Newsletter No. 003|February 20th 2024

Report of the Working Group on
Capital Market Regulations andAsset Management Task Force ofthe Financial System Council-“Product Governance” and “RectifyingJapan‘s unique business practices ininvestment trusts”Atsumi & Sakai
Policy Research InstituteThe Financial Services Agency of Japan recently published a “Report of the Working

Group on Capital Market Regulations and Asset Management Task Force of theFinancial System Council" (the “Report”), which describes a strategy for improving
the capabilities of asset management companies who are playing important roles inmanaging financial assets and making returns for households. The strategies include
promoting a virtuous cycle of growth and asset-based income in the investment chain
through enhancing fund-raising for startups and feeding those returns back tohouseholds, and promoting initiatives for achieving a leading asset management
center.
This newsletter discusses the section of the Report on “Product Governance” and“Rectifying Japan‘s unique business practices in investment trusts”.

While thecontents of the Report are not indicative of an imminent change in the law, we believethat the statements will have an impact on practice.
1．Product Governance
Certain measures have been taken by asset management companies, such as
establishing product governance committees, and the Investment Trusts Association
also has taken initiatives towards improvement of investment trusts, which promotes
product governance. However, issues continue to be pointed out regarding productgovernance in asset management companies, including the provision of informationthat is easy for clients to understand, such as:
・ During the process of developing products, there may not be sufficientverification regarding the setting of appropriate assumed customer attributes or thesetting of appropriate trust fees that match the operational costs.
・After product composition, there may not be sufficient verification on whether
asset management is being conducted as expected, or whether asset management is
continuously suitable for the corresponding product.

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・Sufficient verification is not conducted with regard to sales conditions wheresales companies sell financial products and the procedures for the sale of financial
products may not be suitable for the assumed customer attributes.
・Regarding the provision of information that is easy for customers to understand,there may be room for improvement in how information is provided to customers
regarding product attributes, including assumed customer attributes and costs,
which aids in the appropriate selection by customers.
・The transparency of the asset management system, such as the disclosure ofnames of the individual asset managers, has not been progressing, possibly leaving
customers unable to invest with confidence due to the lack of understanding of theoperational reality. Enhancing the transparency of the operational system, including
the disclosure of individual asset managers’ names, could foster a sense ofresponsibility of asset management towards investors.
・ Asset management companies should tackle with desirable disclosurecomparable and visible to other asset management companies so that investors canmake appropriate product selections through evaluations by fund analysts andinvestment advisory firms.
・As for governance system issues, it is necessary to improve governance at themanagement level of asset management companies.
・With regard to alternative investments, more sophisticated management thantraditional securities operations is required.
・ An appropriate governance system is required in selection of schemes andexamination of sales targets based on the risks of investment objects and methods.
Based on these points, it is appropriate to add descriptions centered on productgovernance to the principles of client-oriented business operations and to establish
a governance system for quality control of individual products in asset management

2companies to support proper product composition and management, and ensuretransparency.
2．Rectify Japan‘s unique business practices in investment trusts
Currently, the net asset value (NAV) of investment trusts is calculated daily by boththe management company (asset management company) and the trustee company(trust bank), a practice known as double-check calculation. Double-check calculation
has contributed to beneficiary protection by enhancing the fairness of the NAV
evaluation through a mutual restraining function. However, with advancements in
information technology and the progression of global competition, there areconcerns that double-check calculation, as a unique business practice in Japan, may
be adding additional costs to investors and may be a barrier to entry.
To implement single calculation, challenges include the need for changes in businessflow and system adjustments at asset management companies, as well as the need forclarification of the materiality policy regarding NAV calculation errors. The
materiality policy for investment trusts refers to a policy of correcting the NAV whenerrors exceed a certain significant (material) level. This is intended to prevent thecost associated with retrospectively correcting minor calculation errors from being
passed on to all investors and to ensure an appropriate level at which errors arecorrected.
Materiality policies are set by internal regulations at each asset managementcompany, with the level for correcting the NAV generally at around 0.5% (50 basispoints), but there is variation among companies, and the policy is not widely
communicated to investors. For the realization and adoption of single calculation,
standardization and unification of business processes within the industry are
considered necessary.
For the clarification of the materiality policy, when setting such a policy, it isappropriate to specify in regulatory guidelines the need for an appropriate level andthe importance of making the policy known to investors. Since the decision to correctthe NAV affects investors, it is desirable for each company to define its approach to3

setting levels under the involvement of management and to communicate this toinvestors.
This report states this approach not only ensures a certain level of investor
protection but also allows new entrants to understand the level that should be set asa materiality policy, potentially lowering barriers to entry and promoting entry into
the investment management business.

-----------------------------------------------------------------------------------------------------------------THIS NEWSLETTER IS PROVIDED FOR INFORMATION PURPOSES ONLY; IT DOES NOTCONSTITUTE AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE.
------------------------------------------------------------------------------------------------------------------Authors/Contacts
Takafumi Ochiai

Kenichi Tanizaki

Atsumi & Sakai

Atsumi & Sakai

Head of Policy Research Institute

Deputy Head of Policy Research InstituteE: takafumi.ochiai@aplaw.jp

E: kenichi.tanizaki@aplaw.jp

Tatsuhiro Hirayama
Atsumi & Sakai
Policy Research InstituteSenior chief researcher
E: tatsuhiro.hirayama@aplaw.jp

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