Overview of Financial
Instruments and Exchange Act
Cabinet Orders and Ordinances(effective September 30, 2007)
Financial Services Agency

Table of Contents
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12.
13.

Basic Framework of the Reform
Basic contents of the Reform
Effective date of the Reform
Contents of the Reform
Expanding scope of regulated products
Cross-sectional and flexible regulation of financial instruments businesses
Regulatory treatment of fund business
Regulation of conduct of financial instruments businessClassification of customers: professional customers and general customers
Cross-sectional regulatory system for similar financial products and services
Ensure proper operation of self-regulatory functions of financial instruments
exchanges
Disclosure requirements tailored to the nature of securities
Quarterly reporting system
Enhancing internal control over financial reporting
Disclosure requirements for fund interests and other securities with low liquidity
Disclosure requirements for corporate restructuring
Expanding scope of qualified institutional investors

I. Basic Framework of the Reform
1. Basic contents of the Reform
Legislation(1) Establish a flexible, cross-sectional framework for a wide
range of financial instruments and services• Expand the scope of regulated products and services• Introduce cross-sectional requirements and restrictions forfinancial instruments businesses• Add flexibility to business regulations based on thecharacteristics of financial instruments, or the customer’sattributes(2) Enhance disclosure requirements•

Enhance disclosure requirements for listed companies•

Review regulations on tender offers and large
shareholding reports: effective December 13, 2006,
January 1 and April 1, 2007

(3) Provide organizational structures for self-regulatory
functions of financial instruments exchanges(4) Strict enforcement measures against securities violations:effective July 4, 2006•

Increase maximum criminal penalties (e.g., from 5 years
in prison to 10 years for market manipulation)•

Expand the scope of criminal and administrative penalties
on “misegyoku”

Cabinet Orders and Ordinances• Details of regulated products and services(e.g., exemptions for certain permissible
products and activities)• Details of regulatory rules on conduct offinancial instruments business (e.g.,
restrictions on advertisement)• Details of criteria for obtaining businessregistration• Detailed scope of professional customers• Details of quarterly reporting system andinternal control reporting system• Enhance disclosure requirements forcorporate acquisition and reorganization• Expand scope of “qualified institutionalinvestors”• Details of self-regulatory functions

2. Effective date of the Reform
Measures

Effective Date

• Strict enforcement measures against
securities violations• July 4, 2006

• Review of regulations on tender offers andlarge shareholding reports• December 13, 2006
(Shorten reporting deadline for special large
shareholding reports: January 1, 2007)(Mandatory electronic filing of large
shareholding reports: April1, 2007)• Enhance disclosure requirements for listedcompanies• September 30, 2007
(applicable from fiscal year commencing on
or after April 1, 2008)• Establish a flexible, cross-sectionalframework for a wide range of financial
instruments and services• Provide organizational structures for selfregulatory functions of financial instruments
exchanges• September 30, 2007

II. Contents of the Reform
1. Expanding scope of regulated products
Legislation

Cabinet Orders and Ordinances• Government bonds• Local bonds• Corporate bonds• Stocks• Beneficiary securities ofinvestment trusts• Add to regulated products “educationalinstitutions bonds” (certain standardizedloans to educational institutions)• Details of carve-outs from thecomprehensive definition for collective
investment schemes• Beneficiary interests in trusts• Interests in collective
investment schemes (funds)(comprehensive definition)e.g., details of cases where all investors areinvolved in the business; insurance andmutual aid contracts; interests in act firms
and accounting firms• Detailed scope of “derivative transactions”• Derivatives (wide-rangingdefinition)etc.

9 Add various statistics (e.g., GDP) to financial
indicators used for derivative transactions
9 Details of carve-outs (e.g., insurance andmutual aid contracts; debt guarantees)2. Cross-sectional and flexible regulation offinancial instruments businesses
Cabinet Orders and Ordinances
Financial instruments businessType I financial instruments business• Sales and solicitation of securities
with higher liquidity• Over-the-counter derivatives• Custodial service• Carve-outs from “financial instruments business”

Investment management business• Investment management

50 million JPY

Type II financial instruments business• Sales and solicitation of securities
with lower liquidity• Market derivatives
Investment advisory & agency business• Investment advice• Introducing investment advisors anddiscretionary investment managers
Registratione.g., acts by national and local government;
derivative transactions with professional customers
Minimum capital requirement
50 million JPY
10 million JPY(for individuals, business security deposit
requirement of 10 million JPY)
No minimum capital requirement(business security deposit requirement of 5 millionJPY)• Details of registration criteriae.g., specific qualification requirements for officers
and employees

3. Regulatory treatment of fund business
Cabinet Orders and Ordinances•
Funds for general investors(registration requirement)• Type II financial instruments business(sales and solicitation of fund interestsby the fund member)• Investment management business(investment management of fundassets by the fund member)

Funds for professional investors(notification requirement)

Exemptions from registration requirement(1) Fund member delegates all investment
management authority
9

Member is exempted from obtaining investment
management business registration

9

Detailed criteria (e.g., the delegatee must be aregistered investment manager)(2) Investment management of offshore funds
9

Detailed criteria (e.g., less than 10 Japanese
resident investors, all of which must be qualified
institutional investors)

9

Investment management by fund member isexempted (sales and solicitation of fundinterests requires registration)• Detailed criteria
9 1 or more qualified institutional investor
9 49 or less general investors(indirect investors through LLP/LPS fund of funds
are included in the number count)4. Regulation of conduct of financial instruments
business
Cabinet Orders and Ordinances(1) Detailed rules on advertisement•
Advertisement rules apply when providing similar information to a large number ofpersons (via mail, facsimile, e-mail, etc.)•
Details of information to be indicated in advertisements (e.g., fee, risk information)•Indication of certain material information (e.g., existence of exposures to loss) must
be clear and accurate, and in large letters•
Reduced requirement for television and radio commercials, billboard advertisements
and novelty advertisements(2) Details of obligation to deliver documents prior to entering into contract•
Details of information to be stated in the documents - tailored information fordifferent types of contract•
Certain material information (e.g., risk information) must be written in plain language•
Details of cases where delivery is exempted (e.g., where the customer received
such document for a similar contract)(3) Details of prohibited acts•
Prohibition on unsolicited promotion – applicable to over-the-counter financial
futures transactions•
Prohibition on solicitation without confirming will of customer, and solicitation against
will – applicable to financial futures transactions in general•
Requirement to provide explanation suitable for each customer when delivering
statutory customer documents

5. Classification of customers: professionalcustomers and general customers
Specified investors(professionalcustomers)
Financial
instruments firm is
exempted fromcertain obligations(e.g., delivery ofstatutory customerdocuments)

Customers otherthan specified
investors(general customers)(1) Cannot request nonprofessional treatment• Qualified institutional
investor• Japanese government• Bank of Japan(2) Can request nonprofessional treatment• Designatedcompanies(3) Can request
professional treatment• Designated individuals(4) Cannot request
professional treatment• Individuals other than
(3)

Cabinet Orders and Ordinances(2) Designated companies•

Local government•

Public companies•

Joint-stock companies whose
capital is reasonably believed
to be 500 million JPY or more•

Foreign companies
etc.

(3) Designated individuals•

Individual (i) with trading
experience of one year or more,and (ii) whose net asset, andinvested assets, arereasonably believed to be eachworth 300 million JPY or more
etc.

Special protective measures under the Financial Products Sales Act(e.g., presumption of damages) are not available for specified investors

6. Cross-sectional regulatory system for similar
financial products and services
Cabinet Orders and Ordinances
Apply same rules of conduct to similar
financial products and services thathave strong investment characteristics• Specified deposits (Banking Act)• Specified insurance (InsuranceBusiness Act)• Specified trust (Trust Business Act)• Commodity futures (CommodityExchange) Act• Real estate syndication business (RealEstate Syndication Business Act)

Recognized investor protection
organization• Resolves complaints and mediates
disputes regarding financial instruments
firms• Foreign currency denominated deposits• Derivative deposits
etc.
• Variable insurance and pension funds• Foreign currency denominated insurance
and pension funds• Derivative depositsetc.
• Trusts other than certain trusts that do nothave strong investment characteristics (e.g.,charitable trusts, custodial trust)• Expand scope of subject firms to othersimilar financial service providers (e.g.,banks, insurance companies, trustcompanies)

7. Ensure proper operation of self-regulatory
functions of financial instruments exchanges
Financial instruments exchanges can delegate its self-regulatory
functions to:• a separate specialized entity (self-regulatory corporation); or• a specialized internal committee (self-regulatory committee)
Cabinet Orders and OrdinancesDetailed scope of self-regulatory functions• Monitoring of trading in the markets• Examination of trading participants’ qualifications• Disciplinary actions and other measures against trading participants• Examination of disclosures by listed issuers• Disciplinary actions and other measures against listed issuersetc.

8. Disclosure requirements tailored to the nature ofsecurities
Disclosure requirements
tailored to each type ofsecurities• Corporate finance typesecurities (e.g., stocks,bonds)– Backed by credit
value of issuer itself• Asset finance typesecurities (e.g., fundinterests, ABS)
– Backed by value ofassets held by issuer

Cabinet Orders and Ordinances
Details of enhanced
disclosure contents for
asset finance typesecurities• Information regarding theassets (e.g., investment
real estate, fund of funds)• Information regarding theasset manager (e.g.,internal control structure)• Information regarding asset
management services (e.g.,basic investment policy)9. Quarterly reporting system
Cabinet Orders and Ordinances•••••

Applicable to listed companies
Reporting deadline:– 45 days after the end of each fiscal quarter(60 days, for the 2nd fiscal quarter of banks and insurance companies)
Details of information to be disclosed in quarterly reports– Consolidated quarterly financial statements(if the issuer does not prepare consolidated statements, nonconsolidated quarterly financial statements)– Banks and insurance companies must submit consolidated and nonconsolidated quarterly financial statements for the 2nd fiscal quarter
Types of consolidated quarterly financial statements– Consolidated quarterly balance sheets– Consolidated quarterly profit and loss statements– Consolidated quarterly cash flow statements
Audit of quarterly financial statements– Audit is certified by quarterly review report10. Enhancing internal control over financial
reportingCabinet Orders and Ordinances••••

Applicable to listed companies
Internal control report– Filed together with (annual) securities reports– Details of information to be included (e.g., name and title of issuer’s
representative (and CFO), basic framework of internal control
regarding financial reporting, scope and procedures ofmanagement assessment)Internal control audit report– Certifies audit of internal control reports– Details of information to be included (e.g., audit opinion regarding
internal control report)
Certification letter– Filed together with (annual) securities reports and quarterly reports– Issuer’s representative (and CFO) must certify the contents of thesecurities report or quarterly report11. Disclosure requirements for fund interests andother securities with low liquidity
Securities with low liquidity (e.g.,interests in collective investment
schemes, beneficiary interests intrusts)• Disclosure requirements (filing ofsecurities registration statement
and ongoing disclosure) apply if:– The fund/trust invests mainly insecurities;– The total amount of the offering
is 100 million JPY or more; and– The offering results in theoffered securities to be held by a
substantially large number ofpersons

Cabinet Orders
and Ordinances
Mainly = more than
50% of fund/trust
assetsA substantially large
number of persons =500 or more persons

12. Disclosure requirements for corporate
restructuring•

In the case of corporate restructuring (e.g., merger) where the stockholders of thesubject company (e.g., dissolving company) receive securities issued by an entity
other than the subject company (e.g., surviving entity), the issuer of the securities
must make public disclosure (e.g., filing of securities registration statement) if:(1) Public disclosure has not been made for such securities; and(2) Public disclosure is made for stocks issued by the subject company[Public disclosure][No public disclosure]

Company B

Company A(Dissolving company)(Surviving company)

Stockholders

Company A must filesecurities registration
statement, and makeongoing publicdisclosures

Company A stocks

Cabinet Orders and Ordinances
Details of additional information to be included in the securities registration statement
for corporate restructuring (e.g., information regarding the corporate restructuringagreement, parties to the restructuring, financial status after restructuring)(If the issuer (Company A) is a public disclosure company, similar information isdisclosed as timely disclosure in the extraordinary reports)

13. Expanding scope of qualified institutional
investors• Offerings of securities areexempted from public
disclosure requirement, if
solicitation is made only toqualified institutional investors• Previous scope of qualified
institutional investors (QIIs) :– Banks, securities firms,
insurance companies– Corporations that filesecurities reports, whichhold securities of 10 billion
JPY or more - must makefiling to become QII– Foreign governments,
foreign financial
institutions - must makefiling to become QII
etc.

Cabinet Orders and Ordinances
Expanded scope of qualified
institutional investors:• Trust companies and foreign
trust companies (excluding
custodial trust companies) –must make filing to become QII• Corporations that holdsecurities of 1 billion JPY or
more - must make filing tobecome QII• Individuals that hold securitiesof 1 billion JPY or more, whohave held securities trading
accounts for more than 1 year must make filing to become QIIetc.