Japan FSA Publishes Draft Enforcement Orders, Cabinet Ordinances, and Supervisory Guidelines for Article 63 Exemption

December 01, 2015

New amendments introduce a significant overhaul with respect to the Article 63 Exemption filing process and the ongoing obligations of Article 63 Exemption Operators.

On May 27, 2015, the National Diet of Japan passed a bill setting forth certain amendments (Amendments) with respect to the “Special Business Activities for Qualified Institutional Investors” (Article 63 Exemption) as set forth under Article 63 of the Financial Instruments and Exchange Act of Japan[1] (FIEA). The Amendments are generally seen as a response by the Financial Services Agency of Japan (Japan FSA) to scandals involving significant losses and damages to unsophisticated individual investors in Japan who subscribed to investment funds marketed under the Article 63 Exemption. The Amendments seek to narrow and limit the circumstances under which the Article 63 Exemption can be utilized while increasing Japanese regulators’ oversight on filers under the Article 63 Exemption (Article 63 Exemption Operators).

On November 20, 2015, the Japan FSA released its drafts of the Enforcement Orders, Cabinet Ordinances, and Supervisory Guidelines in connection with the Article 63 Exemption (collectively, Supplemental Regulations). The Supplemental Regulations provide further details and information with respect to the precise manner by which the Amendments will be effected, as well as certain interpretative information.

This LawFlash provides a summary of the key changes set forth in the Supplemental Regulations that we believe may be relevant to our offshore clients. Please note that while we have sought to cover the significant changes, this LawFlash does not cover certain aspects of the Supplemental Regulations, such as the Venture Fund Exemption.

New Filing Requirements for Article 63 Exemption Operators

Historically, the notification process for Article 63 Exemption Operators had been relatively simple, as applicants were only required to provide general information about themselves (e.g., name, address, telephone number, capital amount). However, under the Amendments, the required information for Article 63 Exemption notifications would be substantially increased such that each applicant will be required to provide additional information, including, but not limited to, the following:

  • Telephone number of its office and website address
  • Summary/contents of the target investments of the limited partnership
  • Name and type of all Qualified Institutional Investors (QIIs) as well as the total number of QIIs that are anticipated to subscribe to the limited partnership
  • Whether the interests of the limited partnership are being offered to non-QIIs
  • If the applicant is a foreign entity, the address and telephone number of its “Japan representative”[2]

Currently, only general information is listed on the Japan FSA website regarding registered Article 63 Exemption Operators. However, subsequent to the Amendments, significantly more information regarding each Article 63 Exemption Operator will be available to the public (e.g., name of representative, target investments, address and telephone number of the office, number of QIIs).

In addition to the information described above, each applicant under the Article 63 Exemption will be required to submit various deliverables with its Article 63 Exemption notification, including, but not limited to the following:

  • Resumes of each of the directors/officers of the applicant as well as “important” employees
  • Affidavit of each of the directors/officers and important employees to confirm address, legal competency, no criminal/administrative sanctions that would disqualify his/her status, and no affiliation with any anti-social forces (i.e., criminal organizations)
  • Oath of each of the directors/officers affirming their status and suitability under Japanese law

Under the Amendments, Article 63 Exemption Operators will be required to file annual business reports and create, maintain, and disclose to the public explanatory documents concerning the annual business reports. The Supplemental Regulations provide details about the items that should be described in annual business reports, such as the contents/summary of the target investments of the limited partnership, financial status, and status of investors. Article 63 Exemption Operators are required to file such annual business reports within three months from the end of the business year.

As can be noted from the various changes described above, the Article 63 Exemption registration process under the Amendments is significantly more burdensome in terms of practical documentation requirements than under the prior regime.

Limitation on the Scope of Investors for Article 63

While the Article 63 Exemption has always required that at least one QII be subscribed to the relevant limited partnership fund, there are no explicit requirements as to the QII itself. In response to a concern regarding the lack of substance of certain QIIs that were used by Article 63 Exemption Operators to satisfy the minimum QII requirement, under the Amendments, if the QII is a domestic investment limited liability partnership (toushi yugen sekinin kumiai, ILLP), such ILLP would be required to have at least JPY 500 million (excluding loans) in invested assets. There are no additional qualifications on other types of QIIs or any minimum subscription amount.  

It should be further noted that the scope of the non-QIIs seeking to subscribe to the limited partnership fund is limited to certain types of investors (such as listed companies, legal entities with JPY 50 million or more of paid-in capital, legal entities with JPY 50 million or more of net assets, and foreign entities) or persons who are closely related to Article 63 Exemption Operators (such as officers or employees of Article 63 Exemption Operators and their family members, sub-delegate or investment adviser of Article 63 Exemption Operators or their officers or employees) at the offering.

Effective Date and Comment Period

The Amendments are anticipated to take effect sometime before June 3, 2016 (Effective Date). Any Article 63 Exemption Operators that will file under the Article 63 Exemption after the Effective Date will be required to immediately comply with the amended obligations, while existing Article 63 Exemption Operators will have six months from the Effective Date to comply with the Amendments.

While the Effective Date is expected to be in June 2016, we recommend that existing Article 63 Exemption Operators use this opportunity to ensure that their Article 63 Exemption notifications are up to date and do not contain any inaccuracies.

The Japan FSA is currently soliciting comments with respect to the Supplemental Regulations and will be accepting comments until Monday, December 21, 2015. The Tokyo office of Morgan Lewis & Bockius LLP/Morgan, Lewis & Bockius Law Offices is happy to assist foreign asset managers that wish to submit such comments, and we will gladly respond to any questions you may have regarding the Supplemental Regulations.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Tomoko Fuminaga

[1] Act No. 25 of 1948, as amended or supplemented from time to time.

[2] With respect to many offshore Article 63 Exemption Operators, the need for a Japan representative under the Amendments is particularly significant, as most of such filers are general partners of limited partnership funds and sensitive to potential tax ramifications of identifying a “representative” individual resident in Japan. The Amendments, however, have not provided any further information or details regarding the exact requirements for the “Japan representative” (e.g. who may act as the Japan representative, the individual’s qualifications, etc.) and whether an “agent” representative (e.g., a law firm, accounting firm, or similar professional organization, or an affiliate in Japan of the general partner) could take on this role.