Q&A on External Audit of Segregated Management
Established on June 8, 2017(Note) Abbreviations used in the documents are as follows:
Regulations: Investment Trust Association, Japan Regulations for Direct Offering, etc. of Beneficiary
Certificates, etc.
Bylaws: Investment Trust Association, Japan, By-laws of the Regulations for Direct Offering, etc. ofBeneficiary Certificates, etc.
Practical Guidelines: The Japanese Institute of Certified Public Accountants, Practical Guidelines No.
56 by Business Committees; Practical Guidelines for Assurance Engagements for Compliance withLaws, Regulations, etc. Concerning Segregated Management of Customer Assets at Investment TrustManagement Companies, etc. for Direct Offerings, etc. of Beneficiary Certificates, etc.

Question 1: What are the main points of the amendment to the Regulations dated June 8, 2017?

Answer: Major changes related to the Segregated Management Audit due to the amendment to theRegulations dated June 8, 2017, are as follows:(1) Unification of legal compliance for segregated management with Assurance Engagements
In the past, Full Members who have been engaged in direct offering have been subject to SegregatedManagement Audit by selecting either of verification services regarding compliance with the laws,regulations, etc. concerning segregated management (hereinafter referred to as “VerificationServices”) or agreed procedures regarding the segregated management (hereinafter referred to as“Agreed Procedures”) with reference to the regulations of the Japan Securities Dealers Association(Regulations for Proper Implementation of Segregated Management of Customer Assets) andpractical guidelines by the Japanese Institute of Certified Public Accountants1 (hereinafter referred toas “Old Practical Guidelines”).
Recently, the Japan Securities Dealers Association has revised the Association’s regulations based on
the results of a study conducted by the Working Group for studying the ideal external audit, etc. forthe segregated management of customer assets in April 2015 and has decided to unify them as theAssurance Engagements (procedures equivalent to the conventional Verification Services of the Japan
Securities Dealers Association).
The Association has decided to obligate the Certified Public Accountants, etc. to perform the“Assurance Engagements for Compliance with Laws and Regulations on Segregated Management ofCustomer Assets” (hereinafter referred to as “Assurance Engagement”) in addition to clarifying the1The Japanese Institute of Certified Public Accountants, Practical Guidelines No. 40 by Business Committees; Handling ofVerification Services for Compliance with Laws and Regulations for Segregated Management of Customer Assets by Financial
Instruments Business Operators.

-1-basis for the segregated management of beneficiary certificates of investment trusts and money aswell as the Segregated Management Audit.
Furthermore, through consultation with the Japanese Institute of Certified Public Accountants, it has
been decided that they will formulate the “Practical Guidelines” for the Segregated ManagementAudits.

(2) Introduction of the obligation to prepare Management ReportsIn the past, Full Members have prepared Management Reports with reference to the “Old PracticalGuidelines” when receiving the Verification Services.
This time, in order to clarify the principle of dual responsibility in the Segregated Management Audit,
it has been determined that the rules of the Japan Securities Dealers Association stipulate theobligation for the Members to prepare a Management Report.
In the direct offering of investment trusts, the act of taking custody of customers’ assets requires strict
control, and in order to earn the customers’ trust, we believe that the same level of segregatedmanagement as that applicable to the Type I Financial Instruments Business Operators and audit arealso required in the business.
The Association has decided to stipulate in the Regulations the obligation of Full Members to prepare
the Management Report.
(Article 11, Paragraph 5 of the Regulations)(3) Matters to be included in Management Report
In Article 3-2, Paragraph 1 of the By-laws, the following are provided for:(i)

The obligation to comply with the laws, regulations, etc. concerning segregated management;(ii) The obligation for establishing and operating an effective internal control system to ensure legal
compliance with the laws, regulations, etc. concerning segregated management;(iii) The obligation to entrust segregated customer funds or manage customer securities separately if
the member is also an account management institution as of the base date for audits (hereinafterreferred to as the “Base Date”);(iv) The obligation to perform procedures to confirm that segregated management of customer
assets has been implemented in compliance with the laws, regulations, etc.;(v) Whether or not segregated management for customer assets complies with the laws, regulations,etc. as of the Base Date as a result of performing the procedures set forth in the preceding item;
and(vi) The content of any event that may have a material impact on compliance with the laws,
regulations, etc. concerning segregated management, which occurred after the Base Date but
before the Management Report submission date.
(Article 3-2, Paragraph 1 of the By-laws)-2-

(4) Introduction of an obligation to implement the procedures to confirm the establishment and operationof effective internal control for compliance with the laws, regulations, etc. concerning segregatedmanagement as well as the status of compliance with such laws, regulations, etc. (referred to as the“Confirmation Procedures” in (4) and (5) below)
With the recent amendment to the Regulations obligating the preparation of the Management Report
described in (2) above in such Regulations, it has been decided to oblige the Full Members toimplement the Confirmation Procedures as the basis for preparing the Management Report.
The Confirmation Procedures at the time of receiving the Segregated Management Audit areconsidered to have been implemented with reference to the Old Practical Guidelines in the past, butshall conform to the revised Regulations henceforth.
(Article 11, Paragraph 6 of the Regulations)(5) Introduction of an obligation to produce the records on the Confirmation Procedures regarding theestablishment and operation of effective internal control for compliance with the laws, regulations,etc. concerning segregated management as well as for the Confirmation Procedures of thecompliance status with such laws, regulations, etc.
It is decided to obligate the Full Members to record the results of implementing the Confirmation
Procedures described in (4) above. In addition, it is decided to obligate to record any non-complianceevent, etc. identified during the implementation of such Procedures. See Q3 for details.
(Article 11, Paragraph 7 of the Regulations)(6) Reporting the results of the Segregated Management Audit to the Investment Trust Association,
Japan
When a Full Member receives a report on the results of Segregated Management Audit conducted byCertified Public Accountants, etc. (meaning the “Assurance report on compliance with the laws,regulations, etc. concerning segregated management” submitted by Certified Public Accountants,etc.; hereinafter referred to as the “Segregated Management Audit Report”), the Regulations oblige
the Full Member to report to the Association according to the submission form as set forth in theBy-laws with a copy of the Management Report attached thereto.
However, notification to this Association is no longer required only when a Full Member, which has
obtained registration for both Type I financial instruments business and Type II financial instruments
business, engages in taking their customers’ deposits for investment concerned with the direct
offering of investment trusts as part of their securities, etc. management business (Type I business)and submits a Segregated Management Audit Report to the Japan Securities Dealers Association.
In order to conduct solicitation and sales as Type I financial instruments business, it is necessary toregister securities sales representatives with the Japan Securities Dealers Association as well as tosubmit a notification of the Sales Officers and Representatives to the Association.
(Article 11, Paragraph 8 of the Regulations and Article 3-2, Paragraph 3 of the By-laws)-3-Question 2: In Article 11, Paragraph 6 of the Regulations, it is provided that the member shall implement

procedures to confirm that it has established and operated an effective internal control system forcompliance with the laws, regulations, etc. concerning segregated management and has conducted thesegregated management of customer assets in compliance with such laws, regulations, etc. What kind ofprocedures are specifically required?

Answer: Full Members are obligated to conduct the segregated management in compliance with the relevantlaws, regulations, etc. and to receive routine audits by Certified Public Accountants, etc. regarding thestatus of their segregated management at least once a year as stipulated in the Order Regarding AccountManagement Institutions or the Regulations. In order to receive such audit by Certified Public
Accountants, etc., it is necessary to prepare a Management Report.
Management Report is for the management to express their opinion on the status of compliance with thelaws, regulations, etc. regarding the segregated management of a Full Member on the Base Date foraudit in order for the Full Member to receive such audit by Certified Public Accountants, etc. on aregular basis.
In other words, in order for the management to express their opinions in the Management Report, themanagement needs to conduct an inspection according to the procedures suited to their own
circumstances (internal inspection, etc.) to ascertain, as of the Base Date for audit, whether thesegregated customer fund has been entrusted and Customer Securities are managed separately as set
forth in the relevant laws, regulations, etc. as well as whether an effective internal control has been
established and implemented to comply with such laws, regulations, etc. concerning segregatedmanagement. Examples of such procedures include the following:(1) Full Members who have been subject to the Agreed Procedures in the past or who receive theSegregated Management Audit for the first time
With reference to the “Internal Control Framework for Segregated Management” and attacheddocument thereto “Check Items and Checkpoints for Segregated Management of Customer Assets,”
it may be advisable to implement procedures (such as internal inspections) to confirm that it hasestablished and operated an effective internal control system for compliance with the laws,
regulations, etc. concerning segregated management and has conducted the segregated managementof customer assets in compliance with such laws, regulations, etc.

(2) Full Members who have received Verification Services in the past
It is acceptable to basically follow the same procedures as the Confirmation Procedures pursuant tothe old Practical Guidelines at the time of receiving the Verification Services in the past.
(Article 11, Paragraph 6 of the Regulations)-4-Question 3: What sort of records are required to be produced according to Article 11, Paragraph 7 of theRegulations?

Answer: The records to be prepared according to Article 11, Paragraph 7 of the Regulations shall include theprocedures implemented pursuant to Article 11, Paragraph 6 of the Regulations (see Q2) and thesummary of the results thereof.
(1) Full Members who have been subject to the Agreed Procedures in the past or who receive theSegregated Management Audit for the first time
When procedures are implemented with reference to the description of Q2(1) above, it is advisable torecord the results of such procedures by using the Japan Securities Dealers Association’s sample form
such as the “Investigation Sheet for Segregated Management.”(2) Full Members who have received Verification Services in the past
It is acceptable to basically follow the same procedures to prepare the records pursuant to the oldPractical Guidelines at the time of receiving the Verification Services in the past.

Question 4: How long should the records be kept, which is prepared according to Article 11, Paragraph 7 ofthe Regulations?

Answer: The storage period of records prepared under Article 11, Paragraph 7 of the Regulations is notprescribed. However, as a check item in the “Inspection Manual for Financial Instruments Business
Operators, etc.,” it is stipulated that “whether a person engaged in the internal audit has accurate recordsof the matters verified through internal audit and problems identified,” and “whether a person engaged
in the internal audit has prepared an internal audit report without delay which accurately reflects
problems, etc. identified through such internal audit.” Therefore, although we believe each member
company provides for an appropriate period for their safekeeping, it is considered necessary to keepsuch records related to internal audit for at least three (3) years taking also into accounts necessary
responses to inspections, etc. by the relevant authorities.

Question 5: What matters should be included in the Management Report?

Answer: In preparing the Management Report pursuant to Article 3-2, Paragraph 1 of the By-laws, as a resultof the procedures (internal inspection, etc.; refer to Q2 above) to confirm that an effective internalcontrol system for compliance with the laws, regulations, etc. concerning segregated management has
been established and implemented, and the segregated management of the customer assets comply withthe such laws, regulations, etc., if any non-compliance with the laws, regulations, etc. is detected on theBase Date for audit such as (i) shortage of segregated customer fund and (ii) non-performance of-5-

segregated management of the securities, all of such non-compliance incidence with the relevant laws,regulations, etc. shall be described in the Management Report, in principle. It is not necessary to state in
the Management Report any accounting error or clerical error that is identified on the Base Date foraudit but not regarded non-compliance with the laws, regulations, etc. (e.g., calculation error or clericalmistake although the Necessary Amount of segregated customer trust fund is satisfied) or legal
non-compliance incidence that had occurred prior to the Base Date for audit but addressed by such BaseDate.
Please refer to Q1(3) for descriptions items in the Management Report.
(Article 3-2, Paragraph 1 of the By-laws)

Question 6: When do we need to start receiving the Assurance Engagements under this revised Regulations?

Answer: The Assurance Engagements under the revised Regulations shall apply to any SegregatedManagement Audit, which will be conducted on or after March 31, 2018, as the Base Date of audit.
Specifically, the details are as follows:(1) Full Members who have received Verification Services in the past
The Full Members who received the Verification Services before the effective date of this amendment
will continue to receive the Assurance Engagements.
(2) Full Members who have received Agreed Procedures in the past
Full Members who have been subject to the Agreed Procedures prior to the effective date of thisamendment will also be required to receive the Assurance Engagements. However, in consideration ofthe fact that preparation is required for the switchover from the Agreed Procedures to the Assurance
Engagements, a grace period has been established. Specifically, with respect to the SegregatedManagement Audit to be conducted on or before March 31, 2018, as the Base Date of audit, it ispossible to continue to receive the Agreed Procedures. (In this case, the Segregated Management
Audit to be conducted on or after April 1, 2018, as the Base Date for the audit is subject to theAssurance Engagements.)-6-