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15 July 20217 minute read

Internationalisation of Japanese Capital Market

Amendments to Financial Instruments and Exchange Act of Japan
1. Introduction

Since the outbreak of COVID-19 and the resulting global pandemic, the risk of concentrating business activities in only one financial hub has become apparent. As a result, this could potentially lead to the decentralisation and relocation of international financial business centres in the future.

The Japanese government considers it important to facilitate participation in the Japanese market from foreign asset management companies and other financial players that have advanced expertise in order to strengthen Japan’s function as an international financial centre through (i) diversification of financial arrangements, sophistication of asset management and evolution of financial innovation, (ii) creation of employment and business and enhancement of financial power and (iii) risk diversification in terms of international locations of the financial industry. In order to achieve these goals, the Japanese government has amended and considers to amend relevant laws, including, without limitation, the Financial Instruments and Exchange Act (the FIEA) and their subordinate regulations.

In 2020 the Market Regulations Working Group (the WG) was established in response to the consultation with the Financial System Council under the Financial Services Agency (the FSA) with regard to, among others, the development of systems for the provision of growth capital and acceptance of foreign financial institutions and other business operators. Pursuant to the discussions by the WG, a law amending, among others, the FIEA (the FIEA Amendments) was proposed to and approved by the Diet on 19 May 2021. The FIEA Amendments are expected to be enforced within the year (2021).

2. English Support for Foreign Asset Management Companies

Prior to the FIEA Amendments, in January 2021 the Cabinet Office Order on Financial Instruments Business, etc. under the FIEA was, among others, amended in order to support removing the Japanese language barrier, therefore enabling foreign asset management companies and the like to enter into the Japanese market.

2.1 Financial Market Entry Office

In January 2021, the Financial Market Entry Office was established by the FSA and the Local Finance Bureaus (the LFBs), with the purpose of providing a one-stop service in English language, including consultation with the authority prior to registration as a financial instruments business operator, registration itself and supervision by the authority after the registration.

2.2 Registration Application in English

Following the amendments, (i) persons who are authorised to conduct asset management business or investment advisory business in a foreign country or their affiliates and (ii) individual persons who worked for the above persons (entities) as senior officers or employees newly applying for a registration as the applicant’s senior officer or important employee may apply in English (instead of Japanese) for a registration as (i) an investment management business operator, (ii) an investment advisory and agency business operator or (iii) a Type II financial instruments business operator which conducts asset management-related business falling under the category of (a) selling investment trusts or funds established by itself or (b) conducting so-called deemed Type II financial instruments business operated by an asset management company of an investment corporation or an investment management business operator for qualified investors.

2.3 Supervision and Inspection in English

For those foreign asset management companies that have registered in English, they may submit documents (required to be submitted to the authority) in English and may communicate in English with the authority in relation to the authority’s supervisions and inspections.

3. Regulations to Accept Foreign Investment Management Companies

In the FIEA Amendments, in order to improve the acceptance rate of foreign investment management companies and the like for the purpose of improving Japan’s function as an international financial centre, the following regulations have been introduced: (i) a new category of investment management business mainly managing funds provided by foreign investors (the Foreign Investor Specially Permitted Business) and (ii) a temporary exception for investment management companies managing funds provided by foreign investors only for a period until they are properly licensed/registered/filed in Japan (the Transition Specially Permitted Business).

3.1 Foreign Investor Specially Permitted Business

Under the FIEA prior to the FIEA Amendments, in order for a fund manager (i) to solicit investment in a collective investment scheme1, a Type II financial instruments and exchange business operator registration is required and (ii) to manage funds invested in a collective investment scheme, an investment management business operator registration is required. Alternatively, if investors in a collective investment scheme include at least one qualified institutional investor (QII) and 49 or less investors who meet the requirements of the investors eligible for the QII specially permitted business (the QII Specially Permitted Business), then the fund manager may solicit and manage funds invested in a collective investment scheme by making a filing with the authority (instead of the registration). The registrations as a Type II financial instruments and exchange business operator and as an investment management business operator are difficult for a fund manager of a collective investment scheme considering the requirements for the registrations, and a filing for the QII Specially Permitted Business is also sometimes difficult since at least one QII is required.

The Foreign Investor Specially Permitted Business allows a fund manager’s solicitation and management of investment in a collective investment scheme by making a filing with the authority (instead of the registration and without a QII), if investors are limited to (i) foreign companies, (ii) foreign individuals who satisfy certain requirements considering his/her knowledge, experience and asset situation, (iii) domestic QIIs (and certain persons equivalent to QIIs) and (iv) certain persons related to the fund manager AND if foreign residents (foreign companies and individuals) invest 50% or more of the total investment amount.

3.2 Transition Specially Permitted Business

Under the FIEA prior to the FIEA Amendments, in order for a fund manager to enter into the Japanese market, it is required to apply for registration as a financial instruments business operator establishing appropriate internal systems.

The Transition Specially Permitted Business allows, for a period of five years after making a filing with the authority (instead of the registration), a fund manager (i) which is properly licensed in a foreign country to conduct investment management business similar to the registration under the FIEA, (ii) which has experience of a certain period after starting investment management business (there are certain exceptions available), (iii) which is adequately staffed and equipped with internal systems, in order to appropriately fulfil the Transition Specially Permitted Business and (iv) which does not mainly (50% or more) invest in domestic shares or certain other domestic securities similar to shares, to conduct investment management business, if investors are limited to (i) foreign companies, (ii) foreign individuals, (iii) certain persons related to the fund manager and (iv) certain persons equivalent to any of the foregoing.

The Transition Specially Permitted Business is a temporary legislation available for five years from the enforcement of the FIEA Amendments.

4. Conclusion

The FIEA Amendments, together with the English language services provided by the FSA and the LFBs, offer foreign financial service providers and foreign investors several new options when considering entering the Japanese market. As a result, more foreign financial service providers and foreign investors are expected to enter the Japanese market, leading to the enhanced recognition and status of the Japanese capital and investment market as an international financial centre.

DLA Piper has extensive experience and expertise in assisting clients entering the Japanese capital and investment market, and we would be happy to assist your organisation.


 

1A collective investment scheme means, among others, interest in a partnership agreement, anonymous partnership agreement, limited partnership agreement for investment and limited liability partnership agreement which is eligible for dividends of profits or distributions of assets in relation to the business using the moneys invested by the interest holders.
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