Newsletter No. 7 | July 24th, 2024

Report of Working Group on CapitalMarket Regulations and AssetManagement Task Force of theFinancial System Council-“Promotion of New Entrants in the AssetManagement Business and SupportProgram for New Entrants (Japanese EMP(Emerging Managers Program))"Atsumi & Sakai
Policy Research Institute1． Promotion of New Entrants in the Asset Management Business(1) Deregulation of Entry Requirements for Asset Management BusinessesA) Deregulation of Entry Requirements for Asset Management Businesses,
Outsourcing of Middle- and Back-office Operations
For operators who have entered the market through professional frameworks (e.g.,investment management business for qualified investors and specially-permitted
business for qualified institutional investors, etc.), it was expected that as theirbusiness expanded, they would transition into the general asset managementbusiness (the businesses targeting general investors). However, the number ofasset management firms in Japan has not showed significant growth.
The main functions required for conducting asset management operations are asfollows:
1. Management operations for funds and similar entities;
2. Investment operations; and3. Tasks related to accounting and legal compliance (so-called "middle- and backoffice operations ").
One of the reasons for the lack of growth in new entrants to the asset managementbusiness is the heavy burden of establishing systems for middle- and back-office
operations to meet registration requirements.
Therefore, from the perspective of ensuring a healthy competitive environment
through the promotion of new entrants, it is appropriate to consider easing someof the entry requirements for the asset management business by allowing theoutsourcing of middle- and back-office operations to service providers that ensure
appropriate quality.
Specifically, it is appropriate to ease the registration requirements (such as capitaland system organization) for the asset management business, especially in cases
where they outsource middle- and back-office operations to external service
providers that ensure appropriate quality and do not directly receive deposits ofmoney or similar assets. Additionally, to ensure that low-quality service providers
who neglect investor protection do not receive such outsourcing contracts, it isappropriate to impose entry regulations and conduct regulations (such as a dutyof loyalty and care) on businesses that undertake all or part of these middle- andback-office operations, and to subject them to regulatory oversight, thereby
ensuring the quality of their services.

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Currently, a variety of outsourcing services for middle- and back-office operations
are available, and imposing uniform entry regulations on all service providers
offering these services could lead to excessive regulation and potentially eliminate
service providers. Therefore, rather than subjecting all businesses that offer
outsourcing services for middle- and back-office operations to uniform entry
regulations, a structure that relaxes the entry requirements for the asset
management business when outsourcing to businesses registered with theauthorities can be considered.
B) Full Outsourcing of Operational Authority
In Japan, a legal revision in 1998 introduced a basis for outsourcing of operational
authority of investment trust management companies, clarifying that outsourcing
is permitted. However, even after the legal revision in 1998, it was pointed out that
all of the operational authority could not be outsourced. As a result, it has been
pointed out that Japan lacks the specialized fund operational functions seen in
European fund management companies.
If Japan sees an increase in firms specializing in fund management functions, it isconceivable that this will lead to a rise in new and distinctive asset managers
utilizing such functions. Moreover, separating functions such as asset management
and asset custody, and entrusting asset management to highly specialized firms, isexpected to enhance overall efficiency, assuming that necessary monitoring andgovernance of the contracted parties are effectively implemented.
Even when the authority related to investment decisions is fully outsourced, asset
management companies still have responsibility to investors for the duty of loyalty
and care, as well as for the operations of the outsourced entities. They are required
to monitor the operational situation of the outsourced entities as necessary. In
addition, asset management companies must inform investors in advance about
the outsourcing of operations, including the name of the external investment
operator, through contracts or trust agreements. Based on these regulations, it isconsidered permissible for asset management companies to specialize in fundoperation functions. Therefore, it would be appropriate to review and potentiallyrevise regulations that prohibit the full outsourcing of operational authority.

2(2) Support program for new entrants (Japanese EMP (Emerging Managers Program))Starting a new asset management business involves significant challenges, including
the heavy burden of establishing systems to meet the registration requirements forthe investment management business and the difficulty in acquiring operating funds(seed money) due to the lack of a track record as a new entrant.
Therefore, to create an environment where financial institutions and asset owners
can realize the best interests of beneficiaries through the investment results of newentrants, it would be appropriate to develop a program to facilitate the supply offunds to emerging managers, in collaboration between the public and private sectors.
The scope of new entrants and the asset classes they target should be considered
broadly, as it is important for various investment products and strategies to diversify
and for competition among asset management businesses to be encouraged. For
example, in terms of asset classes, this could include engagement funds for listedequities (including growth capitalists post-listing on growth markets), bond funds, aswell as a diverse range of investment targets such as private equity (PE) funds,
venture capital (VC) funds, and infrastructure funds.
From the perspective of ensuring the best interests of beneficiaries, financial
institutions and asset owners should seek out asset managers with strong
operational capabilities. Furthermore, from the perspective of discovering potential
partners for future customer-oriented products, there should be active utilization of
new entrants in investment operations, and these managers should not be excluded
merely because of their short business history but rather should be broadly
considered as options for fund management. In addition, the government should
support the entry of new entrants by relaxing the entry requirements for newparticipants. To make such efforts more visible, it is appropriate for the governmentand others to publish various initiatives aimed at funding new entrants and toprovide lists of new entrants to financial institutions and asset owners.
Under such initiatives facilitated by public-private partnerships, the establishment ofnumerous new asset management firms in Japan is expected to lead to theadvancement of the asset management industry through enhanced competition, thedevelopment of skilled gatekeepers who can discern the potential of new entrants,
and the transfer of skills and experience to the next generation. Through theimplementation of EMP, it is crucial to broaden the talent base related to asset
management for the future.

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-----------------------------------------------------------------------------------------------------------------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

Sogo Kato

Atsumi & Sakai

Atsumi & Sakai

Policy Research Institute

Policy Research InstitutePrincipal Researcher

researcher

E: tatsuhiro.hirayama@aplaw.jp

E: sogo.kato@aplaw.jp

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