanding obstacle for many foreign fund managers wishing to raise capital from Japan investors – specifically fund interests which may be classified as Paragraph 1 Securities.

Historically, the numerous personnel and capital requirements have been viewed as the biggest roadblock for foreign fund managers seeking to obtain the Type 1 Dealer registration. While the Limited Type 1 Dealer is a clear attempt to reduce such requirements, at this point in time, it remains to be seen whether these relaxed requirements will be a viable option for many prospective applicants seeking to raise capital in Japan, as well as witness which type of fund managers will seek this new registration. 

In closing however, it should be properly noted that the Limited Type 1 Dealer registration should not be viewed as the only means by which fund managers can offer Paragraph 1 Securities to Japan investors. Prior to any assessment to commence a Limited Type 1 Dealer registration, it is recommended that proper consideration be given to the alternatives which include, but are not limited to, the following options:

• Appointing a Type 1 Dealer.

The fund manager would appoint a Type 1 Dealer to act as the distributor of the relevant funds to Japan investors. 

•  Registering as a Securities Sales Intermediary.  

The Japan office of the fund manager would elect to register with the Japan FSA to engage in a securities sales intermediary business (a SSI Business). The minimum requirements for the SSI Business are nominal in comparison to any other financial instruments business operator registration (i.e., one person headcount and no compliance officer is required).

•  Foreign Securities Firm Exemption.

A fund manager that engages in a securities brokerage business in an offshore jurisdiction is permitted to market both Paragraph 1 Securities and Paragraph 2 Securities to Japan investors subject to two restrictions: (1) any and all marketing must be from offshore; and (2) target Japan investors must be Permitted Entities⁵ as defined under the FIEA (a Permitted Entity).

•  Self-Offering Model for Corporate Funds.

Under the self-offering model, an officer or employee of a corporate fund may engage in a self-offering of its shares to Japan investors without being registered as a Type 1 Dealer (or a Limited Type 1 Dealer).

As there are many regulatory and tax implications of the various alternatives above, a thorough consideration and analysis of each option is recommended to make a determination as to whether the Limited Type 1 Dealer registration is best suited for a fund manager that is seeking to enter into Japan or expand its operations in Japan.

We hope this alert can properly inform those that are considering registering as a Limited Type 1 Dealer as a result of the Amendments.

For more information on any aspect of this alert or to receive copies of historical alerts, please do not hesitate to contact us.

The Investment Funds Team in Tokyo is led by Partners Koji Yamamoto and Yoshiyuki Omori. They are supported by Of Counsel Wataru Sasaki, Senior Associate Hiroki Hosoda, Associate Matthew Shiota and Paralegals Hirokazu Miyamoto and Noriko Narahara.

 

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¹Such foreign company must be registered to engage in a financial instruments business similar to a Type 1 Dealer in its home jurisdiction; or such foreign company must be a wholly-owned subsidiary of an entity that is registered to engage in a financial instruments business similar to a Type 1 Dealer in its home jurisdiction.
²It should be noted that it is common for the full-time compliance officer to serve in a dual capacity to fulfil this role.
³Strictly speaking, the permitted scope of target investors under the Limited Type 1 Dealer registration is wider, and it also covers several other types of investors such as, non-Japan residents, the issuer of the unlisted securities being marketed by the Limited Type 1 Dealer, etc.  However, in practice, it is unlikely that these additional permitted target investors will be contemplated as a target for a fund manager seeking to raise capital in Japan.
⁴ As discussed above, such foreign company must be registered to engage in a financial instruments business similar to a Type 1 Dealer in its home jurisdiction; or such foreign company must be a wholly-owned subsidiary of an entity that is registered to engage in a financial instruments business similar to a Type 1 Dealer in its home jurisdiction.
⁵While there is a large overlap between “Permitted Entities” and “Qualified Institutional Investors” as defined under the FIEA, the scope of Permitted Entities under the Foreign Securities Firm Exemption is more restrictive, though it does include securities companies, banks, insurance companies and DIMs.