In response to the recent events that shook the financial industry of Japan such as the insider trading scandals in connection with public stock offerings and the AIJ fraud scandal, a bill containing various proposed amendments designed to improve the reliability and stability of the financial system of Japan was submitted to the Japan Diet on April 16, 2013.
In this client alert, we have selected topics from the numerous proposed amendments set forth in the bill which we believe may be of particular relevance to our clients with a key focus on the proposed amendments to the existing rules regarding insider trading.
1. Proposed Amendments to the Regulations on Insider Trading.
(1) Prohibition and Penalties with Respect to the Improper Disclosures and Trade Recommendations by Corporate Insiders.
Under the current laws, administrative penalties and criminal charges with respect to insider trading are imposed only on the parties that make the illicit trades using the insider information. However, no penalties are currently imposed on the corporate insiders, including the marketing departments of underwriting securities firms (“Corporate Insiders”) who improperly disclose the insider information except where the actions of the Corporate Insiders are deemed to make it an accomplice with the persons making the illicit trades.
Under the proposed bill, both the disclosure of insider information by a Corporate Insider as well as the making of trading recommendations will be prohibited if the Corporate Insider intends to cause the recipient of the insider information (the “Tippee”) to trade and make a profit using the insider information received. Furthermore, while the foregoing conduct of the Corporate Insider is prohibited under the proposed bill, in order for such conduct to result in the imposition of an administrative penalty or criminal charge against the Corporate Insider, it must be shown that the Tippee did in fact trade using the insider information received from the Corporate Insider.
Regarding the criminal penalties for Corporate Insiders, the bill proposes a penalty of imprisonment of up to five years and/or a fine of no more than JPY5 million for individuals and a fine of no more than JPY500 million for legal entities. With respect to the administrative penalties, the proposed penalty will differ based on the circumstances of the improper misconduct engaged in by the Corporate Insider. If the improper disclosures/recommendations were made by Corporate Insider in connection with: (i) brokerage related activities, the administrative penalty shall be equal to three times (3x) of the aggregate brokerage fees received from the Tippee during the month in which the improper disclosures/recommendations were made; (ii) offering related activities, the administrative penalty shall be equal to the penalty in the foregoing (a) plus 1/2 of the amount of offering related fees (including underwriting fees) earned by the Corporate Insider with respect to the offering related activities; and (iii) other activities, the administrative penalty shall be equal to 1/2 of the aggregate profits made by the Tippee as a result of the improper disclosures/recommendations.
Lastly, in certain circumstances, the Japan regulators may disclose the name of the offending Corporate Insider to the public in the manner and in those circumstances stipulated by Cabinet Order.
(2) Increased Penalties Against Asset Managers.
Under the current laws, the administrative penalty imposed on an asset manager for insider trading is calculated based on the portion of the management fee received by such asset manager that is directly attributable to the shares with respect to which the insider trades were undertaken by the asset manager. For the purpose of increasing the amount of such penalties, under the proposed bill, the calculation methodology will change so that the administrative penalty will be equal to three times (3x) the aggregate management fees received by such asset manager for the calendar month in which the insider trading occurred. In addition, in certain circumstances, the Japan regulators may disclose to the public the name of the offending individual in the manner and in those circumstances stipulated by Cabinet Order.
(3) Expanding the Scope of Exempted Trades.
Under the current laws, off-market trades between a Corporate Insider and a Tippee that directly received the information from the Corporate Insider (the “Primary Tippee”) are exempted from the insider trading prohibitions. However, the foregoing exemption does not apply to any other off-market trades between persons who know insider information, for instance, between a Primary Tippee and a recipient of insider information from the Primary Tippee (the “Secondary Tippee”). Under the proposed bill, off-market trades between persons who know insider information (e.g. trades between Secondary Tippees) will also be exempted from the current insider trading prohibitions.
(4) Tender Offer Bids and Insider Trading.
Under the current laws, the target company of a tender offer bid (including its directors/officers and employees, the “Target Company”) is generally not subject to the insider trading regulations unless it has entered into, or negotiated to enter into, a legal agreement with the party making the tender offer bid (the “Tender Offeror”). In recognition of the fact that many Target Companies will have access to insider information, under the amendments set forth in the proposed bill, the scope of the definition of “insider” under Article 167 of the Financial Instruments and Exchange Act will expand to include a Target Company if it comes into possession of insider information with respect to the tender offer bid that is being made against it.
Lastly, the bill proposes a system under which a Tender Offeror that became aware of insider information regarding a tender offer (“TOB Information”) could seek to exempt itself from the normal prohibitions against insider trading: (i) by making a disclosure in its own tender offer notification to the relevant Local Finance Bureau regarding its receipt of the TOB Information; or (ii) where a six-month period had elapsed and the original Tender Offeror has not commenced its tender offer of the Target Company.
2. Additional Regulations Regarding Registered Investment Managers.
In response to the AIJ fraud scandal, in addition to the various amendments to the Cabinet Office Ordinances and the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators published in December 2012 by the Financial Services Agency of Japan, the bill proposes some additional amendments to the operations of financial instruments operators engaging in investment management businesses.
Noteworthy amendments to the provisions governing the investment management business set forth in the bill include:
(1) significant increases to the criminal penalties applicable to registered investment managers for crimes that involve the provision of false information in investment management reports, the provision of false information to prospective clients at the time of solicitation, and the conclusion of investment management agreements through fraudulent means; and
(2) restricting an employees’ pension fund (kousei nenkin kikin) from electing to be treated as professional investors (tokutei toushika) for the time being unless such employees’ pension fund has a well-developed investment management framework.
3. Amendments to the Operations of Foreign Bank Branches in Japan, etc.
Under the proposed bill, a foreign bank branch located in Japan will be subject to a minimum onshore asset requirement for JPY1 billion yen or more, to be stipulated by Cabinet Order. Furthermore, while previously not applicable, under the proposed bill, the Act on Special Treatment of Corporate Reorganization Proceedings and Other Insolvency Proceedings of Financial Institutions, etc. may apply to the corporate reorganization or other insolvency proceedings of a foreign bank branch located in Japan. This means that the Japanese regulator may file a petition for commencement of Japanese insolvency proceedings against a foreign bank branch to a court of Japan when the foreign bank branch becomes insolvent.
It should be noted that the proposal that foreign bank branches should be converted to a locally incorporated entity—a proposal which had been of considerable concern to the international banking community in Japan—has not been included in the proposed bill.
4. Other Proposed Amendments in the Bill.
Other proposed amendments in the bill that may be of interest to our clients are summarized below:
While the bill has been submitted to the Japan Diet and seems unlikely to change significantly through Diet deliberation, the final form of the amendments remains uncertain. The Investment Management Group of Bingham McCutchen Murase, Sakai Mimura Aizawa - Foreign Law Joint Enterprise will continue to monitor the proposed amendments and will update this alert as further information becomes available.
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:Wells-Christopher