From July 1, 2013, the remaining portions of the amendments (“Amendments”) to the Cabinet Office Ordinance on Financial Instruments Business (the “Business Ordinance”) proposed by the Financial Services Agency of Japan (the “FSA”) to prevent the recurrence of frauds similar to the AIJ scandal went into effect.
DIM’s Obligation to Establish Arrangements Regarding NAV Information
Among the Amendments are those that require financial instruments firms that: (i) engage in a discretionary investment management business (each a “DIM”), (ii) manage their customers’ assets held in trust by a trust bank or a trust company (each a “Trust Bank”), and (iii) invest into the fund securities specified in Article 96(4) of the Business Ordinance, such as units of investment trusts, shares of investment corporations, bonds issued by investment corporations and limited partnership interests (whether domestic or foreign), to establish certain information provision arrangements.
The relevant information provision arrangements must ensure that: (a) the relevant Trust Bank will receive the net asset value (“NAV”) information regarding the fund securities at least every six months (in a case where the beneficiary of the trust is a pension fund, every three months) directly from, or otherwise be able to confirm such information directly with, the party responsible for the relevant NAV calculation like the fund administrator (a “NAV Calculator”), (b) the fund accounts invested by the customer via the Trust Bank are audited, and (c) the relevant Trust Bank will receive an audit report of the relevant fund directly from its auditor or without passing through the relevant DIM’s group entities.1 In addition, these DIMs are also required to provide performance reports containing the relevant fund’s NAV information not only to their customers, but also to the relevant Trust Banks which have custody of the assets of the relevant customer.2
In response to the above requirements, the revised regulations have imposed on Trust Banks increased responsibilities to protect their customers (notably pension funds). These include the obligation to reconcile the NAV information received from (i) the relevant NAV Calculator, (ii) the relevant fund’s audit report, and (iii) the NAV information appearing on the performance report issued and provided by the relevant DIM, and thereafter to report the result of such reconciliation to relevant customers.3
Foreign Manager and Administrator Cooperation in the New Arrangement
We understand that many foreign fund administrators and/or managers that make NAV Calculators have been contacted by the DIMs and/or Trust Banks that have subscribed their funds to assist such parties in complying with the Amendments. Although these foreign fund administrators and/or managers are not the direct addressee of the Amendments, in practice, it is anticipated that they will need to cooperate with DIMs and/or Trust Banks in the new reporting framework in order to enable their Japanese investors (including pension funds) to invest in relevant funds.
As a result, a NAV Calculator may be requested to (i) report the NAV information directly to the relevant Trust Bank, or (ii) be ready to confirm inquiries on the NAV information directly from the relevant Trust Bank. With respect to (ii), the FSA has indicated in the course of public comment process that several methods can be used to respond to such inquiries. These include telephonic confirmations, e-mail confirmations and secured (password) access to a website where the information can be confirmed.4
Should you have questions related to the above obligations, our Tokyo team can elaborate further on these practical obligations of managers towards Japanese investors.
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:Fuminaga-Tomoko
1Article 130(1)(xv) of the Business Ordinance.
2Article 123(1)(xxix) of the Business Ordinance.
3Article 22(9) of the Ordinance for Enforcement of the Act on Engagement in Trust Business by Financial Institutions
4Article 40(9) of the Ordinance for Enforcement of the Trust Business Act.
This article was originally published by Bingham McCutchen LLP.