Comprehensive Guidelines for Supervision of Financial
Instruments Business Operators, etc.

March 2024
Securities Business Division, Supervisory Bureau,
Financial Services Agency

Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.
I. Basic Concept ...................................................................................................................................................... 1
I-1 Basic Concept for Supervision of Financial Instruments Business Operators, etc. ................... 1
I-2 Purpose of Establishment of Guideline for Supervision ............................................................... 3
I-2-1 Purpose of Establishment of Guideline for Supervision ........................................................ 3
I-2-2 Structure of This Guideline ..................................................................................................... 4
II. Points of Attention in the Conduct of Administrative Processes Regarding the Supervision of Financial
Instruments Business Operators, etc. ................................................................................................................... 8
II-1 Basic Concept Concerning Supervisory Processes ...................................................................... 8
II-1-1 Method of Implementation of Supervisory Processes......................................................... 11
II-1-2 Specific Method of Supervisory Processes ........................................................................... 11
II-1-3 Quality Control ...................................................................................................................... 17
II-1-4 General Supervisory Processes ............................................................................................ 18
II-1-5 Cooperation between Supervisory Departments ................................................................ 23
II-1-6 Cooperation with Self-Regulatory Organizations ............................................................... 25
II-1-7 Internal Delegation ............................................................................................................... 25
II-1-8 Points of Attention Regarding Submission Documents Required for Financial Instruments
Business Operators, etc................................................................................................................... 28
II-1-9 Points of Attention Regarding Procedures in Writing and by Face-to-Face Contact ....... 28
II-1-10 Points of Attention when Submitting Written Applications, etc. .................................... 29
II-2 Response to Inquiries, Complaints, etc. ..................................................................................... 30
II-3 Response to External Inquiries about Interpretations of Laws and Regulations, etc. ........... 31
II-3-1 Inquiries about Laws and Regulations ................................................................................ 31
II-3-2 Prior Confirmation Procedures on the Application of Laws and Regulations by
Administrative Agencies (“No Action Letter” System) ................................................................. 33
II-3-3 System to Eliminate Regulatory Gray Zones ...................................................................... 35
II-4 Points of Attention in Providing Administrative Guidance, etc. .............................................. 38
II-4-1 Points of Attention in Providing Administrative Guidance, etc. ....................................... 38
II-4-2 Points of Attention in Holding Interviews, etc.................................................................... 40
II-4-3 Procedures for Communications and Consultations .......................................................... 40
II-5 Points of Attention in Taking Administrative Dispositions ...................................................... 41
II-5-1 Response to Inspection Results, etc. .................................................................................... 41
II-5-2 Administrative Dispositions Based on Articles 51 to 52-2 (1) (Business Improvement
Orders, Business Suspension Orders, etc.) .................................................................................... 42
II-5-3 Points of Attention Regarding Administrative Dispositions against Registered Financial
Institutions....................................................................................................................................... 43
II-5-4 Standard Processing Period Regarding Supervisory Actions Based on Inspection Results........................................................................................................................................................... 44

II-5-5 Removal of the Requirement for the Submission of Reports on Compliance with Business
Improvement Orders under Articles 51 and 51-2 of the FIEA ..................................................... 44
II-5-6 Relation to the Administrative Procedure Act and Other Laws ........................................ 45
II-5-7 System for Exchange of Opinions ........................................................................................ 45
II-5-8 Notification to Relevant Authorities, including Overseas Supervisory Authorities ........ 46
II-5-9 Concept on the Publication of Adverse Dispositions .......................................................... 46
II-6 Application Mutatis Mutandis .................................................................................................... 47
III. Supervisory Evaluation Points and Various Administrative Procedures (General) ................................ 49
III-1 Governance (General)................................................................................................................. 49
III-2 Appropriateness of Businesses (General) ................................................................................. 54
III-2-1 Control Environment for Legal Compliance ...................................................................... 54
III-2-2 Supervisory Response to Problematic Conduct in Financial Instruments Business ..... 55
III-2-3 Control Environment for Customer Solicitation and Explanations ................................ 56
III-2-3-1 Principle of Suitability and Duty of Good Faith and Fair Dealing .............................. 56
III-2-3-2 Control Environment for Managing Sales Staff ............................................................ 59
III-2-3-3 Regulation on Advertisements, etc. ................................................................................ 60
III-2-3-4 Control Environment for Providing Explanations to Customers ................................. 62
III-2-4 Control Environment for the Management of Information Related to Customers, etc.. 65
III-2-5 Dealing with Complaints, etc. (Including Response to the Financial ADR System) ...... 70
III-2-5-1 Establishment of Internal Control Environment for Dealing with Complaints, etc... 71
III-2-5-2 Response to the Financial ADR System ......................................................................... 75
III-2-5-2-1 In cases where there is a designated ADR body .................................................. 75
III-2-5-2-2 In cases where there is no designated ADR body ................................................ 77
III-2-5-3 Statements in Various Documents .................................................................................. 82
III-2-5-4 Administrative Response ................................................................................................. 82
III-2-6 Measures such as Verification at the Time of Transaction ............................................... 82
III-2-7 Control Environment for Managing Administrative Risk ................................................ 88
III-2-8 Control Environment for Managing Information Technology Risk ................................. 90
III-2-9 Control Environment for Crisis Management ................................................................... 98
III-2-10 Measures to Prevent Violation of Law by Financial Instruments Intermediary Service
Providers ........................................................................................................................................ 101
III-2-11 Prevention of Damage that May be Inflicted by Anti-Social Forces ............................ 102
III-2-12 Information Disclosure Regarding Corporate Social Responsibility (CSR), etc. ........ 106
III-2-13 Response to Disabled Persons ........................................................................................ 107
III-2-14 Points of Attention Regarding Crypto-and Other Assets.............................................. 108
III-2-15 Supervisory Response in Cases of Long-term Suspension of Business, etc. ................ 111
III-3 Various Administrative Procedures (General)........................................................................ 112
III-3-1 Registration ........................................................................................................................ 112
III-3-2 Notification......................................................................................................................... 114

III-3-3 Books and Documents Related to Business Activities .................................................... 116
III-3-4 Matters Related to the Industrial Competitiveness Enhancement Act ........................ 119
IV. Supervisory Evaluation Points and Various Administrative Procedures (Type I Financial
Instruments Business) ...................................................................................................................... 121
IV-1 Governance (Type I Financial Instruments Business) ........................................................... 121
IV-1-1 Officers of Financial Instruments Business Operators ................................................... 121
IV-1-2 Adequate Staffing for Properly Conducting Financial Instruments Business .............. 122
IV-1-3 Development of Conflict of Interest Management Systems ............................................ 122
IV-2 Soundness of Financial Condition (Type I Financial Instruments Business) ...................... 128
IV-2-1 Preciseness of Capital Adequacy Ratio ............................................................................. 128
IV-2-2 Supervisory Response to Cases of Financial Instruments Business Operators’ Capital
Adequacy Ratio Falling Below Prescribed Level......................................................................... 130
IV-2-3 Control Environment for Managing Market Risks .......................................................... 131
IV-2-4 Counterparty Risk Management Framework .................................................................. 137
IV-2-5 Control Environment for Managing Liquidity Risk ........................................................ 141
IV-2-6 Early Warning System ....................................................................................................... 142
IV-3 Appropriateness of Business Operations (Type I Financial Instruments Business) ........... 144
IV-3-1 Appropriateness of Business Operations Related to Securities Businesses .................. 144
IV-3-1-1 Control Environment for Legal Compliance ................................................................. 144
IV-3-1-2 Control Environment for Customer Solicitation and Explanations ............................ 144
IV-3-1-3 Discretionary Trading Contracts ................................................................................... 153
IV-3-1-4 Exchange of Non-Disclosure Information with Parent/Subsidiary Corporations, etc.
........................................................................................................................................................ 154
IV-3-1-5 Measures to Prevent Misrecognition ............................................................................. 165
IV-3-1-6 Business Continuity Management (BCM) .................................................................... 166
IV-3-1-7 Measures Regarding Financial Services Support in Event of Disasters .................... 168
IV-3-2 Appropriate Exercise of Market Intermediary Function of Securities Companies, etc. 170
IV-3-2-1 Improvement of Reliability of Operations of Securities Companies, etc., as Market
Intermediaries ............................................................................................................................... 170
IV-3-2-2 Exercise of Checking Function against Issuers ............................................................ 171
IV-3-2-3 Exercise of Checking Function against Investors ........................................................ 173
IV-3-2-4 Maintenance of Self-Discipline of Securities Companies, etc., as Market Players .... 175
IV-3-2-5 Supervisory Method and Actions ................................................................................... 176
IV-3-3 Appropriateness of Business Operations Related to Over-the-Counter Derivatives
Transactions ................................................................................................................................... 177
IV-3-3-1 Control Environment for Legal Compliance ................................................................. 177
IV-3-3-2 Control Environment for Customer Solicitation and Explanations ............................ 180
IV-3-3-3 Discretional Trading Contracts, etc. .............................................................................. 189
IV-3-3-4 Control Environment for Business Execution .............................................................. 190

IV-3-3-5 Control Environment for Managing Risk Related to Currency-Related Over-TheCounter Derivative Transactions ................................................................................................. 196
IV-3-3-6 Control Environment for Managing Risk Related to Securities-Related Over-TheCounter Derivative Transactions ................................................................................................. 200
IV-3-3-7 Control Environment for Managing Risk Related to Crypto-Assets, etc.-Related Overthe-Counter Derivatives Transactions ......................................................................................... 201
IV-3-4 Appropriateness of Business Operations Related to Commodity-Related Market
Derivatives Business ..................................................................................................................... 202
IV-3-4-1 Control Environment for Legal Compliance ................................................................. 202
IV-3-4-2 Control Environment for Customer Solicitation and Explanations ............................ 203
IV-3-5 Appropriateness of Business Operations Related to Financial Instruments Business Operators Who
Provide Service of Handling Electronic Public Offerings..................................................................... 207
IV-3-5-1 Basic View on Financial Instruments Business Operators Who Provide Service ofHandling Electronic Public Offerings .......................................................................................... 207
IV-3-5-2 Appropriateness of Service of Handling Electronic Public Offerings .......................... 207
IV-3-5-2-1 Control Environment for Legal Compliance....................................................... 207
IV-3-5-2-2 Provision of Information Intended to Protect Investors .................................... 207
IV-3-5-3 Appropriateness of Electronic-Application-Style Services of Handling Electronic Public
Offerings ......................................................................................................................................... 208
IV-3-5-3-1 System to Control Operations ............................................................................. 208
IV-3-5-4 Appropriateness of Type 1 Small-Amount Electronic Public Offering Services ......... 210
IV-3-5-4-1 Control Environment for Customer Solicitation and Explanations ................. 210
IV-3-5-4-2 Points of Attention Regarding Total Issued Amount of Securities ................... 211
IV-3-6 Appropriateness of Business Operations Related to Financial Instruments Business
Operators That Handle Electronically Recorded Transferable Rights That Must Be Indicated on
Securities, etc. ................................................................................................................................ 212
IV-3-6-1 Control Environment for Legal Compliance ................................................................. 212
IV-3-6-2 Control Environment for Customer Solicitation and Explanations ............................ 212
IV-3-6-3 Points of Attention Regarding the System to Control Operations .............................. 214
IV-3-6-4 Measures such as Verification at the Time of Transaction .......................................... 214
IV-3-6-5 Control Environment for Managing Information Technology Risk............................. 217
IV-3-6-6 Points of Attention Regarding Segregated Management ............................................. 219
IV-3-6-7 Points of Attention Regarding Actions against Risk of Leakage of Electronically
Recorded Transferable Rights That Must Be Indicated on Securities, etc. .............................. 220
IV-3-6-8 Development of an Environment for Screening the Issuer of Electronically Recorded
Transferable Rights ....................................................................................................................... 223
IV-3-6-9 Segregated Management of Investments Through Crypto-and Other Assets ........... 224
IV-3-7 Points of Attention Regarding Supervision of Non-Affiliated Business Operators ....... 224
IV-4 Various Administrative Procedures (Type I Financial Instruments Business Operator) .... 226

IV-4-1 Registration ........................................................................................................................ 226
IV-4-2 Approval and Notification .................................................................................................. 229
IV-4-2-1 Authorization................................................................................................................... 229
IV-4-2-2 Approval ........................................................................................................................... 233
IV-4-2-3 Notification ...................................................................................................................... 234
IV-4-2-4 Points to Consider Concerning Cumulative Investment Business ............................. 235
IV-4-3 Registration of Sales Representatives .............................................................................. 242
IV-4-4 Financial Instruments Transaction Liability Reserves................................................... 243
IV-4-5 Books and Documents Related to Service of Handling Electronic Public Offerings ..... 243
IV-5 Treatment of Designated Parent Company Groups ............................................................... 244
IV-5-1 Governance ......................................................................................................................... 244
IV-5-1-1 In the Case of a Designated Parent Company that is a Company with Auditors ...... 245
IV-5-1-2 In the Case of a Designated Parent Company that is a Company with a Nominating
Committee, etc. .............................................................................................................................. 250
IV-5-1-3 In the Case of a Designated Parent Company that is a Company with Audit andSupervisory Committees ............................................................................................................... 255
IV-5-2 Appropriateness of Business Operations .......................................................................... 261
IV-5-3 Adequacy of Equity Capital ............................................................................................... 262
IV-5-3-1 Appropriateness and Sufficiency of the Equity Capital of Final Designated Parent
Companies ...................................................................................................................................... 262
IV-5-3-1-1 Directors and Board of Directors ......................................................................... 262
IV-5-3-1-2 Evaluating Capital Adequacy .............................................................................. 263
IV-5-3-1-3 Confirming the Eligibility of Capital-Raising Instruments as Equity Capital for
Consolidated Capital Adequacy Ratio................................................................................... 268
IV-5-3-2 Accuracy of Consolidated Capital Adequacy Ratio of Final Designated Parent
Companies ...................................................................................................................................... 268
IV-5-3-2-1 Judgment of Eligibility for Intentional Holdings and Checks concerning the Useof the Proportionate Consolidation Method ......................................................................... 268
IV-5-3-2-2 Method of Calculating Risk Assets...................................................................... 269
IV-5-3-2-3 Internal Control, etc. for Assets and Transactions Related to Trading Operations................................................................................................................................................. 270
IV-5-3-3 Accuracy of Calculation of the Consolidated Leverage Ratio of Final Designated Parent
Company ........................................................................................................................................ 271
IV-5-3-3-1 Significance ........................................................................................................... 271
IV-5-3-3-2 Consistency of Calculation Methods for the Consolidated Leverage Ratio ..... 271
IV-5-3-4 Disclosing the Adequacy of Equity Capital and Other Items ..................................... 271
IV-5-3-5 Early Corrective Action .................................................................................................. 272
IV-5-3-5-1 Significance ........................................................................................................... 272
IV-5-3-5-2 Supervisory Method and Actions ......................................................................... 272

IV-5-3-6 Capital Distribution Constraint Measure ..................................................................... 277
IV-5-3-6-1 Significance ........................................................................................................... 277
IV-5-3-6-2 Supervisory Method and Actions ......................................................................... 277
IV-5-3-7 Early Warning System.................................................................................................... 279
IV-5-4 Soundness Regarding Liquidity ........................................................................................ 281
IV-5-4-1 Significance...................................................................................................................... 281
IV-5-4-2 Accuracy of Calculation of the Consolidated Liquidity Coverage Ratio and theConsolidated Net Stable Funding Ratio ...................................................................................... 281
IV-5-4-2-1 Significance ........................................................................................................... 281
IV-5-4-2-2 Points of Attention ................................................................................................ 281
IV-5-4-2-3 Supervisory Method and Actions ......................................................................... 284
IV-5-4-3 Supervisory Measures Regarding the Regulation on Consolidated Liquidity Ratio . 285
IV-5-4-3-1 Supervisory Method ............................................................................................. 285
IV-5-4-3-2 Supervisory Actions .............................................................................................. 286
IV-5-4-4 Disclosure of the Soundness Status Related to Liquidity in Business Operations.... 287
IV-5-4-5 Disclosure of the Soundness Status Related to TLAC (companies subject to TLAC
regulation) ...................................................................................................................................... 291
IV-5-5 Control Environment for Risk Management .................................................................... 292
IV-5-5-1 Integrated Control Environment for Risk Management ............................................. 293
IV-5-5-2 Control Environment for Managing Liquidity Risks ................................................... 293
IV-5-5-3 Supervisory Viewpoints for the Capability to Aggregate Data Relating to Risk
Management and Reporting to Board of Directors, etc. ............................................................. 294
IV-5-5-3-1 Significance ........................................................................................................... 294
IV-5-5-3-2 Supervisory Viewpoints and Supervisory Method and Actions ........................ 295
IV-5-5-4 Credit Risk Management for Large Borrowers ............................................................ 296
IV-5-5-4-1 Significance ........................................................................................................... 296
IV-5-5-4-2 Main Supervisory Focus....................................................................................... 296
IV-5-5-4-3 Supervisory Method and Actions ......................................................................... 298
IV-5-6 Compensation Structure .................................................................................................... 299
IV-5-6-1 Points of Attention Regarding Compensation Structures............................................ 299
IV-5-6-2 Disclosure of the Compensation Structure ................................................................... 301
IV-5-7 Supervisory Method and Actions ...................................................................................... 305
IV-6 Treatment of Special Financial Instruments Business Operator Groups ............................ 307
IV-6-1 Basic Concept...................................................................................................................... 307
IV-6-2 Supervisory Method and Actions ...................................................................................... 307
IV-7 Treatment of Type I Financial Instruments Business Operators which are the Japanese Baseof a Foreign Holding Company, etc. Group ..................................................................................... 309
IV-7-1 Governance ......................................................................................................................... 309
IV-7-2 Appropriateness of Business Operations .......................................................................... 310

IV-7-3 Appropriateness and Sufficiency of Equity Capital ......................................................... 311
IV-7-4 Control Environment for Risk Management .................................................................... 311
IV-7-4-1 Control Environment for Managing Liquidity Risk ..................................................... 312
IV-7-5 Compensation Structure .................................................................................................... 312
IV-7-6 Supervisory Method and Actions ...................................................................................... 313
IV-8 Ensuring Smooth Execution of Orderly Resolution................................................................ 314
IV-8-1 Significance ......................................................................................................................... 314
IV-8-2 Development of Recovery and Resolution Plans .............................................................. 315
IV-8-2-1 Background...................................................................................................................... 315
IV-8-2-2 Supervisory Focus, Approaches, and Actions ................................................................ 315
IV-8-3 Measures to Ensure the Effectiveness of Stay Decision in Agreements Governed byForeign Laws.................................................................................................................................. 317
IV-8-3-1 Background...................................................................................................................... 317
IV-8-3-2 Main Supervisory Focus ................................................................................................. 317
IV-8-3-3 Supervisory Approaches and Actions............................................................................. 318
IV-8-4 Measures to Ensure Operational Continuity of Critical Functions to Financial System in
Orderly Resolution ........................................................................................................................ 318
IV-8-4-1 Significance...................................................................................................................... 319
IV-8-4-2 Main Supervisory Focus, Approaches and Actions ....................................................... 319
IV-8-5 Development of Liquidity Monitoring and Reporting Capabilities toward Smooth
Execution of Orderly Resolution................................................................................................... 321
IV-8-5-1 Significance ..................................................................................................................... 321
IV-8-5-2 Main Supervisory Focus, Approaches and Actions ....................................................... 321
IV-8-6 Adequacy of Loss-absorbing Capacity............................................................................... 323
IV-8-6-1 Appropriateness, Sufficiency, and Preciseness of Loss-absorbing Capacity ............... 323
IV-8-6-1-1 Significance ........................................................................................................... 323
IV-8-6-1-2 Major Supervisory Viewpoints and Supervisory Method and Actions ............. 323
IV-8-6-2 Orderly Resolution Using TLAC ................................................................................... 334
IV-8-6-2-1 Significance ........................................................................................................... 334
IV-8-6-2-2 Specific Examples of Procedures ......................................................................... 335
V. Supervisory Evaluation Points and Various Administrative Procedures (Type II Financial Instruments
Business) .............................................................................................................................................................. 340
V-1 Governance (Type II Financial Instruments Business) ........................................................... 340
V-1-1 Officers of Financial Instruments Business Operators .................................................... 340
V-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business ........ 340
V-2 Appropriateness of Business Operations (Type II Financial Instruments Business) ........... 342
V-2-1 Appropriateness of Business Operations Related to Securities Equivalents Sales Business......................................................................................................................................................... 342
V-2-1-1 Control Environment for Customer Solicitation and Explanations ............................. 342

V-2-1-2 Discretionary Trading Contracts, etc. ............................................................................. 346
V-2-1-3 Measures to Prevent Misrecognition .............................................................................. 346
V-2-1-4 Segregated Management of Investments Through Crypto-and Other Assets, etc. ..... 347
V-2-2 Appropriateness of Business Operations Related to Market Derivatives Business
Operators........................................................................................................................................ 347
V-2-2-1 Control Environment for Legal Compliance................................................................... 347
V-2-2-2 Control Environment for Customer Solicitation and Explanations ............................. 348
V-2-2-3 Exercise of Checking Function against Investors .......................................................... 349
V-2-2-4 Discretionary Trading Contracts, etc. ............................................................................. 349
V-2-2-5 Control Environment for Managing Risk Related to Currency-Related Market
Derivative Transactions, etc. ........................................................................................................ 350
V-2-3 Appropriateness of Business Operations Related to Deemed Type II Financial Instruments
Business ......................................................................................................................................... 351
V-2-4 Appropriateness of Business Operations Related to Financial Instruments Business
Operators Who Provide Service of Handling Electronic Public Offerings ................................ 352
V-2-4-1 Basic View on Financial Instruments Business Operators Who Provide Service ofHandling Electronic Public Offerings .......................................................................................... 352
V-2-4-2 Appropriateness of Service of Handling Electronic Public Offerings ........................... 352
V-2-4-2-1 Control Environment for Legal Compliance ........................................................ 352
V-2-4-2-2 Control Environment for Customer Solicitation and Explanations ................... 352
V-2-4-2-3 Provision of Information Intended to Protect Investors ..................................... 352
V-2-4-3 Appropriateness of Electronic-Application-Style Services of Handling Electronic Public
Offerings ......................................................................................................................................... 353
V-2-4-3-1 System to Control Operations ............................................................................... 353
V-2-4-4 Appropriateness of Type 2 Small-Amount Electronic Public Offering Services .......... 355
V-2-4-4-1 Control Environment for Customer Solicitation and Explanations ................... 355
V-2-4-4-2 Points of Attention Regarding Total Issued Amount of Securities ..................... 356
V-2-5 Appropriateness of Business Operations Related to Financial Instruments Business
Operators That Handle Electronically Recorded Transferable Rights That Must Be Indicated on
Securities, etc. ................................................................................................................................ 357
V-2-6 Actions to Take When Acquiring Information Regarding Continuity of Business ......... 358
V-2-7 Points of Attention Regarding Supervision of Non-Affiliated Business Operators ........ 360
V-3 Various Administrative Procedures (Type II Financial Instruments Business Operator).... 361
V-3-1 Registration .......................................................................................................................... 361
V-3-2 Registration of Sales Representatives................................................................................ 362
V-3-3 Points of Attention Regarding Depositing of Deposits for Operation .............................. 363
V-3-4 Books and Documents Related to Service of Handling Electronic Public Offerings ...... 364
VI. Supervisory Evaluation Points and Various Administrative Procedures (Investment Management
Business) .............................................................................................................................................................. 365

VI-1 Governance (Investment Management Business) .................................................................. 365
VI-1-1 Officers of Financial Instruments Business Operators................................................... 365
VI-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business ...... 366
VI-2 Appropriateness of Business Operations (Investment Management Business) .................. 367
VI-2-1 Control Environment for Legal Compliance .................................................................... 367
VI-2-2 Appropriateness of Business Operations Related to Discretionary Investment Business......................................................................................................................................................... 367
VI-2-2-1 Control Environment for Business Execution .............................................................. 367
VI-2-2-2 Control Environment for Customer Solicitation and Explanations ........................... 371
VI-2-2-3 Duty of Loyalty and Measures to Prevent Internal Collusion .................................... 374
VI-2-2-4 Measures to Prevent Legal Violations by Agency/Brokerage Service Providers ....... 376
VI-2-2-4-1 Selection of Agency/Brokerage Service Providers .............................................. 376
VI-2-2-4-2 Measures Taken by Primary Business Operator to Ensure the Appropriatenessof Agency/Brokerage Service Providers ................................................................................ 377
VI-2-2-5 Other Points of Attention ............................................................................................... 378
VI-2-3 Appropriateness of Business Operations Related to Investment Trust Management
Business, etc................................................................................................................................... 384
VI-2-3-1 Control Environment for Business Execution .............................................................. 384
VI-2-3-2 Control Environment for Customer Solicitation and Explanations for Beneficiaries, etc.
........................................................................................................................................................ 389
VI-2-3-3 Duty of Loyalty and Measures to Prevent Internal Collusion .................................... 391
VI-2-3-4 Business Continuity Management (BCM) of Investment Trust Management Companies........................................................................................................................................................ 392
VI-2-3-5 Points of Attention with respect to consideration of ESG ............................................. 393
VI-2-3-6 Other Points of Attention ............................................................................................... 396
VI-2-4 Appropriateness of Business Operations Related to Foreign Investment TrustManagement Business .................................................................................................................. 396
VI-2-5 Appropriateness of Business Operations Related to Fund Management Business ...... 396
VI-2-5-1 Control Environment for Business Execution .............................................................. 396
VI-2-5-2 Control Environment for Customer Solicitation and Explanations ........................... 400
VI-2-5-3 Duty of Loyalty and Measures to Prevent Internal Collusion .................................... 401
VI-2-5-4 Other Points of Attention ............................................................................................... 402
VI-2-6 Points of Attention Regarding Real Estate-Related Fund Management Companies ... 402
VI-2-6-1 Control Environment for Legal Compliance ................................................................. 402
VI-2-6-2 Internal Control Environment....................................................................................... 402
VI-2-6-3 Evaluation Items Concerning Operations of Real Estate-related Fund Management
Companies ...................................................................................................................................... 403
VI-2-7 Points of Special Attention Regarding Investment Management Business for Qualified
Investors ......................................................................................................................................... 407

VI-2-7-1 Points of Attention Regarding the Control Environment for Business Execution .... 407
VI-2-8 Points of Special Attention Regarding Businesses Specially Permitted for Overseas
Investors, etc. ................................................................................................................................. 408
VI-2-8-1 Points of Attention Regarding the Control Environment for Business Execution .... 409
VI-2-9 Points of Special Attention Regarding Businesses Specially Permitted for theTransitional Period, etc. ................................................................................................................ 410
VI-2-9-1 Points of Attention Regarding the Control Environment for Business Execution .... 410
VI-2-10 Appropriateness of Investment Corporations’ Business Operations............................ 411
VI-2-10-1 Items Regarding Investment Corporations’ Organizational Management .............. 411
VI-2-11 Other Points of Attention ................................................................................................ 412
VI-2-11-1 Points of Attention Regarding Investment Trust Act and Trust Act......................... 412
VI-2-11-2 Points of Attention Regarding Investment Trusts without Settlor Instructions ..... 413
VI-2-11-3 Points of Attention Regarding Merger of Investment Corporations ......................... 413
VI-2-11-4 Points of Attention Regarding Segregated Management, etc.................................... 413
VI-2-12 Points of Attention Regarding Supervision of Non-Affiliated Business Operators .... 414
VI-3-1 Registration ........................................................................................................................ 416
VI-3-1-1 Investment Management Business ............................................................................... 416
VI-3-1-2 Investment Management Business for Qualified Investors ........................................ 420
VI-3-1-3 Investment Corporation ................................................................................................. 422
VI-3-2 Approval and Notification ................................................................................................. 426
VI-3-2-1 Approval .......................................................................................................................... 426
VI-3-2-2 Notification...................................................................................................................... 426
VI-3-2-3 Investment Report .......................................................................................................... 427
VI-3-2-4 Account Documents Regarding Investment Trust Assets............................................ 435
VI-3-2-5 Criteria for Items to be Included in Notification of Foreign Investment Fund ......... 436
VI-3-2-6 Investment Report on Foreign Investment Funds ....................................................... 439
VI-3-2-7 Items to be Included in Notification on Foreign Investment Corporations ............... 442
VI-3-3 Points of Attention Regarding Administrative Processes Related to Businesses Specially
Permitted for Overseas Investors, etc. ......................................................................................... 444
VI-3-3-1 Confirmation of Matters to be Notified ......................................................................... 444
VI-3-3-2 Preparation and Publication, etc. of the List of Notifiers, etc. .................................... 445
VI-3-3-3 Points of Attention Regarding Business Operators Which Fail to Make Necessary
Notifications ................................................................................................................................... 448
VI-3-3-4 Points of Attention Concerning Supervisory Actions for Persons Engaging in
Businesses Specially Permitted for Overseas Investors, etc. ..................................................... 448
VI-3-4 Points of Attention Regarding Administrative Processes Related to Businesses Specially
Permitted for the Transitional Period, etc. .................................................................................. 450
VI-3-5 Points of Attention Regarding Administrative Processes Related to Investment
Corporations................................................................................................................................... 450

VI-3-5-1 Notification of Changes Related to and Dissolution of Registered Investment
Corporations................................................................................................................................... 450
VI-3-5-2 Extraordinary Reports ................................................................................................... 451
VI-3-5-3 Consultations, etc., with the FSA about Permissions and Administrative Actions
Regarding Investment Corporations, etc ..................................................................................... 452
VI-3-5-4 Issuance of Certificates .................................................................................................. 455
VII. Supervisory Evaluation Points and Various Administrative Procedures (Investment Advisory andAgency Business)................................................................................................................................................. 460
VII-1 Governance (Investment Advisory and Agency Business) ................................................... 460
VII-1-1 Officers of Financial Instruments Business Operators ................................................. 460
VII-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business .... 461
VII-2 Appropriateness of Business Operations (Investment Advisory and Agency Business) .... 462
VII-2-1 Appropriateness of Business Operations Related to Investment Advisory Business . 462
VII-2-1-1 Control Environment for Legal Compliance ............................................................... 462
VII-2-1-2 Control Environment for Customer Solicitation and Explanations .......................... 462
VII-2-1-3 Cancellation of Investment Advisory Contracts (Cooling-Off Rule) .......................... 463
VII-2-1-4 Duty of Loyalty and Measures to Prevent Internal Collusion ................................... 464
VII-2-1-5 Measures to Prevent Legal Violations by Agency/Brokerage Service Providers ...... 465
VII-2-2 Appropriateness of Business Operations Related to Agency/Brokerage Services ....... 467
VII-2-2-1 Control Environment for Legal Compliance ............................................................... 467
VII-2-2-2 Development of Control Environment by Agency/Brokerage Service Providers ...... 467
VII-2-2-3 Provision of Information to Protect Investors ............................................................. 468
VII-2-2-4 Measures to Be Taken by Agency/Brokerage Service Providers When Undertaking
Services for Two or More Primary Business Operators .............................................................. 469
VII-2-3 Actions to Take When Acquiring Information Regarding Continuity of Business ...... 469
VII-3 Various Administrative Procedures (Investment Advisory and Agency Business) ............ 473
VII-3-1 Registration....................................................................................................................... 473
VII-3-2 Points of Attention Regarding Depositing of Deposits for Operation ........................... 476
VII-3-3 Account Documents Related to Investment Advisory Business .................................... 477
VIII. Supervisory Evaluation Points and Various Administrative Procedures (Registered Financial
Institutions) ......................................................................................................................................................... 479
VIII-1 Appropriateness of Business Operations (Registered Financial Institutions) .................. 479
VIII-1-1 Appropriateness of Individual Operations .................................................................... 479
VIII-1-2 Risk Management Framework Related to Non-Cleared Over-The-Counter Derivative
Transactions ................................................................................................................................... 482
VIII-1-3 Prevention of Abuse of Superior Bargaining Position .................................................. 482
VIII-1-4 Points of Attention Regarding Supervision of Non-Affiliated But Registered Financial
Institutions....................................................................................................................................... 484
VIII-2 Various Administrative Procedures (Registered Financial Institutions) .......................... 485

VIII-2-1 Registration ..................................................................................................................... 485
VIII-2-2 Approval and Notification .............................................................................................. 487
VIII-2-3 Account Documents Related to Business Operations................................................... 487
VIII-2-4 Registration of Sales Representatives ........................................................................... 487
VIII-2-5 Interpretation of Article 33 of FIEA .............................................................................. 487
VIII-2-6 Others .............................................................................................................................. 488
IX. Supervisory Evaluation Points and Various Administrative Procedures (Specially Permitted Business,
etc. for Qualified Institutional Investors, etc.) ................................................................................................. 489
IX-1 Appropriateness of Business Operations Related to Specially Permitted Business, etc. for
Qualified Institutional Investors, etc. ............................................................................................. 489
IX-1-1 Control Environment for Customer Solicitation and Explanations ............................... 489
IX-1-2 Identification of Actual State of Operator of SPBQII, etc. .............................................. 493
IX-2 Various Administrative Procedure........................................................................................... 495
IX-2-1 Confirmation Matters to be Notified ................................................................................ 495
IX-2-2 Preparation and Publication, etc. of the List of Notifiers of SPBQII, etc. ..................... 496
IX-2-3 Points of Attention Regarding Business Operators Which Fail to Make Necessary
Notifications ................................................................................................................................... 499
IX-2-4 Extension, etc. of Submission Deadline of Copy of Contract Related to Invested Business......................................................................................................................................................... 499
IX-2-5 Points of Attention Concerning Supervisory Actions for Operators of SPBQII, etc...... 500
X. Supervisory Evaluation Points and Various Administrative Procedures (Foreign Securities Companies).............................................................................................................................................................................. 502
X-1 Basic Concept for Foreign Securities Companies .................................................................... 502
X-1-1 Basic Concept on Laws and Regulations Regarding Foreign Securities Companies ..... 502
X-1-2 Foreign Securities Companies’ Cross-Border Transactions Using Internet ................... 502
X-2 Appropriateness of Business Operations ......................................................................................... 504
X-2-1

Appropriatenessof

Business

Operations(Authorized

Transaction-At-Exchange

Operators) ...................................................................................................................................... 504
X-2-2 Appropriateness of Business Operations (Authorized Service Providers of Electronic Overthe-Counter Derivative Transactions) ......................................................................................... 505
X-3 Various Administrative Procedures (Authorized Transaction-At-Exchange Operators) ...... 507
X-3-1 Various Administrative Procedures (Authorized Transaction-At-Exchange Operators) 507
X-3-1-1 Permission ........................................................................................................................ 507
X-3-1-2 Notification ....................................................................................................................... 510
X-3-1-3 Account Documents Related to Business Operations .................................................... 511
X-3-2 Various Administrative Procedures (Authorized Service Providers of Electronic Over-theCounter Derivative Transactions) ................................................................................................ 511
X-3-2-1 Permission ........................................................................................................................ 511
X-3-2-2 Notification ....................................................................................................................... 514

X-3-2-3 Account Documents Related to Business Operations ............................................................. 515
XI. Supervisory Evaluation Points and Various Administrative Procedures (Financial Instruments
Intermediary Service Providers) ....................................................................................................................... 516
XI-1 Appropriateness of Business Operations (Financial Instruments Intermediary Service
Providers) ........................................................................................................................................... 516
XI-2 Various Administrative Procedures (Financial Instruments Intermediary Service Providers)............................................................................................................................................................ 516
XI-2-1 Registration ........................................................................................................................ 516
XI-2-2 Notification ......................................................................................................................... 518
XI-2-3 Account Documents Related to Business Operations ...................................................... 518
XI-2-4 Registration of Sales Representatives .............................................................................. 518
XII. Supervisory Evaluation Points and Various Administrative Procedures (Securities Finance Companies).............................................................................................................................................................................. 519
XII-1 Governance (Securities Finance Companies) ........................................................................ 519
XII-2 Appropriateness of Business Operations (Securities Finance Companies) ........................ 519
XII-3 Various Administrative Procedures (Securities Finance Companies) ................................. 520
XII-3-1 License Screening Criteria............................................................................................... 520
XII-3-2 Notification........................................................................................................................ 521
XII-3-3 Approval ............................................................................................................................ 521
XII-3-4 Authorization .................................................................................................................... 522
XII-4 Measures to Ensure the Effectiveness of Stay Decision in Agreements Governed by Foreign
Laws ................................................................................................................................................... 523
XII-4-1 Background ....................................................................................................................... 523
XII-4-2 Main Supervisory Focus ................................................................................................... 523
XII-4-3 Supervisory Approaches and Actions .............................................................................. 524

I. Basic Concept
I-1 Basic Concept for Supervision of Financial Instruments Business Operators, etc.
(1)The primary preconditions for investors to actively make investments and for companies to smoothly raise funds
in the financial instruments market are that the market be fair and efficient, and that Financial Instruments Business
Operators, etc., (“Financial Instruments Business Operators, etc.” refers to Financial Business Operators andRegistered Financial Institutions; the same shall apply hereinafter) play an important role as market intermediaries.
The purpose of the supervision of Financial Instruments Business Operators, etc., is to secure sound andappropriate business operations of persons who conduct Financial Instruments Business, to ensure fairness in theissuance of securities and transactions of financial instruments, to facilitate the smooth distribution of securities andto realize fair price formation of financial instruments by fully utilizing the functions of the capital market throughthe appropriate exercise of their own market intermediary function, thereby contributing to the sound developmentof the national economy and the protection of investors.

(2) Since its establishment, the Financial Services Agency (FSA) has aimed to establish transparent and fairadministration based on clear rules, in principle. Therefore, it is determined to improve the efficiency andeffectiveness of administration in supervision and various other areas, including inspection and surveillance, and tofurther clarify rules and improve administrative procedures.
(3) Transparency and fairness of administration will continue to be the fundamentals of administrative managementin the future. However, if the FSA formulates excessively detailed checklists, etc. in an effort to clarify rules, andmerely automatically repeats and continues uniform, ex-post facto examination based on exhaustive examination
items without conducting substantive examination, etc. that takes into account the fundamental cause of problems
and the possibility that such cause could further generate other wide-ranging problems, it could bring about adverse
effects to Financial Instruments Business Operators, etc., such as obstructing them from identifying truly important
issues by taking into account their entire business management and the fundamental cause of problems, resolving
the fundamental cause for preventing the recurrence of problems, taking early measures for the future, and making
creative efforts for better practice.
In cooperation with the Securities and Exchange Surveillance Commission, etc. that inspect Financial
Instruments Business Operators, etc. (hereinafter referred to as "inspection departments"), the FSA will continue tomonitor Financial Instruments Business Operators, etc. by combining on-site and off-site techniques throughidentification of the actual state and dialogue, according to the size and characteristics of each Financial Instruments
Business Operator, etc. and the probability of occurrence of a serious problem related to compliance, etc. in thebusiness operator, etc. It will implement supervisory measures as necessary to prevent the occurrence of serious
problems in advance. In addition, it will encourage Financial Instruments Business Operator, etc. to make various
efforts for better practice through dialogue, as necessary.
(Reference) "JFSA’s supervisory approaches -Replacing checklists with engagement-" (June 29, 2018)1

(4) Officials that engage in supervision of Financial Instruments Business Operators, etc. are to comply with thefollowing code of conduct in performing their duties and endeavor to secure the confidence of supervisoryadministration, while observing the basic concept set forth in (1) through (3).
(i) Entrustment by the Citizens and Maintenance of Ethics Pertaining to the Duties
The officials will be aware that their work is based on duties entrusted by citizens, and that they need togive top priority to attaining the purpose of supervision of Financial Instruments Business Operators, etc. set
forth in I-1(1) in performing their work. In addition, they will strive to maintain ethics pertaining to duties,
and aim to ensure public trust in financial administration.
(ii) Maintenance of Discipline, Decorum, and Confidentiality
In performing financial administration, the officials will strictly maintain discipline, decorum, andconfidentiality as well as a calm and composed attitude.
(iii) Broad and Medium- to Long-term Viewpoint
The officials will consider the standpoint of citizens and corporations that use financial services, and insteadof being content with focal and short-term problem setting and solving alone, they will identify thefundamental causes and address problems at an early stage from a broad and medium- to long-term viewpoint.
(iv) Fairness
The officials will perform their work in a fair manner, following appropriate procedures based on laws andregulations, and taking into account the conditions of each Financial Instruments Business Operator, etc. In
addition, the officials will not treat domestic Financial Instruments Business Operators, etc. and branches ofFinancial Instruments Business Operators, etc. that are foreign corporations conducting business in Japan or
Financial Instruments Business Operators, etc. that are subsidiaries of foreign corporations differently without
reasonable grounds that are based on laws and regulations.
(v) Respect of Voluntary Efforts by Financial Instruments Business Operators, etc.
The officers will recognize that voluntary initiatives and creative efforts of Financial Instruments Business
Operators, etc. are essential for attaining the purpose of supervision set forth in I-1(1), and give consideration
to respect the voluntary efforts regarding business operations made by Financial Instruments Business
Operators, etc. in their capacity as private companies.
(vi) Self-improvement
The officials will acquire knowledge on financial laws, regulations, and rules and trends of Financial
Instruments Business Operators etc. in Japan and other countries, as well as wide-ranging social and economic
events surrounding finance as economic infrastructure. In addition, in performing their work of having a
dialogue, etc., as they not only need to have deep knowledge on the actual circumstances specific to each
Financial Instruments Business Operator, etc., but also the ability to conduct analyses and other work basedon high expertise according to issues, such as business analysis, governance, and risk management, they will
make self-improvement efforts on a daily basis toward acquiring that knowledge and ability.
(vii) Appropriate and Close Cooperation with Parties Concerned Inside and Outside the Organization
As a broad perspective beyond their own jurisdiction is important for realizing highly effective supervision,
the officials will appropriately and closely cooperate with various entities inside and outside the FSA.
2

I-2 Purpose of Establishment of Guideline for Supervision
I-2-1 Purpose of Establishment of Guideline for Supervision
In order to enable the Japanese economy to achieve sustainable development, it is important to accelerate a shiftof funds “from savings to investment,” which means a shift in emphasis from indirect financing to direct financing
and market-based indirect financing. This shift is expected to contribute to the stability of Japan’s financial system,
the creation of an attractive market for both domestic and foreign market participants as well as corporate growthand economic development, by bringing about the following four benefits:(i)Creating a robust financial system with an advanced risk-dispersion capability by moving to a market
structure in which a wide range of market participants share risks according to their own capabilities(avoiding vulnerability of the financial system that may result from concentration of risks on indirect
finance).

(ii) Promoting corporate innovation by facilitating smooth provision of risk money.
(iii) Improving the efficiency of capital and the profitability of Japanese companies by promoting a shift of funds
from savings to investment, thereby creating a market with sufficient depth to keep a watchful eye on
business managers.
(iv) Creating an affluent and colorful society by providing investors with a diverse range of means to manage
assets amid the declining birth rate and the aging of society.
In order to promote the shift of funds from savings to investment, it is essential not only that Financial
Instruments Business Operators, etc., which act as market intermediaries, gain and maintain public confidence, butalso that financial authorities design appropriate institutional frameworks and properly motivate Financial
Instruments Business Operators, etc., to strengthen governance while bearing in mind the protection of investors
and appropriate risk management.
Since the financial system reform of 1998, which was carried out under the banner of “a free, fair and global
market,” Japan has implemented a variety of measures, including making it easier for securities companies toadvance into new businesses, liberalizing their business operations and diversifying the range of institutions allowed
to undertake securities business, in order to invigorate the securities market. These measures gradually produced
benefits in the form of the diversification of financial instruments and sales channels, thereby bringing aboutchanges in the environment for securities business and promoting the globalization of the financial and capital
markets.
Even as the reform described above proceeded, protecting investors, improving convenience for them andensuring the reliability of Japan’s markets remained as major challenges. Regarding cases of financial damage toordinary customers, such as losses caused by fraudulent sales of unregulated financial instruments, Japan reformed
the institutional framework for the protection of investors by strengthening relevant measures on a case-by-casebasis, an example of which was the introduction of regulation on foreign exchange margin trading (put into effectin July 2005) through a revision of the Financial Futures Trading Act.
The revamping of the Securities and Exchange Act as the FIEA (put into effect on September 30, 2007), is3

intended to promote financial innovation, in order to reap further benefits from the reform measures already
implemented and to ensure appropriate protection of users through the establishment of comprehensive and crosssectoral rules concerning the protection of investors. In order to accelerate the shift of funds “from savings toinvestment,” the supervisory authorities will need to take advantage of the results of the past reform measures while
dealing with Financial Instruments Business Operators, etc., in an appropriate manner under the cross-sectoral legal
framework, as their businesses are becoming increasingly diverse.
In order to conduct daily supervisory processes under these circumstances, we decided to systematically sortout the contents of sector-by-sector guidelines for supervision and administrative processes, and work out concepts
concerning supervision, supervisory viewpoints and methods of supervision in a comprehensive manner on a crosssectoral basis.
This Guideline was compiled with due consideration of the actual state of Financial Instruments Business
Operators, etc., so that it can be applied to various cases, and the requirements of the supervisory evaluation points
specified in the Guideline shall not be uniformly applied to all Financial Instruments Business Operators, etc.
Accordingly, when applying this Guideline, it is necessary to bear in mind that even if a Financial Instruments
Business Operator does not literally meet the requirements of all evaluation points, the case shall not be judged
inappropriate insofar as there is no problem from the viewpoint of protecting public interests and investors; it isnecessary to avoid applying the Guideline in a mechanical and uniform fashion. On the other hand, it should also
be borne in mind that even if a Financial Instruments Business Operators etc. formally fulfills all the functions
concerning evaluation points, the case could be deemed to be inappropriate from the viewpoint of protecting
public interests and investors.
Local Finance Bureaus (including the Fukuoka Local Finance Branch and the Okinawa General Bureau. The
same shall apply hereinafter), as well as relevant divisions of the FSA, shall implement supervisory processes
regarding Financial Instruments Business Operators, etc., that operate in their districts of jurisdiction based on thisGuideline. Following the establishment of this Guideline, we abolished “the Comprehensive Guideline forSupervision of Securities Companies,” “Comprehensive Guideline for Supervision of Financial Futures Traders,”“Guideline for Administrative Processes (points of attention regarding the supervision of investment trust
management companies, investment corporations and securities investment advisory companies)” and Section 10“Trust Beneficiary Rights Sales Business” of the “Comprehensive Guideline for Supervision of Trust Companies,etc.” and Section 6 “Commodity Fund Business” of the “Points of Attention in Financial Supervision, etc. (Guideline
for Administrative Processes) Vol. 3: Financial Companies.”
I-2-2 Structure of This Guideline(1) This Guideline was compiled as a comprehensive one applicable to the supervision of a diverse range ofFinancial Instruments Business Operators, etc., with a view to limiting overlapping descriptions to a minimum.
Accordingly, the contents of Section I "Basic Concept" and Section II "Points of Attention in the Conduct ofAdministrative Processes Regarding the Supervision of Financial Instruments Business Operators " basically cover4

persons engaging in Financial Instruments Business (Type I Financial Instruments Business, Type II Financial
Instruments Business, Investment Management Business and Investment Advisory and Agency Business) orregistered financial institutions , but also take into consideration the supervision of persons engaging in businesses
specially permitted for qualified institutional investors, etc., businesses specially permitted for overseas investors,
etc. , and businesses specially permitted for the transitional period, and foreign securities companies, financial
instruments intermediary service providers, securities finance companies, investment corporations and commodities
investment sales companies.
Sections I and II are followed by “Supervisory Evaluation Points and Various Administrative Procedures,” which
comprises Sections III to VII. Section III sets forth general supervisory viewpoints and procedures that are common
to all types of Financial Instruments Business Operators, while Sections IV to VII set forth additional supervisory
viewpoints that are specific to individual types of Financial Instruments Business Operators.
Therefore, supervisors of Financial Instruments Business Operators, etc., shall first refer to Section III and thento either of Sections IV to VII according to the attributes of the businesses they supervise.
Section VIII and the following sections set forth supervisory viewpoints and various administrative procedures
regarding registered financial institutions, persons engaging in businesses specially permitted for qualified
institutional investors, etc., foreign securities companies, financial instruments intermediary service providers andsecurities finance companies, selecting suitable points of attention and procedures from among those specified in
the preceding sections and applying them mutatis mutandis, so supervisors should refer to them when necessary..
It is noted that High Speed Trading (HST), operated as part of business by Financial Instruments Business
Operators, registered financial institutions or authorized transaction-at-exchange operators (as defined in Section
X-2-1(1)), shall be supervised by applying mutatis mutandis supervisory viewpoints in the “Guidelines forSupervision of High Speed Traders,” established as supplemental to this guideline.
(2) While the FSA has indicated the Guideline for Supervision as well as various documents including themespecific reports and various principles, annual policies, and requests to industry organizations, etc. as policies onsupervision, when conducting supervision, supervisors shall use these documents based on the gist and purposesof the documents, and provide detailed explanation on those gist, etc. to Financial Instruments Business
Operators, etc.

5Specially Permitted
Businesses
Foreign Securities
Company
Financial
Instruments
Intermediary
Securities Finance
Service
ProviderCompany

Instruments
Investment
Business
Management
Business
Investment
Advisory andAgencyRegistered Financial
Business
Institutions

Sections of the Guideline

Type I
Financial
Instruments
Type IIBusiness
Financial(Reference)
Application Table for the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc
Financial Instruments
Business Operators
Businesses Covered

I. Basic Concept
○
○
○
○
○
○
○
○ ○
II. Points of Attention in the Conduct ofAdministrative Processes Regarding the
○
○
○
○
○
○
○
○ ○
Supervision of Financial Instruments Business
Operators, etc.
III. Supervisory Evaluation Points and Various Administrative Procedures (General)
Evaluation points (general)○○○○
Various administrative procedures (general)○○○○
IV. Supervisory Evaluation Points and Various Administrative Procedures (Type I Financial Instruments Business)
Evaluation points (Type I Financial Instruments○
Business)
Various administrative procedures (Type I○
Financial Instruments Business)
V. Supervisory Evaluation Points and Various Administrative Procedures (Type II Financial Instruments Business)
Evaluation points (Type II Financial Instruments○
Business)
Various administrative procedures (Type II○
Financial Instruments Business)
VI. Supervisory Evaluation Points and Various Administrative Procedures (Investment Management Business)
Evaluation points (Investment Management○
Business)
Various administrative procedures (Investment○
Management Business)
VII. Supervisory Evaluation Points and Various Administrative Procedures (Investment Advisory and Agency
Business)
Evaluation points (Investment Advisory and○Agency Business)
Various administrative procedures (Investment○
Advisory and Agency Business)
VIII. Supervisory Evaluation Points and Various Administrative Procedures (Registered Financial Institutions)
Evaluation points (Registered Financial○
Institutions)
Various administrative procedures (Registered○
Financial Institutions)
IX. Supervisory Evaluation Points and Various Administrative Procedures (Specially Permitted Businesses for
Qualified Institutional Investor, etc.)
Evaluation points (Specially Permitted
Businesses for Qualified Institutional Investor,○
etc.)
Various administrative procedures (Specially
Permitted Businesses for Qualified Institutional○
Investor, etc.)
X. Supervisory Evaluation Points and Various Administrative Procedures (Foreign Securities Company)
Evaluation points (Foreign Securities Company)○
Various administrative procedures (Foreign○
Securities Company)
XI. Supervisory Evaluation Points and Various Administrative Procedures (Financial Instruments Intermediary
Service Provider)
Evaluation points (Financial Instruments○
6

Intermediary Service Provider)
Various administrative procedures (Financial○
Instruments Intermediary Service Provider)
XII. Supervisory Evaluation Points and Various Administrative Procedures (Securities Finance Company)
Evaluation points (Securities Finance Company)
Various administrative procedures (Securities
Finance Company)

7○○II. Points of Attention in the Conduct of Administrative Processes Regarding the Supervision of Financial
Instruments Business Operators, etc.
II-1 Basic Concept Concerning Supervisory Processes
As mentioned earlier (I-1(1)), in order to attain the purpose of supervision of Financial Instruments Business
Operators, etc., supervisory departments also need to continuously take actions with regard to Financial Instruments
Business Operators, etc. according to the size and specific characteristics of individual Financial Instruments
Business Operators, etc.
Therefore, in carrying out supervisory processes of Financial Instruments Business Operators, etc., it isindispensable for supervisory departments to first understand the policy adopted by each Financial Instruments
Business Operator, etc. in addressing issues such as building business models, exercising the market intermediaryfunction, ensuring fairness in transactions, protecting investors, establishing a control environment for managing
compliance and risk, and then precisely identify the details of arrangements and procedures under which that policy
is implemented, the potential risks and challenges the policy incorporates, and how the Financial Instruments
Business Operator, etc. recognizes such risks, etc. and how it intends to address them.
In order to respond to priority issues with the entire business management in view and to make that effort lead tothe sound development of the national economy and the protection of investors, each Financial Instruments Business
Operator, etc. needs to reform its business arrangements and procedures itself so as to voluntarily make
improvements for best practice without being pointed out by supervisors. In the process of continuous monitoring
through identification of the actual state and dialogue, etc., the FSA will encourage the efforts of each Financial
Instruments Business Operator, etc. to pursue better practice.
On such basis, when, in the abovementioned process, it is deemed that there is a serious problem from theperspective of public interest or investor protection or it is deemed that business improvement will not be made by
the voluntary efforts of the Financial Instruments Business Operator, etc., the FSA shall consider issuance of an
administrative disposition such as a business improvement order under Article 51, etc. of the Financial Instruments
and Exchange Act (hereinafter referred to as the "FIEA").
In addition, in carrying out supervisory processes of Financial Instruments Business Operators, etc., the following
points should also be fully taken into consideration.
(1) Securing Sufficient Communications with Financial Instruments Business Operators, etc.
In the supervision, it is important to precisely grasp and analyze information concerning the business
management of the Financial Instruments Business Operators, etc. and take actions in an appropriate and timely
manner. Therefore, rather than merely waiting for reports from Financial Instruments Business Operators, etc.,
supervisory departments need to proactively gather information by engaging in communications with them on adaily basis as necessary under a sound and constructive, tense relationship. To be more specific, supervisorydepartments should ensure daily communications with Financial Instruments Business Operators, etc., throughperiodic and timely interviews and exchanges of opinions with various officers and employees of Financial
Instruments Business Operators, etc., including the management team, outside directors, and those in charge ofinternal audit, so as to grasp information not only concerning their financial conditions, but also various business8

management matters.
(2) Respect of Voluntary Efforts by Financial Instruments Business Operators, etc.
The standpoint of supervisory departments is to examine, in the light of laws and regulations, management
decisions made by Financial Instruments Business Operators, etc., in their capacity as private companies, based on
the principle of self-responsibility, and to encourage correction of problems. With due consideration of thisstandpoint, supervisory departments must give consideration to respect the voluntary efforts of Financial
Instruments Business Operators, etc. regarding business operations when supervising them.
(3) Securing Efficient and Effective Supervisory Processes
In order to make effective use of the limited resources of supervisory departments as well as those of Financial
Instruments Business Operators, etc., it is necessary to implement supervisory processes in an efficient and effective
manner in full consideration of the size and specific characteristics of Financial Instruments Business Operators,
etc. Therefore, when requiring Financial Instruments Business Operators, etc. to submit reports and other materials,
supervisors must make sure to limit the volume of the required reports and materials to the minimum necessary forthe supervisory purpose and strive to improve the efficiency and effectiveness of supervision by, for example,
constantly reviewing the necessity of existing supervisory processes and the method of implementing them and by
making improvements as necessary.
The submission of existing reports and other materials shall be periodically reviewed once a year based on such
perspectives as reducing the administrative burden on Financial Instruments Business Operators, etc. In doing so, itshould be kept in mind that the opinions of the Financial Instruments Business Operator, etc. should be sufficiently
heard.
Furthermore, the supervisory authorities need to maintain close cooperation with Financial Instruments Firms
Associations (which refer to the Authorized Financial Instruments Firms Association and Public Interest
Corporation-Type Financial Instruments Firms; the same shall apply hereinafter), which are self-regulatoryorganizations as specified by the Financial Instruments and Exchange Act (hereinafter referred to as "FIEA"), as
well as financial instruments exchanges, since they, in their capacity as entities familiar with the circumstances ofthe market, are responsible for exercising the function of self-regulation that is intended to secure investors'
confidence in Financial Instruments Business Operators, etc.
At the same time, in the case of supervising Financial Instruments Intermediary Service Providers, supervisory
authorities must be implemented in a manner whereby the sound and proper implementation of operations of the
Financial Instruments Intermediary Service Providers are basically ensured through supervision of the Entrusting
Financial Instruments Business Operators, etc. However, if the supervisory authorities must directly guide andsupervise Financial Instruments Intermediary Service Providers in the case where Financial Instruments
Intermediary Service Providers have their own problems or the case where specific Financial Instruments
Intermediary Service Providers have common problems, the supervisory authorities need to pay attention to the
reduction of their administrative burdens in full consideration of their size and specific characteristics.
(Note) In the case of requesting Financial Instruments Business Operators, etc. to produce reports, materials, etc.
9

concerning their small offices, etc., attention should be paid so as not to disturb the smooth implementation of theiroperations in full consideration of the specific characteristics of the services, products, etc., of such offices, etc.
(4) Risk Management of Financial Groups Covering Multiple Business Types
In Japan, financial groups covering multiple business types have been formed with the lifting of the ban on
mutual business entries through subsidiaries in respective business fields as a result of the financial reform in 1993,
the lifting of the ban on financial holding companies, and the development of regulations concerning subsidiaries
by the Financial System Reform Act in 1998.
On one hand, formation of financial groups covering multiple business types by Type I Financial Instruments
Business Operators or investment management business operators may help strengthen the business structure offinancial institutions and improve the quality of services. On the other hand, however, it has the risk of causing
inefficient business operations resulting from the complex organizational structures, occurrence of conflicts ofinterest, increased inducements for tie-in sales, intra-group risk contagion, risk concentration and so on.
In light of such specific characteristics, it is important particularly for designated parent company groups(meaning those defined in IV-5) and special financial instruments business operator groups (meaning those definedin IV-6) that conduct international activities to not only ensure the soundness, etc. of individual financial institutions,but also identify the actual state of the control environment for governance of the entire group and the financial
soundness and appropriateness of business operations of the group. From the perspective ensuring theappropriateness of business operations, it is necessary to facilitate integrated management of financial groups.
In addition, also in the case where the Type I Financial Instruments Business Operator or the investment
management business operator is a financial institution of another business type or a subsidiary corporation, etc. ofa foreign financial group or of a non-financial company, it is important to examine whether the Financial Instruments
Business Operator is subject to the abovementioned risk contagion, risk concentration and so on by exercising thesupervisory authority on major shareholders of the Financial Instruments Business Operator and by holding in-depth
hearings, etc.
Meanwhile, as a result of the modes of financial groups being varied and the characteristics of the risks faced bygroups and the risk contagion processes being different, their control environments for governance naturally differ,so consideration shall be given to the fact that each financial group's control environment needs to be examinedbased on the actual state of that group. For financial groups covering multiple business types and financial groups
that integrally provide comprehensive financial services, it is necessary to ensure monitoring at similar levels
regarding similar or integrated acts conducted in different types of business or by different financial institutions,and also regarding regulations related to such acts, and it is also important to strengthen cooperation between
relevant departments and divisions such as divisions in charge of the supervision of banks and other supervisorydepartments and inspection departments.
(5) Implementation of Supervisory Processes Taking Diversity into AccountFinancial Instruments Business Operators, etc. include various kinds of business operators, such as Type I
Financial Instruments Business Operators as well as Type II Financial Instruments Business Operators, investment
management business operators, and investment advisory business operators, and their sizes and specific10characteristics as well as the conditions of the control environment for compliance to the FIEA and other laws andregulations are varied. Therefore, in carrying out the supervisory processes described in this Guideline forSupervision for Financial Instruments Business Operators, etc., it should particularly be kept in mind that techniquesthat match the size and specific characteristics, etc. of individual Financial Instruments Business Operators, etc.
need to be selected, while taking into account such diversity of Financial Instruments Business Operators, etc.
(6) Cooperation with Inspection Departments
It should be kept in mind that supervisory departments should cooperate with inspection departments by, forexample, sharing information through timely exchange of information identified in monitoring and sharing eachother's problem awareness.
II-1-1 Method of Implementation of Supervisory Processes
The fundamentals of supervisory processes of Financial Instruments Business Operators, etc. are to encourage
each Financial Instruments Business Operator, etc. to make necessary improvements, by appropriately combining
techniques such as monitoring through identification of the actual state and dialogue, etc., supervisory measures,
feedback, and dissemination of information according to the conditions of the Financial Instruments Business
Operator, etc. and the characteristics and seriousness of the problems it has.
In addition, supervisory departments are required to precisely identify changes in the global economic and market
environments of Financial Instruments Business Operators, etc. through daily monitoring. At the same time,supervisory departments are required to conduct monitoring in full consideration of the size and specificcharacteristics of Financial Instruments Business Operators, etc., and based on the results, encourage the initiativesof Financial Instruments Business Operators, etc. for solving issues, such as the pursuit of best practice concerning
risk management, etc. and development of the control environment for managing business management andgovernance that can flexibly respond to changes, in dialogues held with them.
II-1-2 Specific Method of Supervisory Processes(1) Continuous and Intensive Monitoring Combining On-site and Off-site Techniques
Supervisory departments will identify the specific characteristics and issues of each Financial Instruments
Business Operator, etc., and conduct continuous monitoring, following up on the status of improvement, by flexibly
using different monitoring techniques, including on-site inspections by inspection departments, according to thenature and priority of the issues.
Supervisory departments will use different monitoring techniques by fully taking into account the individual andspecific conditions of each Financial Instruments Business Operator, etc., as well as viewpoints such as how
effectively the actual state can be identified by each technique, the extent of burden on supervisors and that on the
Financial Instruments Business Operator, etc., and urgency of the issue. In principle, they shall first conduct
monitoring including analysis of materials concerning business management, finance, and risk coefficients andhearings with parties concerned inside and outside the Financial Instruments Business Operator, etc., and determine
11whether or not on-site inspections by inspection departments are required based on analysis results, such as whether
there are issues relating to the immediate soundness and appropriateness of operations.
(2) Specific Method(i) Acts that Serve as the Basis in Carrying Out Identification of the Actual State and Dialogue
A. Information Gathering and Profiling (Identification of Specific Characteristics)
The FSA will conduct monitoring for the purpose of identifying the individual and specific conditionsof each Financial Instruments Business Operator, etc. at a given time, such as its specific characteristics
and issues and the state of its voluntary initiatives toward improvement. This includes identification of
the effects that changes in the environment of Financial Instruments Business Operators, etc. have on theirbusiness management and the state of actions taken by each Financial Instruments Business Operator, etc.
against such changes.
In addition, as trends in economies and financial/capital markets in Japan and overseas and behaviors
of individual Financial Instruments Business Operators, etc. may affect each other, the FSA also needs toanalyze and identify their mutual effects.
Such information gathering and profiling are an accumulation of the results of daily monitoring, andare not bound by any specific formats, but they will for example be conducted from the following
perspectives.
a. Macro Perspective
It is necessary to analyze and identify the effects that changes in the environment in Japan and overseas,such as changes in the economy, financial markets, politics, society, etc., have on each Financial
Instruments Business Operator, etc. and the financial system. To this end, it will be useful for supervisorydepartments to, for example, cooperate with related divisions within the FSA, Local Finance Bureaus,
inspection departments, and related ministries and agencies, and gather information on changes in theenvironment in Japan and overseas, such as scandals of Japanese and overseas entities, including general
non-financial companies, trends in legal and institutional amendments and court judgments in Japan andoverseas, trends in discussions in overseas authorities and international organizations, and changes in theeconomic/social environment (e.g., growth of attention to SDGs), and then analyze and identify issues
that also commonly exist in other companies in the industry, other industries, similar businesses andproducts, and legal systems, etc.
Supervisory departments will strive to identify or specify issues inherent in the entire financial sector
by analyzing the lateral development or spread of problematic events through such information
gathering and analysis.
b. Micro Perspective
In order to realize effective dialogue, etc. with Financial Instruments Business Operators, etc., it isindispensable to accumulate deep knowledge on the actual circumstances specific to each Financial
Instruments Business Operator, etc. In particular, as the starting point, it will be necessary to confirm
the management philosophy of the Financial Instruments Business Operator, etc., such as what kind oforganization it aims to become in its respective business environments (customer characteristics,
12

competitive environ, etc.) and what it wants to do to achieve that aim. To this end, it will be useful togather information from that Financial Instruments Business Operator, etc. and its stakeholders(employees, customers, local community, shareholders, etc.) as described below, for example:- To analyze not only typical materials such as financial data and risk coefficient data, but also materials
and minutes of the conference body involved in decision-making concerning management.
- To conduct not only periodic hearings regarding financial results and risk management, but also
hearings on an as-needed basis regarding business trends, etc. with the manager of each division andpersons from the respective levels of the organization.
- To exchange opinions with the internal control division, members of the audit (and supervisory)committee, auditors, outside directors, etc. in order to identify how the Financial Instruments
Business Operator, etc. itself recognizes risks and conducts business.
- To analyze external information, including financial services users' opinions gathered through various
channels, such as information on inquiries and complaints brought to the Counseling Office forFinancial Services Users, as well as media reports and external inquiries.
Through the information gathering and analyses mentioned above and conventional monitoring,supervisory departments will gain an understanding of the business models, management strategies,
business operations, and organizational structures of Financial Instruments Business Operators, etc., andidentify their respective issues and specific characteristics as well as the effects that changes in theenvironment of Financial Instruments Business Operators, etc. have.
B. Identification of Priority Issues and Formulation of Monitoring Policy and Plan
It is necessary to order, in terms of priority, the issues of each Financial Instruments Business Operator,etc. and cross-sectional issues commonly shared across business types, etc. that have been identified
through the abovementioned information gathering and identification of specific characteristics, while
fully taking into account the degree of importance and urgency at the given time, such as the level ofsocial demand, in order to discuss matters that are practically important for business management withthe management team of the Financial Instruments Business Operator, etc. and to use the limited
administrative resources as effectively as possible. The cross-sectoral, high-priority issues that have been
identified in this way are specified and published in the annual policy, etc. at the beginning of the program
year.
Next, there is a need to formulate the monitoring policy and plan, decide on the policy and plan for
specific actions to be taken against the priority issues, and establish arrangements and procedures, suchas allocating appropriate personnel, based on the state of management and other conditions that are
specific to each Financial Instruments Business Operator, etc. In that process, in order to enable the
Financial Instruments Business Operator, etc. to concentrate its management resources on the
improvement of practically important matters, the authorities will selectively use the on-site inspection
by inspection departments and other monitoring techniques, and the monitoring of individual Financial
Instruments Business Operators, etc. and horizontal monitoring, according to the nature of priority issues.
In addition, the authorities will make an effort to implement appropriate monitoring according to the13situation, such as flexibly reviewing the monitoring plan if a new issue occurs or is found during theperiod.
(ii) Detailed Identification of the Actual State of Each Financial Instruments Business Operator, etc.
In order to identify the actual state, the authorities shall select the most efficient and effective techniquesfrom among various hearings, requests for voluntary submission of materials, questionnaires, requests forreports under laws and regulations, on-site inspections by inspection departments, and so on, according to
the nature of issues or the progress in the actions taken to address them, or according to the actual state ofeach Financial Instruments Business Operator, etc.
In addition, the authorities will give consideration to reducing the burden on the Financial Instruments
Business Operator, etc.; for example, if they have acquired information in the past or are acquiring
information in another process, they will confirm the contents of the information in advance, and make useof that information as much as possible.
Moreover, even in the case of implementing monitoring based on an analysis that has been conducted, if
a new issue is found as a result of information gathering, identification of the actual state, or dialogue,
appropriate actions will be taken according to the nature of the new issue.
The selected techniques will be implemented by respectively keeping in mind the following points, forexample. Whichever technique is implemented, the authorities will provide detailed explanation to the
Financial Instruments Business Operator, etc. as to what kind of issues have been recognized and what kindof discussions are being sought by the authorities.
A. Various Hearings
In order to deepen the mutual understanding of priority issues with the Financial Instruments Business
Operator, etc., the authorities will hold hearings on multiple levels with the top management, division or
branch managers, working level employees, etc. according to the nature of the issues.
With regard to initiatives for pursuing best practices, it is necessary to keep in mind that the authorities
should not press a specific answer on the Financial Instruments Business Operator, etc., given that the
Financial Instruments Business Operator, etc. should make creative efforts according to its environment
and its specific characteristics.
In addition, as part of such various hearings, the authorities sometimes hold intensive hearings or
dialogue on a specific theme over a certain period inside a facility of the Financial Instruments Business
Operator, etc.
B. Request for Voluntary Submission of Materials
In consideration of the burden on the Financial Instruments Business Operator, etc. and with the aim ofclearly and accurately conveying the purpose of the request, the authorities will provide a detailed
explanation to the Financial Instruments Business Operator, etc. and strive to gain its understanding,clarifying what kind of issues have been recognized as the basis for making the request and what kind of
materials are required for this purpose. In that process, the authorities shall make effort to reduce theburden imposed on the Financial Instruments Business Operator, etc. by, for example, spacing out thetimings for making such requests, avoiding overlapped requests, and allowing ample time for thesubmission. In particular, when targeting multiple Financial Instruments Business Operators, etc. such as
14

in the case of conducting a questionnaire survey, sufficient consideration should be given to the specificcharacteristics and the environment of each Financial Instruments Business Operator, etc.
C. Request for Reports under Laws and Regulations
When it is deemed to be necessary, the authorities will request submission of a report under laws andregulations. In that process, the authorities will provide a detailed explanation to the Financial Instruments
Business Operator, etc. as to what kind of issues have been recognized as the basis for requesting thereport.
D. On-site Inspections under Laws and Regulations
When it is deemed to be necessary, such as when detailed examination on the immediate soundness andappropriateness of operations is judged to be necessary, the authorities will request the inspection
departments to conduct on-site inspections under laws and regulations.
(iii) Dialogue
Dialogue is held according to individual and specific conditions at a given time, such as occurrence, nonoccurrence, or probability of occurrence of a serious problem related to ensuring of fairness in transactions,protection of investors, or compliance, etc., the state of voluntary initiatives by the Financial Instruments
Business Operator, etc. for improving its management or the state of exercising the market intermediaryfunction, or according to the nature of issues.
When holding dialogue, the authorities will ensure that they first fully identify the concepts and policiesof the Financial Instruments Business Operator, etc., and then hold the dialogue while presenting facts, andwhile striving to avoid making assumptions or pressing a hypothesis on the Financial Instruments Business
Operator, etc., and enabling the Financial Instruments Business Operator, etc. to assert its standpoint at easeinsofar as possible.
Furthermore, in holding dialogue, the authorities need to strive to fully take into account their pastcommunication with each Financial Instruments Business Operator, etc., and give consideration to thecontinuity of dialogue.
A. Even when it is deemed in the process of identification of the actual state by the authorities that theprobability of occurrence of a serious problem related to the ensuring of fairness in transactions, protectionof investors, or compliance, etc. has increased, the Financial Instruments Business Operator, etc. itself is
to first examine the issue, the fundamental cause, and the appropriateness of improvement measures, andthen in-depth dialogue is to be held between the authorities and the Financial Instruments Business
Operator, etc. about formulation and implementation of improvement measures. However, if a high degreeof urgency is found, such as in the case where the abovementioned problem has already occurred, theauthorities first clearly point out the matters which they consider should be improved, and then confirm
what actions the Financial Instruments Business Operator, etc. will take.
B. With regard to Financial Instruments Business Operators, etc. for which the probability of occurrence of
the abovementioned problem is not found, it is important that they continue to strive to further advancetheir business models and risk management by demonstrating diverse, proactive, and creative efforts
according to their circumstances. Thus, the authorities will hold in-depth dialogue with Financial
Instruments Business Operators, etc. about business models, risk management, human resource15

development, and so on after gaining a deep understanding of the business environment or management
issues of each Financial Instruments Business Operator, etc. or strategies and policies of each Financial
Instruments Business Operator, etc. based on identification of their specific characteristics through daily
monitoring, for the purpose of having Financial Instruments Business Operators, etc. gain awarenessthemselves without premising a specific answer (in this process, the authorities and Financial Instruments
Business Operators, etc. will share other reference cases of best practices, etc. as necessary).
(iv) Flexible and Appropriate Combination of Diverse Techniques
As mentioned above, supervisory departments use various techniques as administrative actions against
Financial Instruments Business Operators, etc., but these techniques have advantages and disadvantages
from the viewpoint of their effectiveness and the burden and costs to be borne by the authorities and by the
Financial Instruments Business Operators, etc. Therefore, supervisory departments will aim to realize
effective and efficient inspection and supervisory processes by flexibly combining these techniques in amanner that maximize their advantages according to the individual and specific conditions at a given time,such as the state of issues of each Financial Instruments Business Operator, etc. and occurrence or nonoccurrence of a serious problem related to the ensuring of fairness in transactions, protection of investors,
or compliance, etc. For example, the following methods can be considered apart from the already mentioned
techniques:- Providing feedback of information on the industry's common state or issues or information on caseexamples in a specific field contributes to the demonstration of creative efforts by Financial Instruments
Business Operators, etc. themselves. In particular, providing feedback of information on such initiatives
according to the issues facing each Financial Instruments Business Operator, etc. makes it possible to holdin-depth dialogue after establishing a high level of common value between the authorities and the
Financial Instruments Business Operator, etc. In that case again, consideration needs to be given so thatthe authorities respect the voluntary management decisions of the Financial Instruments Business
Operator, etc. and do not inappropriately intervene in decisions on individual transactions.
- Information on management policy, initiatives for its improvement, the state of exercise of the market
intermediary function, and so on voluntarily disclosed by the Financial Instruments Business Operator,etc. may not only contribute to the dialogue between the Financial Instruments Business Operator, etc.
and the authorities, but also deepen the dialogue with parties concerned, such as customers, and contributeto initiatives by the Financial Instruments Business Operator, etc. for improving its management.
- When the issue facing a Financial Instruments Business Operator, etc. is in the field of market intermediaryor customer convenience, it will be possible to enhance the effect of the dialogue by not merely
communicating between the authorities and the Financial Instruments Business Operator, etc., but by
conducting a questionnaire survey or hearings with third parties, such as business partners or users, andfeeding back the results at the time of holding dialogue between the authorities and the Financial
Instruments Business Operator, etc.
- The FSA could influence stakeholders involved in the business management of Financial Instruments
Business Operators, etc. by sharing common values or targets with parties concerned other than Financial
Instruments Business Operators, etc. or sending out information on its various analysis results and its
16

stance on financial administration as needed.
(v) Actions Based on Monitoring Results
In providing feedback of the monitoring results as mentioned above, the feedback will be provided in amanner suitable for conducting intensive discussions on priority issues, such as continuing discussions on
an ongoing basis while confirming any differences in recognition between the authorities and the Financial
Instruments Business Operator, etc. regarding any points.
The authorities will conduct an appropriate follow-up by, for example, providing feedback to the Financial
Instruments Business Operator, etc. in the following manner and holding continuous discussions or requiring
actions for improvement as necessary:
A. Informing the results of on-site and off-site monitoring conducted throughout the year in the form of
documents by issuing "feedback letters" throughout the year as needed.
B. In addition to A. above, sending out information on the industry's common issues as needed.
The authorities will classify the problems identified and information gathered through monitoring into (i) thosespecific to individual Financial Instruments Business Operators, etc., (ii) those that are common to the business type,(iii) those that are also common to other business types, and (iv) those that affect the authorities' other operations,related ministries and agencies, or industry organizations, etc. and through processes such as those mentioned in II1-2(2)(i)A. above, the authorities will reflect them in the annual policy and the monitoring plan for the following
period, consider implementation of horizontal monitoring across business types, and not only conduct monitoring,
but also influence the authorities' other operations, related ministries and agencies, or industry organizations in lightof the extensive effects of problems.
II-1-3 Quality Control
The authorities will carry out quality control as an organization to ensure appropriate determination on the qualityand depth of monitoring conducted through identification of the actual state and dialogue in all supervisory
processes. The authorities will strive to secure the quality of supervisory processes to make sure that the creative
efforts of each Financial Instruments Business Operator, etc. are being respected and the supervision does not
impose an inappropriate burden on each Financial Instruments Business Operator, etc., in light of the specificcircumstances of the Financial Instruments Business Operator, etc. such as its business environment andmanagement philosophy, from a broad viewpoint of maximizing the welfare of all citizens, so that market fairness
and investor protection will be secured in the business operation of the Financial Instruments Business Operator,etc.
To this end, senior officials of supervisory departments, etc. will conduct multi-faceted and multi-layered
examination on the following points, for example, while taking into account opinions they have received from
Financial Instruments Business Operators, etc., and continuously make necessary improvements:- When conducting information gathering, a hearing, or dialogue, whether effective cooperation andinformation sharing are conducted between monitoring teams of different business types or sectors so as not
to impose an excessive burden, such as overlapping requests, on Financial Instruments Business Operators,
17

etc. In addition, when requesting submission of materials, whether the contents of the request are clear,whether consideration is given to the size and specific characteristics of the Financial Instruments Business
Operator, etc., and whether ample time is allowed for the submission.
- In identifying specific characteristics, whether the specific circumstances of the Financial Instruments
Business Operator, etc. such as its business environment and management philosophy are fully taken into
account. Also, whether objective materials and facts are taken into account so that the supervisors in charge
do not fall into making assumptions.
- In identifying priority issues, whether focus is placed on issues that are practically important for business
management according to the actual circumstances specific to each Financial Instruments Business Operator,etc. In addition, whether any issues commonly shared by other Financial Instruments Business Operators,
etc. or across business types have been overlooked.
- In formulating the monitoring policy and plan, whether appropriate monitoring targets and techniques are
selected and arrangements and procedures for conducting monitoring have been developed.
- In requesting reports, whether a detailed explanation on the authority's recognition of issues is provided to
the Financial Instruments Business Operator, etc.
- Whether dialogue is conducted appropriately based on II-1-2(2) above. In addition, whether dialogue isconducted in a manner that is not deemed to be one-way guidance.
- Whether analysis of the fundamental cause is conducted for issues and problems identified as a result ofmonitoring.
- In providing feedback of the monitoring results, whether a method that is most suitable for conducting
intensive discussions on priority issues is selected. In addition, whether precise discussions and requests for
improvement are made on the contents of the feedback according to the importance of the problems, whether
trivial problems have not been pointed out, and whether the feedback has not resulted in making inappropriate
intervention in management.
In that process, the senior officials will strive to increase opportunities for receiving frank opinions or criticisms
from Financial Instruments Business Operators, etc. by, for example, visiting Financial Instruments Business
Operators, etc. and directly hearing opinions on monitoring from them.
In addition, they will evaluate financial administration through hearings, etc. with Financial Instruments Business
Operators, etc. and FSA officials, and hear the opinions of outside experts through expert panels, etc.
II-1-4 General Supervisory Processes(1) Submission of Monitoring Survey Reports
As part of offsite monitoring, supervisors shall, based on Article 56-2(1) of the FIEA, require Financial
Instruments Business Operators, etc. to submit a monitoring survey report regarding the following matters.
Upon receipt of a monitoring survey report, the director-general of the Local Finance Bureau (including thedirectors-general of the Fukuoka Local Finance Branch and the Okinawa General Bureau; the same shall apply
hereinafter) shall, in accordance with guidelines issued by the FSA Commissioner, conduct administrative processes
18pertaining to offsite monitoring reports. In conducting the administrative processes, the relevant sections of the
Local Finance Bureau shall cooperate fully with the FSA divisions concerned.
[Monitoring of Type I Financial Instruments Business Operators](i)Capital Adequacy Ratio(ii)

Status of business operations and accounting(iii) Status of segregated management of customer assets(iv) Market risk(v)

Counterparty risk(vi) Operational risk(vii) Liquidity risk
[Monitoring of persons engaged in the investment of a fund, etc. above a certain size (for each fund or customer
assets](i) Name of the fund, etc.
(ii) Operator category(iii) Type of the fund, etc.
(iv) Items related to the investment period(v) Items related to rights holders (including investors and excluding individuals)(vi) Items related to the amount of the investment assets(vii) Items related to the amount of the net assets(viii) Items related to asset class exposure(ix) Items related to financial instruments classification(x) Items related to borrowings(xi) Items related to counterparty risk(xii) Items related to liquidity risk
(Note) A "person engaged in the investment of a fund, etc. above a certain size," who is required to submit amonitoring survey report, refers to a person who falls under any of the following and is engaged in theinvestment of a fund or customer assets for which the net assets per fund or per contract is at least 50 billion
yen as of the end of the latest business year prior to the last day of June every year:
・A person who performs the act set forth in Article 2(8)(xii) of the FIEA on a regular basis
・A person who performs the act set forth in Article 2(8)(xiv) of the FIEA on a regular basis
・A person who is engaged in the investment of money or other property invested or contributed by a personthat holds the rights set forth in Article 2(8)(xv)(c) of the FIEA, on a regular basis, as an investment mainly
in securities or in rights connected with derivatives transactions, based on investment decisions that are
grounded in an analysis of the values, etc. of financial instruments.
(2) Points of Attention Regarding Public Notice of Administrative Dispositions
A public notice of an administrative disposition based on Article 54-2 of the FIEA shall specify the following
items:
19

(i)Name of the financial instruments business operations and individuals concerned(ii)

Location of the head office, etc.
(Note) The “head office, etc.” refers to the head office, or the principal office engaging in sales andadministrative work (the principal office in Japan in the case of foreign corporations or individuals,
and the head office in the case of no principal office, etc. in Japan). The same shall apply hereinafter.

(iii) Registration number(iv) Registration date(v)

Date of the administrative disposition(vi) Contents of the administrative disposition(3) Grasp of the Actual State of Unregistered Business Operators and Operators Using Similar Trade Names
When supervisors have recognized the existence of operators engaging in financial instruments business without
registration, or operators’ names that may be confused with other operators that are registered, based on complaints
from investors, inquiries from investigative authorities, information provided by Financial Instruments Firms’
Associations, advertisements carried by newspapers, etc., they shall make active efforts to grasp the actual state ofsuch operators through means such as inquiring with police, local consumer centers, etc., about the operators anddirectly contacting the operators via telephone.
When they have received complaints from consumers and inquiries from investigative authorities in particular,
supervisors shall take sufficient care to do more than merely respond to the complaints and inquiries.
(4) Handling of Unregistered Business Operators and Other Questionable Operators
When supervisors have received information regarding unregistered business operators and other questionable
operators, they shall take the following measures in order to prevent financial damage to customers from spreading.
(i)

Receipt of Complaints
When supervisors have received information from investors and other persons with regard to business
operators engaging in financial instruments business without registration, they shall take the following
measures after collecting information as detailed as possible (e.g. the corporate name, location, telephone
number, the state of sales activities of the said business operators and the names of the operators’
representatives, the names of the information providers and whether the information providers agree to havetheir information communicated to the investigative authorities).
A. When a Local Finance Bureau has received information regarding an unregistered business operator
based in a region under the jurisdiction of another Local Finance Bureau, it shall communicate theinformation to the competent bureau. (The competent Local Finance Bureau shall handle the casethereafter, in principle.)
B. Regarding business operators who cannot be contacted, supervisors shall strive to collect more
information.
C. When the information provider asks supervisors to refrain from contacting the business operator
concerned or other organizations, supervisors shall make sure to prevent his/her interests from being
damaged.
20

D. Regarding information related to a business operator suspected of conducting business without
registration, supervisors shall encourage the information provider to provide information directly toinvestigative authorities.
E. A registry book (the format is specified in the Attached List of Formats II-6) shall be compiled tosystematically record complaints and inquiries from investors, guidance given by the authorities tobusiness operators, and the operators’ responses thereto.
(ii)

Cases where it is found that business operators could be engaging in financial instruments businesswithout registration
Regarding a questionable business operator whose name and contact details have been identified throughinformation and so forth received directly or via the FSA or other bureaus, and whose actual state of sales
activity has become known to a certain extent, supervisors shall strive to grasp the actual state by directly
contacting the said business operator by telephone or through other means. If it is subsequently found that thebusiness operator could be conducting financial instruments business without registration (including cases
where contact cannot be made for such reasons as the business operator being absent), supervisors shall issue
a document using the Attached List of Formats II-5, and the following measures shall be taken:
A. If the business operator is found to be unintentionally operating without registration and with nomalicious intent and to have no problem from the viewpoint of investor protection, it shall be
immediately required to be registered.
B. If the business operator is found to be intentionally operating without registration and with malicious
intent or to have other problems from the viewpoint of investor protection, the investigative authorities
shall be notified and the business operator shall be warned in writing, in the format specified in the
Attached List of Formats II-4, to stop conducting business immediately.
Although it is unnecessary to issue a document using the Attached List of Formats II-5, if it isidentified that a business operator is conducting financial instruments business without registration,
supervisors shall immediately warn the business operator in writing using the Attached List of Formats
II-4.
C. In cases where a business operator, although not found to be conducting financial instruments
business without registration, is found to be indicating that it will conduct financial instruments
business or is soliciting customers to sign contracts for financial instruments transactions for the
purpose of conducting financial instruments business, instead of using the Attached List of Formats
II-4, supervisors shall warn the business operator using the Attached List of Formats II-13.
(iii) Cases Where Correction Is Not Made in Response to a Warning
Regarding business operators who refuse to take corrective action despite being issued with a warning bymeans of the Attached List of Formats II-4 or II-13, complaints shall be filed with the investigative authorities
as necessary.
(iv) Publication, etc.
Regarding cases where a warning has been issued against a business operator or a complaint has been filedwith the investigative authorities, the name or trade name of the business operator subject to these measures(including the name of a representative director or a person equivalent thereto in the case of a juridical person),21

the location or address of the business operator (the names of the prefecture and the municipality or special
ward in the case of an individual, or the equivalent thereto in the case of a nonresident) and the content of thefinancial instruments business that was conducted unregistered, etc. shall be made public, and a set of copiesof the relevant section of the aforesaid registry book, the written warning and other relevant documents shallbe immediately sent to the FSA Commissioner. On receipt of a report, the FSA shall make a list of the business
operators that have been made public, and shall publicize this on the FSA website.
In cases where issuing a warning is difficult, such as where it is clear that the location of the business
operator issued with the warning is false or where the location of the business operator is unknown, the FSA
shall carry out the above publication, etc. without issuing the warning.
(Note) Regarding the handling of unregistered business operators and other questionable operators, cases
where the investigation by the investigative authorities could be impeded shall be excluded. It should be
kept in mind that receipt of an inquiry or the like from an investigative authority regarding the registration
pertaining to the said business operator does not immediately mean that it should be judged a case where
the investigation by the investigative authorities would be impeded.
(5) Handling of Business Operators Using Similar Trade Names(i)

A business operator whose trade name is deemed to be undoubtedly similar to an existing trade name (e.g.

“XXX Securities Company,” “Type X Financial Business Operator” and “XXX Investment Corporation”)
shall be warned in writing, in the format specified in the Attached List of Formats II-1, and ordered, throughdirect contact such as telephone conversations or face-to-face interviews, to take corrective action. In addition,such cases shall be notified to the investigative authorities and the exchange of information with theauthorities shall be maintained.
In the case of a business operator whose trade name is deemed to be similar to an existing one, and who
is found to be possibly conducting financial instruments business without registration, supervisors shall, in
principle, take action in accordance with the procedures set forth in (4) above.
(ii)

A business operator using a trade name that could be confused with that of a Financial Instruments

Business Operator (refer to Note) shall be warned in writing, in the format specified in the Attached List ofFormats II-2. In addition, the details of the business operators’ business shall be investigated through means
such as inquiring with police, local consumer centers and other entities about the operators and directly
contacting them via telephone.
Unless the business operator is found as a result of the investigation to be engaging in a business that is
obviously different from Financial Instruments Business, it shall be warned in writing again, this time in theformat specified in the Attached List of Formats II-3 and ordered, through direct contact such as telephone
conversations and face-to-face interviews, to take corrective action.
(iii) Regarding a business operator who refuses to take corrective action in response to warnings issued in theformats specified in the Attached List of Formats II-1 and II-3, a complaint shall be filed with the investigative
authorities as necessary.
(iv) In cases where the measures (i) to (iii) above have been taken, the Director-General of the competent
Local Finance Bureau shall immediately report to the FSA Commissioner the name of the business operator
22

concerned, the name of its representative, the location of its stores and other facilities, the nature and size ofits business and so on. On receipt of a report, the FSA shall publicize the name, etc. of the person who has
been warned on the FSA website.
(v)

Regarding business operators using similar trade names, and other questionable business operators, thedirectors-general of Local Finance Bureaus shall compile a registry book (in the format specified in the
Attached List of Formats II-6) to systematically record complaints and inquiries from investors, guidance
given by the authorities to the business operators, and the business operators’ response thereto.
(Note) “Examples of Trade Names Which Could be Confused with Those of Financial Instruments Business
Operators”
Of Financial Instruments Business Operators, those who were registered under Article 28 of the former
Securities and Exchange Act at the time when the FIEA was put into force, and those who started engaging insecurities-related businesses after the FIEA was put into force are entitled to include the word “Securities” intheir trade names. Judgment on the appropriateness of trade names that could be confused with the names ofthese business operators (hereinafter referred to as “Specified Securities Companies, etc.”) shall be made ona case-by-case basis in light of the degree of the risk of such confusion. The following are examples of namesthat could cause confusion:(a) Trade names which could be confused with those of specified securities companies although they combine“Securities” with words describing other types of businesses.
<Examples>“XXX Securities Transactions,” “XXX Securities Trader,” “XXX Securities Broker,” “XXX Securities
Investment,” “XXX Securities Trading Company,” “XXX Securities Call Loan,” “XXX Securities
Entrustment,” “XXX Securities Intermediation,” “XXX Securities Agency”
However, names that are obviously different from those of specified securities companies, for example,“XXX Securities Printing,” shall be excluded.
(b) Trade names which could be confused with those of specified securities companies although not using theword “Securities.”<Examples>“XXX Stock Entrustment,” “XXX Stock Investment,” “XXX Stock Brokerage,” “XXX Stock Trade,”“XXX Stock Transactions,” “XXX Stock Agency (Regarding these names, “Stock” may be substituted with
“Bond”),” “XXX Financial Instrument Trade”
II-1-5 Cooperation between Supervisory Departments(1) Cooperation between the FSA and Local Finance Bureaus
The FSA and Local Finance Bureaus need to strengthen the effectiveness of monitoring through sharing therecognition of the location of risks and perspectives on problems by properly exchanging information deemednecessary for the supervision of Financial Instruments Business Operators, etc. To that end, they shall strive tostrengthen their cooperation through means such as by providing information to each other in a timely andappropriate manner and actively exchanging views with regard to various matters, including matters other than23

those that concern consultations related to the internal delegation processes set forth in II-1-7, and by sharing knowhow obtained through the accumulation of case examples. In addition, Local Finance Bureaus shall strive tostrengthen cooperation among themselves. For example, when a Local Finance Bureau has detected publicly
unknown risks or problems regarding a Financial Instruments Business Operator, etc., under the jurisdiction of the
FSA or another Local Finance Bureau, it shall provide relevant information to the FSA or the competent bureau asnecessary.
(2) Coordination and Liaison with the Director-General of the Competent Local Finance Bureau(i)When the FSA Commissioner and the directors-general of Local Finance Bureaus have received anotification of the establishment, relocation, name change, abolition, temporary suspension or resumption ofoperation of a sales office of a Financial Instruments Business Operator in a region not under their jurisdiction,
they shall send a copy thereof to the director-general of the Local Finance Bureau that has jurisdiction over
the region where the said sales office is located.
(ii)

When the FSA Commissioner and the directors-general of the Local Finance Bureaus have taken an

administrative disposition under either of Articles 51 to 54 of the FIEA against a sales office of a Financial
Instruments Business Operator, etc., under their jurisdiction that is located in a region not under theirjurisdiction, they shall immediately notify the details of the action to the director-general of the Local Finance
Bureau that has jurisdiction over the region where the said sales office is located.
(iii) When the director-general of a Local Finance Bureau has received a notification submitted under Article
32 of the FIEA by a major shareholder in a Financial Instruments Business Operator under the jurisdiction of
the FSA Commissioner or the director-general of another Local Finance Bureau, he/she shall immediately
send the original of the notification to the FSA Commissioner or the director-general of the competent Local
Finance Bureau.
(iv) When the FSA Commissioner and the directors-general of the Local Finance Bureaus have issued an order
based on Article 32-2 of the FIEA to a major shareholder in a Financial Instruments Business Operator under
their jurisdiction, they shall notify the details of the order to the director-general of the Local Finance Bureau(to the director-general of the Kanto Local Finance Bureau in cases where the shareholder is a nonresident)
that has jurisdiction over the region where the head office or principal office of the said major shareholder(the residence of the shareholder in cases where the shareholder is an individual) is located.
(v)

When a Financial Instruments Business Operator, etc. under the jurisdiction of the FSA Commissioner

and the Directors-General of Local Finance Bureaus entrusts business operations to a financial instrumentsintermediary service provider, etc. (referring to a financial instruments intermediary service provider and afinancial service intermediary (referring to the financial service intermediary prescribed in Article 11(6) of
the Act on the Provision of Financial Services and the Development of the Environment for Using Financial
Services, and limited to such financial service intermediary engaged in securities, etc. intermediary business
operations (referring to the securities, etc. intermediary business operations prescribed in Article 11(4) of thesame Act; the same shall apply hereinafter); the same shall apply hereinafter)) located in a region not under
their jurisdiction, the FSA Commissioner and the Directors-General of Local Finance Bureaus shall cooperatewith the Director-General of the Local Finance Bureau that has jurisdiction over said financial instruments
24intermediary service provider, etc. by, for example, providing the information necessary for the supervision
thereof.
II-1-6 Cooperation with Self-Regulatory Organizations
It should be kept in mind that in the supervision of Financial Instruments Business Operators, etc., it is necessary
to attach importance to rules set by relevant self-regulatory organizations as well as to laws and regulations. In
addition, supervisors shall maintain the appropriate exchange of information necessary for supervision with selfregulatory organizations, to the extent necessary for the purpose of ensuring the fairness of transactions andprotecting investors. It is also essential that supervisors strive to share the recognition of the location of risks andperspectives on problems with self-regulatory organizations. Furthermore, they shall provide active support to selfregulatory organizations’ efforts to exercise cross-sectoral self-regulatory functions through participation inmeetings aimed at facilitating liaison and coordination between self-regulatory organizations.
Also, in order to exclude crime syndicates and other illegal organizations from financial instruments business,supervisors shall maintain appropriate cooperation with relevant organizations through the securities security liaisongroup.
II-1-7 Internal Delegation(1) Consultations with the FSA Commissioner
The directors-general of Local Finance Bureaus shall hold prior consultations with the FSA Commissioner withregard to the following matters when they conduct delegated supervisory processes concerning Financial
Instruments Business Operators, etc.
In addition, directors-general shall report the results of the deliberations made by their bureaus and express theopinions thereof in the consultations.
(i)

Refusal of registration under Article 29-4(1) and Article 33-5 of the FIEA

(ii)

Granting of authorization of the conduct of business under Article 30(1) of the FIEA(iii) Administrative disposition against a major shareholder under Article 32-2 of the FIEA (including cases
where the provision of Article 32-4 of the FIEA is applied mutatis mutandis)(iv) Approval of exclusion from application regarding preventive measures against internal collusion under
the proviso of Article 44-3(1) and (2) of the FIEA(v)

Administrative dispositions, including orders to improve or suspend business operation and rescission ofregistration and authorization under Article 51, Article 51-2, Article 52 (1) and Article 52-2(1) of the FIEA(vi) Dismissal of officers of Financial Instruments Business Operators (limited to officers stationed at sales
and other offices in Japan or representative persons in Japan in the case of foreign securities companies) under
Article 52(2) and Article 52-2(2) of the FIEA(vii) Administrative dispositions, including business improvement orders in relation to the Capital Adequacy
Ratio under Article 53 of the FIEA
(viii) Rescission of registration of Financial Instruments Business Operators, etc., who have suspended their
25

business operations for an extended period of time under Article 54 of the FIEA(iv) Dispositions necessary for investigation under Article 187 of the FIEA(v)

Approval of the use of the interest rate sensitivity analysis under Article 7(1) of the Notice of theEstablishment of Criteria for the Calculation of Financial Instruments Business Operators’ Market Risk
Equivalent, Counterparty Risk Equivalent and Basic Risk Equivalent (hereinafter referred to as the “Capital
Adequacy Notice”)(vi) Approval of the use of an internal control model under Article 10 of the Capital Adequacy Notice(xii) Rescission of approval under Article 14(5) of the Capital Adequacy Notice(2) Reporting to the FSA Commissioner
When the directors-general of Local Finance Bureaus conduct delegated supervisory processes regarding
Financial Instruments Business Operators, etc., they shall complete the relevant processes and then report to the
FSA Commissioner on the following matters:(i)When a Financial Instruments Business Operator, etc., under the jurisdiction of the FSA has obtained

registration from a Local Finance Bureau under Article 29-3(1) or Article 33-4(1) of the FIEA, the directorgeneral of the said bureau shall immediately send the original of the registration application and attacheddocuments to the FSA Commissioner.
(ii)

The directors-general of Local Finance Bureaus shall report on the conditions of major shareholders(major shareholders as specified under Article 29-4(2) of the FIEA) as of the end of each financial quarter tothe FSA Commissioner by the 20th day of the month following the end of the quarter, in the format specified
in the Attached List of Formats II-7.
(iii) The directors-general of Local Finance Bureaus shall compile a report regarding administrative processes
concerning the confirmation of problems (as specified in the proviso of Article 39(3) of the FIEA) on a halfyearly basis, in the format specified in the Attached List of Formats II-8 (Report on the Status of the Conductof Administrative Processes concerning Confirmation), and submit the report to the FSA Commissioner by
the 15th day of the month following the end of each six-month period.
(iv)

When the directors-general of Local Finance Bureaus have received the following documents, they shallimmediately send a copy thereof to the FSA Commissioner.
A. Reports regarding international businesses (Article 173 (2) of the Cabinet Office Ordinance regarding
Financial Instruments Business, etc. (hereinafter referred to as the “FIB Cabinet Office Ordinance”)
B. Reports regarding the establishment or abolition of representative offices of foreign securities
companies (Article 199 (11) H of the FIB Cabinet Office Ordinance)(v)

When the directors-general of Local Finance Bureaus have received reports based on Article 50-2(1) and(7) of the FIEA, they shall immediately send a copy thereof to the FSA Commissioner.
(vi) When the directors-general of Local Finance Bureaus have issued a notice based on Article 57(3) of the
FIEA (limited to cases where a notice to the Minister of Finance based on Article 194-4(1) of the FIEA is
required), they shall immediately send a copy thereof to the FSA Commissioner.
(vii) In cases where the directors-general of Local Finance Bureaus received a notification under Article 63-9(1)of the FIEA from a person who will become a Financial Instruments Business Operator, etc. under the26

jurisdiction of the FSA, the directors-general shall immediately send the original of the written notification
and attached documents to the FSA Commissioner.
(viii) In cases where the directors-general of Local Finance Bureaus received a notification under Article 3-3(1)of the Supplementary Provisions of the FIEA (including cases where applied mutatis mutandis pursuant toparagraph (7) of the same Article; the same shall apply in II-6) from a person who will become a Financial
Instruments Business Operator, etc. under the jurisdiction of the FSA, the directors-general shall immediately
send the original of the written notification and attached documents to the FSA Commissioner.
(ix) When the directors-general of Local Finance Bureaus have received reports based on Article 14(1) and(2) of the Capital Adequacy Notice, they shall immediately send a copy thereof to the FSA Commissioner.
(x)

The directors-general of Local Finance Bureaus shall examine the status of the payment, for the previous

business year, of the Registration and License Tax (the registration license tax as specified under Article 2 of
the Registration and License Tax Act) by Financial Instruments Business Operators, etc., under theirjurisdiction, and report the findings to the FSA Commissioner by April 30 every year.
(3) Re-delegation to Director-General of Local Finance Offices, etc.
Of the processes delegated to the directors-general of Local Finance Bureaus under Article 42 of the Order for
the Enforcement of the Financial Instruments and Exchange Act (hereinafter referred to as the “FIEA Enforcement
Order”), the directors-general may re-delegate the following processes to the director-general of local Finance
Offices that have jurisdiction over the regions where the head offices of the applicants and Financial Instruments
Business Operators, etc., are located as well as to the heads of the Oar and Kitami Branch Offices.
(i)

Administrative processes regarding the receipt of applications for registration as specified under Article29-2 (1) and Article 33-3(1) of the FIEA
(ii)

Administrative processes regarding the receipt of applications for authorization specified under Article30-3(1) of the FIEA(iii) Administrative processes regarding the receipt of applications for approval as specified under Article
35(4) of the FIEA(iv) Administrative processes regarding the receipt of notifications based on Article 31(1) and (3), Article 336(1) and (3), Article 31-2(5) and (8), Article 35(3) and (6), Article 46-6(1), Article 50(1), Article 50-2(1) and(7) of the FIEA(v)

Administrative processes regarding the receipt of notifications based on Article 32(1) and (3), Article 32-

3, Article 32-4 and Article 57-26(1) of the FIEA(vi) Administrative processes regarding the receipt of documents submitted under Article 46-3(1) and (2),Article 47-2, Article 48-2(1) and (2) and Article 49-3(1) and (2)(4) Points of Attention
The provisions of (ii), (iii), (vii), and (x)-(xii) of II-1-7(1), (ii), (iv) and (ix) of II-1-7(2) and (ii), (iii) and (v) ofII-1-7(3) shall not be applicable to the conduct of administrative processes concerning the supervision of registeredfinancial institutions.

27II-1-8 Points of Attention Regarding Submission Documents Required for Financial Instruments Business
Operators, etc.
It should be noted that an officer, etc. who has changed his/her surname may enter, in addition to the current
surname, the former surname (meaning the former surname prescribed in Article 30-13 of the Order for
Enforcement of the Residential Basic Book Act (Cabinet Order No. 292 of 1967); the same shall apply
hereinafter) in the parentheses in the column when entering officers’ names in the Formats attached to the
Guidelines.
With regard to attached Formats III-1, VI-11, VI-12, VI-13, VI-14, and VI-15, it should also be noted that aperson who has submitted a written application for registration referred to in Article 29-2(1) of the Act or a written
notification referred to in Article 31(1) of the Act in which he/she entered both his/her former surname and current
surname may enter either the former surname or current surname or both until the person has filed a notification to
the effect that he/she changes the relevant former surname and current surname entered in such written
application or written notification.
II-1-9 Points of Attention Regarding Procedures in Writing and by Face-to-Face Contact
With regard to applications and notifications filed by Financial Instruments Business Operators, etc. andnotices on dispositions issued by the authorities to Financial Instruments Business Operators, etc., Article 6(1) and
Article 7(1) of the Act on the Promotion of Administration Using Information and Communications Technology(hereinafter referred to as the "Digital Procedures Act") provide that a means that involves the use of an electronic
data processing system may be used even in cases where procedures in writing or by any other means areprescribed under the provisions of laws and regulations, irrespective of the provisions of the relevant laws andregulations.
In light of the purport of the Digital Procedures Act, the provisions of the Supervisory Guidelines pertaining to theprocedures subject to the Digital Procedures Act are revised to permit the use of a means that involves the use ofan electronic data processing system for those procedures, irrespective of the provisions requiring procedures inwriting or by face-to-face contact.
In addition, with the rapid progress of digitalization in economic and social activities as a whole, the national
government is reviewing Japan's systems and practices that require written documents, seals, and face-to-faceprocedures, and is working toward the realization of a remote society where procedures can be completed without
actually visiting an office.
In order to steadily promote these efforts, the FSA has also been promoting the computerization ofadministrative procedures by revising the Electronic Application and Notification System of the FSA to enable
online submission of all applications and notifications filed by Financial Instruments Business Operators, etc., aswell as by revising the Cabinet Office Ordinance and Supervisory Guidelines to abolish the use of seals.
Furthermore, with regard to procedures among private businesses, the national government held the "Panel for
Reviewing Procedures Requiring Documents, Seals and Face-to-Face Contact in the Financial Industry" toencourage the entire industry to review its practices, thereby working to digitize documents, eliminate the need forseals, and review face-to-face regulations.

28Based on these efforts in the public and private sectors, the provisions of the Supervisory Guidelines pertaining
to documents and face-to-face contact regarding procedures other than those subject to the Digital Procedures Act
are revised to permit the use of a means that involves the use of an electronic data processing system or otherinformation and communications technology, except for the cases where the original documents are required to besent as described in II-1-10.
In light of the purpose of the above-mentioned treatment, it is recommended that procedures based on theprovisions of the Supervisory Guidelines be conducted, to the extent possible, in a manner other than in writing or
by face-to-face contact, while taking into consideration the intentions of the other party to the procedures.
II-1-10 Points of Attention when Submitting Written Applications, etc.
Based on II-1-9, applications and notifications to the authorities filed by Financial Instruments Business
Operators, etc. shall, in principle, be required to be submitted by the methods set forth in (1) and (2) below.
However, for attached documents issued by public institutions (copy of resident certificate, ID card, copy offamily register, documents certifying payment of taxes and fees, etc.), the original documents should be sent.
(1) The Electronic Application and Notification System of the FSA
Applications and notifications, etc. to the authorities filed by Financial Instruments Business Operators, etc.,
shall, in principle, be required to be submitted by the submission deadline stipulated by laws and regulations using
the Electronic Application and Notification System of the FSA, except for the procedures for which the use of theIntegrated System for Supporting the Operation of the FSA (hereinafter referred to as the "Integrated System") set
forth in (2) is required.
However, for procedures for which written applications, etc. may be submitted by using the e-Gov, which the
FSA introduces on its website, submission using the e-Gov is permitted, for the time being, together withsubmission using the Electronic Application and Notification System of the FSA.
(2) The Integrated System for Supporting the Operation of the FSA
A written notification of the capital adequacy ratio prescribed in Article 46-6(1) of the FIEA, a business reportprescribed in Article 47-2 of the same Act, a business report based on Article 48-2(1) of the same Act, a written
report on the business or on the status of property prescribed in Article 188(ii) of the FIB Cabinet Office
Ordinance based on Article 48-2(2) of the FIEA, a business report prescribed in Article 63-4(2) of the same Act,and a business report prescribed in Article 63-12(2) of the same Act (including cases where applied pursuant to
Article 3-3(4) of the Supplementary Provisions of the same Act (including cases where applied mutatis mutandis
pursuant to paragraph (7) of the same Article; the same shall apply hereinafter)) shall, in principle, be required tobe submitted by using the Integrated System.

29

II-2 Response to Inquiries, Complaints, etc.
(1) Basic Response
At the FSA, the Counseling Office for Financial Services Users is primarily responsible for handling inquiries,
complaints, etc. regarding Financial Instruments Business Operators, etc., and financial instruments transactions.
At Local Finance Bureaus, such complaints are primarily handled by relevant divisions. The FSA and Local Finance
Bureaus shall explain to persons who lodge complaints that they are not in a position to act as a mediator for specifictransactions, and they shall refer such persons to a designated ADR body (meaning a designated dispute resolution
body specified in Article 156-38(1) of the FIEA; the same shall apply hereinafter), Financial Instruments Firms’
Associations and Certified Investor Protection Organizations, which respond to inquiries, complaints, etc. based on
the FIEA.
If persons who have made inquiries, complaints, etc. consent to the provision of information to the Financial
Instruments Business Operators, etc., the supervisory departments shall, in principle provide information to the
Financial Instruments Business Operators, etc.
(2) Accumulation of Information
Local Finance Bureaus shall record the inquiries, complaints, etc. regarding Financial Instruments Business
Operators, etc. that are deemed to be useful for supervising such operators (in the format specified in the Attachedlist of Formats II-9). When they find any information that is deemed to be particularly important, they shallimmediately report such information to the relevant FSA divisions.
(3) Cooperation with the Counseling Office for Financial Services Users
In order to ensure that inquiries, complaints, etc. brought to the Counseling Office for Financial Services Users
are appropriately reflected in the administrative processes regarding supervision, supervisory departments shall takethe following measures:(i)analyze the inquiries, complaints, etc. referred from the counseling office; and(ii) exchange information with the counseling office.

30

II-3 Response to External Inquiries about Interpretations of Laws and Regulations, etc.
II-3-1 Inquiries about Laws and Regulations(1) Scope of Laws and Regulations Regarding Which Inquiries May be Processed
Inquiries may be processed only regarding the FIEA and related laws and regulations that are under the FSA’s
jurisdiction. Comments shall never be made in response to inquiries regarding laws and regulations outside the
FSA’s jurisdiction.
(2) Method of Response to Inquiries(i)Regarding an inquiry to which a reply can be made based on existing documents and reference materials,

such as this Guideline for Supervision and reports compiled by advisory councils, the reply shall be provided
promptly.
(ii)

When Local Finance Bureaus have received an inquiry to which they find it difficult to reply on their own,

they shall compile an inquiry mail in the format specified in the Attached List of Formats II-10 and consult
with the relevant FSA division via e-mail, etc.
(iii) When business operators to which the laws and regulations under the FSA’s jurisdiction are directly
applicable or business associations comprising such business operators have made a general inquiry that meetsthe requirements specified in the following A and B with regard to the said laws and regulations, the headof the relevant FSA division shall provide a written reply and make it public if it is deemed to be appropriate
to do so from the viewpoint of improving the predictability of the application of laws and regulations.
(Note) A “business association” refers to a group formed by a substantial number of business operators
engaging in the same type of business to which the laws and regulations under the FSA’s jurisdiction
are directly applicable in order to promote their common interests, or a federation of such groups (limited
to the top-tier organization in the case of business sectors where there are layers of associations andfederations).
A. Scope of Inquiries for Which the Reply may be Published
An inquiry must meet all of the following requirements if the written reply thereto is to be made public:a. Must not ask whether a law or regulation is applicable to a specific transaction involving a specificbusiness operator, but rather ask about the general interpretation of the law or regulation. (Noteligible for the application of the Prior Confirmation Procedures on the Application of Laws andRegulations by Administrative Agencies (“no action letter” system).)b. Must not seek factual recognition.
c. Must relate to transactions and other matters common to business operators to which the laws andregulations under the FSA’s jurisdiction are directly applicable (in cases where the inquirer is anassociation of business operators, the inquiry must concern transactions and other matters common
to business operators constituting the association) and must be regarding matters that a number ofbusiness operators are expected to make an inquiry into.

31

d. Must not ask about points that are clear in light of the Guideline for Administrative Processes andother documents and materials that have been made public in the past.
B. Written Inquiry Forms (including Electronic Forms)
The inquirer shall submit a written inquiry that specifies the following items. In addition to the written
inquiry, the inquirer may be asked to submit additional or corrected documents, if necessary, in order tojudge the contents of the inquiry and whether it meets the criteria specified in “A” above.
a. The legal provision which the inquiry concerns and specific points of issueb. The inquirer’s opinion concerning the inquired points of issue and the basis thereofc. A statement from the inquirer agreeing to have the contents of the inquiry and the response thereto
made public.
C. Contact Point for Inquiry
A written inquiry shall be submitted to the FSA division with jurisdiction over the law or regulation inquestion or the relevant section of the Local Finance Bureau that has jurisdiction over the inquirer. Whena Local Finance Bureau section has received an inquiry, it shall immediately forward it via e-mail, etc.,
to the relevant FSA division.
D. Replya. The head of the relevant FSA division shall strive to reply to the inquirer within two months inprinciple of the arrival of a written inquiry at the contact point. In cases where it is not possible to
reply within two months, it is necessary to provide the reason for the delay and the expected dateof reply to the inquirer.
b. Written replies shall contain the following disclaimer:“This reply expresses a general view regarding the law or regulation in question that the FSA
formed at this time exclusively on the basis of information contained in the written inquiry, in its
capacity as the entity that has jurisdiction over the said law or regulation. Therefore, the reply does
not provide judgment regarding the application of the said law or regulation to a specific case or
have binding power on the judgment of the investigative or judicial authorities.”c. When the relevant FSA division decides not to reply to the inquiry through said process, it shallnotify the inquirer with the decision and provide the basis thereof.
E.

Publication
When the FSA has provided a reply according to the procedures prescribed in “D” above, it shallimmediately publish the inquiry and the reply on its web site.

(iv)

Regarding inquires which do not fit the description of (iii) above but are made frequently, a reference

circular that describes the reply to the inquiry (in the format specified in the Attached List of Formats II-11)
shall be compiled, distributed to the relevant departments and stored at the planning sections of the relevant
departments of the FSA and the Local Finance Bureaus.
(v)

In cases where the inquirer seeks a written reply from the FSA and where the Prior Confirmation

Procedures on the Application of Laws and Regulations by Administrative Agencies (“no action letter”
system) are applicable in light of II-3-2(2), the inquirer shall be asked to apply for the said procedures.

32

II-3-2 Prior Confirmation Procedures on the Application of Laws and Regulations by Administrative Agencies(“No Action Letter” System)
Under the Prior Confirmation Procedures on the Application of Laws and Regulations by Administrative
Agencies (hereinafter referred to as the “No Action Letter System”), private companies seek prior confirmation as
to whether specific practices related to their planned business activities are subject to specific laws and regulations,and the said organizations make the replies they receive public. The FSA has established detailed rules concerning
the No Action Letter System. This section only specifies the administrative procedures concerning the No Action
Letter System, so

supervisors shall make sure to refer to “Detailed Rules concerning the Prior Confirmation

Procedures on the Application of Laws and Regulations by Administrative Agencies” when using the No Action
Letter System.
(1) Contact Point for Inquiry
Inquiries shall be submitted to the Coordination Division of the Supervisory Bureau. The Coordination Division
shall immediately process the inquiry if it meets the requirements specified in (2) (iii) below and forward it to thedivision that has jurisdiction over the law or regulation in question. Financial institutions under the jurisdiction of
Local Finance Bureaus shall submit an inquiry to the relevant bureaus, which shall in turn immediately forward thewritten inquiry to the Coordination Division of the Supervisory Bureau via e-mail, etc.
(Note) In principle, the local Finance Bureau forwarding the written inquiry to the Coordination Division of theSupervisory Bureau shall attach its own opinion thereto.
(2) Flow of Processes after Receipt of a Written Inquiry
The relevant division that has received the inquiry shall check whether it is appropriate to reply thereto in lightof (i) and (iii) below in particular. In cases where the inquiry is not eligible for the No Action Letter System, theinquirer shall be notified of the ineligibility. In cases where it is deemed to be necessary for the inquirer to submit
additional or corrected documents, the inquirer may be asked to do so. However, it is important to avoid imposing
an excessive burden on the inquirer, by minimizing the volume of requested additional or corrected documents.
(i)

Scope of Matters Subject to Inquiry
Whether the inquiry has been submitted by a private company planning to engage in a new business ortransaction in order to inquire about the following matters, in relation to the laws and ordinances listed on the
FSA’s web site as subject to the No Action Letter System (hereinafter referred to as “Relevant Laws andRegulations (Provisions)” and government orders based thereon.
A. Whether engaging in the business or transaction in question amounts to operating without authorization.
B. Whether engaging in the business or transaction in question amounts to operating without notification.
C. Whether engaging in the business or transaction in question leads to the suspension of business operation
or rescission of a license (adverse dispositions).
D. Whether engaging in the business or transaction in question leads to the direct imposition of a certain
obligation or limitation of rights.
(ii)

Scope of Eligible Inquirers
Whether the inquirer is an individual or a legal person planning to start a new business and wishing to33

inquire about the applicability of the Relevant Laws and Regulations (Provisions), or a lawyer or the like
employed by the said individual or legal person. Whether the inquirer has submitted a written inquiry thatmeets the criteria specified in (iii) below and agreed to have the content of the inquiry and the reply thereto
made public.
(iii) Inquiry Content
An inquiry must meet the following criteria:
A. Describing specific and concrete facts relating to planned business activity.
B. Containing specific indication of the provisions of the relevant laws and regulations (Provisions)regarding which the inquirer wishes to check the applicability to the planned activity.
C. Containing a statement from the inquirer agreeing to have the contents of the inquiry and the reply
thereto made public.
D. Clarifying the inquirer’s opinion concerning the applicability of the provisions of the laws andregulations in “B” above and the basis thereof.
(iv) Response Timeframe
In principle, the head of the division that has received the inquiry shall reply to the inquirer within 30 days
from the arrival at the contact point of a written inquiry from the inquirer. However, in the following cases,
the response timeframe shall be set as follows. In any case, the FSA shall strive to ensure that the response
time, including the time needed for submitting additional or corrected documents, is made as short as possible.
A. In cases where the inquiry concerns advanced financial techniques or technologies, thus requiring a
careful judgment, the FSA shall make a reply within 60 days in principle from the receipt of the inquiry.
B. In cases where the relevant section's conduct of administrative processes may be impeded significantly
by an excessive volume of inquiries, a reply may be delayed till 30 days from the initial receipt of theinquiry or later but must be made within a reasonable period of time.
C. In cases where the law or regulation in question is under the joint jurisdiction of the FSA and anothergovernment agency, a reply shall be made within 60 days in principle from the receipt of the inquiry.
In cases where the inquirer has been asked to submit corrected or additional information, the days involved
in gathering the said information shall not be counted in the 30-day period. If it is not possible to make a reply
within 30 days, the FSA shall provide the reason for the delay and the expected date of reply to the inquirer.
(v)

Publication of Inquiries and Replies
As a general rule, the contents of inquiries and the replies thereto shall be posted on the FSA’s web site intheir entirety within 30 days from the issuance of the reply.
However, in cases where the inquirer requests a delay in the publication of the inquiry and the reply thereto,and provides a rational reason for the delay and specifies the time when publication may be made, the FSA
may delay the publication of the inquiry and the reply. In such cases, the publication may not necessarily bedelayed until the date requested by the inquirer. When the reason for the requested delay has ceased to bevalid, the FSA may make the inquiry and the reply thereto public after giving prior notice to the inquirer. In
cases where an inquiry or the reply thereto contains information that falls under the category of matters of
non-disclosure, as specified under the provisions of Article 5 of the Act Concerning the Disclosure ofInformation Retained by Administrative Agencies, the FSA may, as necessary, withhold such information from34

disclosure.
II-3-3 System to Eliminate Regulatory Gray Zones
Article 7(1) of the Industrial Competitiveness Enhancement Act (hereinafter referred to as the “EnhancementAct”) stipulates a system under which persons who intend to conduct new business activities may request
confirmation of the interpretation of provisions of the law that stipulates regulations concerning the intended new
business activities and related business activities, as well as ordinances based on the law (including notifications;
hereinafter referred to as the “laws and regulations” in this paragraph), and the presence or absence of applicationof said provisions to the new business activities and related activities (hereinafter referred to as the “Gray Zone
Elimination System”). This paragraph prescribes the administrative processes of the Gray Zone Elimination System.
Reference shall invariably be made to the “Guide to the Use of the ‘Gray Zone Elimination System,’ ‘Regulatory
Sandbox,’ and ‘Special Measures on Regulations for New Businesses’” (Ministry of Economy, Trade and Industry(METI), July 15, 2022) (hereinafter referred to as the “Usage Guide,” including those after revisions by the METI
in this paragraph).
(1) Contact Point for Inquiry
The contact point for inquiry shall be the Strategy Development Division, the Strategy Development andManagement Bureau of the FSA.
The Strategy Development Division shall promptly accept an inquiry form that satisfies the requirements
indicated in the criteria for items to be included as shown in (2)(iii) below when it arrives. If the inquiry form is tobe submitted to multiple competent ministers, confirmation of those other competent ministers shall be obtained.
Financial Instruments Business Operators, etc., under the jurisdiction of Local Finance Bureaus shall makeinquiries to the relevant Local Finance Bureaus, respectively. When a Local Finance Bureau has received an inquiry,
it shall promptly send the inquiry form to the Strategy Development Division, the Strategy Development andManagement Bureau of the FSA.
(Note) When sending an inquiry form to the Strategy Development Division, the Strategy Development andManagement Bureau of the FSA, a Local Finance Bureau shall attach review comments to only those requests
for confirmation described in said inquiry form that concern laws and regulations under the jurisdiction of the
FSA.
(2) Procedures Following the Receipt of Inquiry Form
After accepting an inquiry form, the Strategy Development Division, the Strategy Development andManagement Bureau shall promptly forward said inquiry form to the responsible section that has jurisdiction overthe laws and ordinances related to the request for confirmation described in the inquiry form. While discussing withsaid responsible section, the Policy and Legal Division, Planning and Coordination Bureau shall check the following(i) through (iii) in particular regarding whether or not a response shall be given to the matter, and in the case of arequest for confirmation that cannot use the System, the person who submitted said inquiry form (hereinafterreferred to as the “submitter” in this paragraph) shall be thus notified. In addition, if any corrections to the inquiry
form or submission of additional documents is necessary, the required responses may be requested of the submitter.
35

However, additional documents shall be limited to the minimum to avoid excessive burden on the submitter.
(i) Subject of the Request for Confirmation
Whether A. and B. below are satisfied.
A. Whether the submitter is a person who intends to conduct new business activities.
(Note) “New business activities” refer to the development or production of new products, the development
or provision of new services, the introduction of new production or sales methods of products, theintroduction of new provision methods of services and other new business activities through which
improvement of productivity (including resource productivity (the degree of the contribution of the useof energy or the use of mineral resources (excluding their use as energy) to the economic activities of
those who intend to conduct new business activities)) or cultivation of new demand is expected andwhich have no danger of injuring public order or morals (Article 2(4) of the Enhancement Act, andArticle 2 of the Order on Testing of New Technology, Development of Special Measures on
Regulations for New Businesses, and Promotion of Regulatory Reform Based on the Industrial
Competitiveness Enhancement Act (hereinafter referred to as the “Order Based on the EnhancementAct”).
B. The submitter is a person who intends to conduct new business activities related to businesses under thejurisdiction of the FSA. Or, the submitter is a person who intends to request confirmation of theinterpretation of provisions of the laws and regulations under the jurisdiction of the FSA that stipulate
regulations concerning the new business activities and related business activities the submitter intends to
conduct, as well as the presence or absence of application of said provisions.
(ii) Subject of the Inquiry
Whether the submitter requests confirmation of the interpretation of provisions of the laws and regulations
under the jurisdiction of the FSA that stipulate regulations concerning the new business activities and related
business activities the submitter intends to conduct, as well as the presence or absence of application of said
provisions, and inquires on matters such as the following:
A. Whether conducting the business or transaction corresponds to unlicensed trading.
B. Whether conducting the business or transaction corresponds to unregistered trading.
C. Whether conducting the business or transaction would be subject to suspension of business or rescissionof license (adverse disposition).
D. Whether obligations will be directly imposed or rights be restricted in relation to the conduct of thebusiness or transaction.
(iii) Criteria for Items to be Included in the Inquiry Form
Whether the following matters are included in accordance with Form 5 of the Ordinance for Enforcement of
the Enhancement Act and based on the Usage Guide.
A. The goals of the new business activities and related business activities
B. The particulars of the new business activities and related business activities
C. Timing of conducting the new business activities and related business activities
D. Clauses of the laws and ordinances for which confirmation of interpretation and presence or absence of36

application are requested
E. Specific matters to be confirmed(3) Response
The section to which the inquiry form was forwarded shall, in the case where the Strategy Development Division,
the Strategy Development and Management Bureau, has decided to respond, issue a written response to thesubmitter by using Form 11 of the Order Based on the Enhancement Act within one month, in principle, from when
the inquiry form arrived from the submitter at the contact point for inquiry.
If there are unavoidable circumstances that prevent the issuance of a written response within the above period,in light of the status of examination of the interpretation of the provisions of the laws and regulations and theapplicability of the provisions with regard to the request for confirmation stated in the inquiry form, the section towhich the inquiry form was forwarded shall notify the submitter of that fact and its reason every period that does
not exceed one month, until said written response is issued.

37II-4 Points of Attention in Providing Administrative Guidance, etc.
II-4-1 Points of Attention in Providing Administrative Guidance, etc.
When providing administrative guidance, etc., (“Administrative guidance, etc.,” includes administrative
guidance as specified under Article 2(vi) of the Administrative Procedure Act as well as the advice and other actsthat cannot be clearly distinguished from administrative guidance) to Financial Instruments Business Operators, etc.,
supervisors shall abide by the Administrative Procedure Act and other relevant laws and regulations. The following
points shall be taken into consideration.
(1) General Principles (Article 32 of the Administrative Procedure Act)(i)

Whether the administrative guidance, etc., is followed entirely on the basis of voluntary cooperation of

the supervised business operator. For example, the following points shall be taken into consideration:
A. Whether the supervisor has obtained the understanding of the supervised business operator on thecontents and application of the administrative guidance, etc., and the conduct of the official in charge.
B. Whether the administrative guidance has been continued despite the supervised business operator’s
expression of an unwillingness to cooperate.
(ii)

Whether the supervisor has given unfavorable treatment to a business operator for failing to follow

administrative guidance, etc.
A. It should be kept in mind that disclosing a failure to follow administrative guidance, etc., without due
legal grounds could amount to “unfavorable treatment” in a situation where such disclosure would serve
as a social punishment by causing economic losses, for example.
B. In cases where the authority to take administrative dispositions may be exercised depending on thecircumstances following the provision of administrative guidance, etc., the supervisor may provide theadministrative guidance, etc., while indicating the possibility of the exercise of the said authority.
(2) Administrative Guidance, etc. Related to Applications (Article 33 of the Administrative Procedure Act)
Whether the supervisor has prevented the applicant’s exercise of its rights by continuing administrative guidance,
etc., despite the applicant’s expression of an intention not to follow the said administrative guidance, etc.
(i)

Even if the applicant has not clearly expressed an intention not to follow administrative guidance, etc.,

the supervisor shall consider whether the applicant has no intention to do so by taking into consideration the
background to the administrative guidance etc., and changes in the objective circumstances, etc.
(ii)

It should be kept in mind that even if the applicant is following administrative guidance etc., this does notnecessarily constitute voluntary consent to the supervisor’s possible suspension of the screening and response
processes regarding the application.
(iii) The following points shall be taken into consideration, for example:
A. Whether the supervisor has prevented the applicant’s exercise of its rights by putting the applicant in asituation in which it is impossible not to follow administrative guidance, etc.
B. In cases where the applicant has not clearly expressed an intention to not follow administrative guidance,
etc., whether the supervisor has not suspended the screening and response processes regarding the38

application on the grounds that the applicant is receiving administrative guidance, etc.
C. In cases where the applicant has expressed an intention to not follow administrative guidance, etc.,
whether the supervisor has ceased the said administrative guidance, etc., and processed the application
in a prompt and appropriate manner.
(3) Administrative Guidance, etc., Concerning Authority over Granting of License and Approval (Article 34 of the
Administrative Procedure Act)In cases where the supervisor does not have the authority to grant a license or approval or take administrative
dispositions based thereon, or where the supervisor has no intention to exercise such authority, whether thesupervisor is forcing a business operator to follow administrative guidance, etc., by making an ostensible show of
the possibility of exercising the authority.
For example, the following points shall be taken into consideration:(i)

Whether the supervisor is requiring a business operator to engage in or refrain from engaging in aparticular act by pretending to have the authority to deny a license or approval in cases where the supervisor
does not in reality have such authority.
(ii)

Whether the supervisor is forcing a business operator to follow administrative guidance, etc., by indicating

the possibility of exercising the authority regarding licensing and approval at any time unless theadministrative guidance, etc., is followed, or by implying that some kind of unfavorable treatment would begiven.
(4) Method of Administrative Guidance (Article 35 of the Administrative Procedure Act)(i)

When providing administrative guidance, etc., whether the supervisor clarifies to the supervised business

operator what the purpose and contents of the said guidance, etc., are and who the officer in charge is.
The following points shall be taken into consideration, for example:
A. Whether the supervisor clarifies what act the supervised business operator should engage in or refrainfrom engaging in.
B. Whether the supervisor indicates which officer is responsible for the provision of relevant administrative
guidance, etc.
C. In cases where administrative guidance, etc., is provided based on a specific law, whether the supervisor
indicates the legal provision used as the basis.
D. In cases where the provided administrative guidance, etc., is not based on a specific law, whether thesupervisor gains the business operators understanding of the necessity of the said guidance by explaining
the purpose thereof.
(ii)

In cases where the supervised business operator requests the provision of a document that specifies theofficer in charge and the purpose and contents of administrative guidance, etc., whether the supervisor meetsthe request in principle, unless there is any particular problem from the viewpoint of the conduct ofadministration (excluding cases that fit the description of either item of Article 35 (3)).
A. In cases where the provision of a written document is requested, it is necessary to meet the request assoon as possible.
39

B. A “particular problem from the viewpoint of the conduct of administration” that justifies a refusal toprovide the requested document refers to the case in which a significant impediment could be caused tothe conduct of administration by the indication in writing of the officer in charge and the purpose andcontents of administrative guidance, etc. For example, if the document specifying those matters is
utilized or interpreted regardless of the intention of the person who compiled it, achieving a certain
administrative objective could become impossible.
C. It should be kept in mind that a large backlog of work to be conducted or a need to conduct work in ashort period of time alone would not constitute a “particular problem from the viewpoint of the conductof administration.”II-4-2 Points of Attention in Holding Interviews, etc.
When FSA employees hold interviews, etc., (“Interviews, etc.,” include face-to-face interviews, telephone
conversations and e-mail exchanges) with management and employees of Financial Instruments Business Operators,
etc., they shall take the following points into consideration:(i)

Whether the FSA employees who participate in interviews, etc., always maintain discipline and decorum

as well as a calm and composed attitude.
(ii)

Whether FSA employees confirm the purpose of interviews, etc., and the names and affiliation of theinterviewees.
(iii) Whether FSA employees ensure that the place and time of their interviews, etc., as well as the compositionof participants from the FSA side and the interviewed business operator are appropriate in light of the purpose
and contents thereof.
(iv)

Whether FSA officials make sure, as necessary, to have both sides share the recognition of the contents

and results of interviews, etc. In particular, when the contents and results of an interview, etc., are subject to aconfidentiality obligation, whether it is ensured that the need for confidentiality is made clear to both sides.
(v)

In cases where FSA officials face a need to consult their superiors with regard to the contents of interviews,

etc., whether they seek the superiors’ judgment in advance or make a report to the superiors immediately after
the interviews, etc., depending on the circumstances. Furthermore, when they hold interviews with two or
more business operators regarding matters that require consultations with their superiors, whether FSA
officials take care to ensure the consistency and transparency of the conduct of administration.
II-4-3 Procedures for Communications and Consultations
When supervisors find it difficult to make judgment in light of the Administrative Procedure Act as to theappropriateness of the administrative guidance, etc., that they plan to provide through interviews, etc., they shallcontact the relevant FSA division and hold consultations as necessary about what to do.

40II-5 Points of Attention in Taking Administrative Dispositions
II-5-1 Response to Inspection Results, etc.
(1) Response to Inspection Results
Supervisory departments shall properly reflect the results of inspections of Financial Instruments Business
Operators, etc., conducted by inspection departments in supervisory processes as follows:(i)

Regarding violation of laws pointed out in inspection reports, and acts and situations that are related to

Financial Instruments Business Operators’ business operations and assets and registered financial institutions’business operations, and that are problematic from the viewpoint of protecting public interests and investors,
as well as important matters pointed out in the previous inspection regarding which improvement is not
sufficient, supervisors shall order, under Article 56-2(1) of the FIEA, the submission within one month (thedeadline for the submission may be shortened on an item-by-item basis) of a report on factual confirmation,
the analysis of causes, and improvement and corrective measures, when they deem it necessary andappropriate to do so.
In addition, regarding a Financial Instruments Business Operator, etc., that is planning a system integrationas part of a merger or another similar business restructuring move, and regarding which a problem has been
pointed out with regard to the internal control environment for managing system integration risk, thesupervisor shall order the submission of a report under the same legal provision on the policy for implementing
its system integration plan precisely and on the internal control environment regarding the system risk(including internal audits), among other matters, when they deem it necessary and appropriate to do so.
Orders for the submission of the above reports shall be issued in the format specified in the Attached Listof Formats II-12.
(ii)

When receiving the above reports, the supervisor shall hold sufficient hearings with the Financial

Instruments Business Operator, etc. When holding the hearings, the supervisor shall maintain close
cooperation with inspection departments.
(iii) In cases where a certain period of time is deemed to be necessary in order to implement improvement andcorrective measures specified in the reports and to make improvement regarding the matters pointed out inthe inspection, the supervisor shall strive to ensure appropriate follow-up through periodic hearings, forexample.
(iv)

In cases where the Securities and Exchange Surveillance Commission has issued a recommendation

regarding administrative dispositions and other measures to be taken based on Article 20 (1) of the Act for
Establishment of the Financial Services Agency, supervisory authorities shall consider issuing an order for thesubmission of reports based on Article 56-2(1) of the FIEA and taking administrative dispositions based on
Articles 51 to 52-2 of the FIEA and other appropriate measures after examining the contents of therecommendation.
(2) Requirement for the Submission of Reports Based on Off-site Monitoring(i)

In cases where a Financial Instruments Business Operator, etc., is deemed to have a problem in its control
41

environment for risk management, legal compliance and governance, etc., the supervisor shall require thesubmission of a report, based on Article 56-2(1) of the FIEA, on factual recognition regarding the problem,the analysis of the cause, improvement and corrective measures and other necessary matters.
(ii)

In cases where it is deemed necessary to conduct more detailed investigation as a result of verifying thereport, the supervisor shall require the submission of an additional report based on Article 56-2(1) of the FIEA.
(iii) In cases where any serious problem from the viewpoint of protecting public interests and investors has
not been detected as a result of the examination of the above reports, and where it is deemed possible for the
Financial Instruments Business Operator, etc., to make voluntary improvement efforts, the supervisor shallfollow up on the reported improvement and corrective measures through voluntary hearings and other means.
(iv)

When necessary, the supervisor shall require the submission of periodic reports based on Article 56-2(1)of the FIEA and follow up thereon.
II-5-2 Administrative Dispositions Based on Articles 51 to 52-2 (1) (Business Improvement Orders, Business
Suspension Orders, etc.)
In cases where a serious problem from the viewpoint of protecting public interests and investors has been
detected as a result of the examination of the contents of reports submitted by Financial Instruments Business
Operators, etc., or the contents of recommendations issued by the Securities and Exchange SurveillanceCommission in light of the evaluation items specified in this Guideline for Supervision, the supervisory departments
shall decide which administrative dispositions to take with due consideration of the factors described in (1) to (3)below after considering, among other factors, the following points:


Whether it is appropriate to leave it to the Financial Instruments Operator, etc., to make improvement efforts
on a voluntary basis.

Whether substantial improvement is required and it is necessary to have the Financial Instruments Business
Operator, etc. concentrate on business improvement for a certain period of time.

Whether it is appropriate to allow the Financial Instruments Business Operator, etc., to continue business
operations.

(1) Seriousness and Maliciousness of Acts(i)

Degree of Damage to Public Interests
Whether the Financial Instruments Business Operator, etc., is undermining public interests significantlyby, for example, originating and providing products markedly inappropriate from the viewpoint of appropriate
disclosure of financial conditions to customers, thereby damaging confidence in the financial markets.
(ii)

Extent of Damage to Users
Whether a number of users across wide regions have suffered damage. How serious the damage done toindividual users is.
(iii) Maliciousness of Acts
Whether the Financial Instruments Business Operator, etc., has acted in a malicious way, such as bycontinuing to sell similar products despite receiving numerous complaints from users.
(iv) Duration and Repetitive Nature of Acts
42

Whether the act in question committed by a Financial Instruments Business Operator, etc., has beencommitted for a long period of time. Whether the act has been committed repeatedly and continuously or only
once. Whether the Financial Instruments Business Operator, etc., committed a similar illegal act in the past.
(v)

Intentionality
Whether the Financial Instruments Business Operator, etc., has committed the illegal/inappropriate act

intentionally while recognizing the illegality and inappropriateness, or has done so through negligence.
(vi) Institutional Involvement
Whether the act has been committed based on an individual employee’s judgment or a manager has been
involved. Whether the management team has been involved.
(vii) Presence or Absence of Cover-Up Actions
Whether an attempt to cover up the act has been made after its illegality was recognized. Whether a coverup, if one exists, was an institutional act.
(viii) Involvement of Anti-Social Forces
Whether any anti-social forces have been involved. How much involvement, if any.
(2) Appropriateness of Control Environment for Governance and Business Operation(i)Whether the representative director and the board of directors are fully aware of the importance of legal

compliance and make sufficient efforts to ensure compliance.
(ii)

Whether the internal audit section is adequately staffed and equipped to conduct audits and whether thedivision is functioning properly.
(iii) Whether the compliance and risk management divisions are adequately staffed and equipped to performtheir tasks and whether they are functioning properly.
(iv) Whether employees engaging in business are fully aware of the importance of legal compliance andwhether sufficient internal training is provided.
(3) Attenuation Factors
Apart from (1) and (2) above, whether there are attenuation factors, such as the implementation of voluntary
efforts by the Financial Instruments Business Operator, etc. to protect investors before the administrative response.
In particular, if the Financial Instruments Business Operator, etc. precisely implements voluntary efforts based onprinciples that have been shared with administrative authorities, this fact is to be taken into consideration as anattenuation factor.
II-5-3 Points of Attention Regarding Administrative Dispositions against Registered Financial Institutions
In cases where inappropriate practices have been recognized with regard to securities-related businesses
conducted by registered financial institutions, supervisory departments shall require the submission of reports andissue orders for business improvement, etc., as necessary in cooperation with the divisions in charge of thesupervision of banks, from the viewpoint of not only protecting investors under the FIEA but also ensuring thesoundness of the management under the Banking Act and other relevant laws.

43

II-5-4 Standard Processing Period Regarding Supervisory Actions Based on Inspection Results
In cases where supervisory actions are to be issued based on Articles 51 to 52-2 of the FIEA, the following
procedures shall be followed:(i)

The supervisor shall determine supervisory actions within one month from the receipt of letters ofrecommendations or inspection reports (copies) (within two months in cases where the chief of the relevant
Local Finance Bureau needs to consult the FSA Commissioner and in cases where the actions are based onlaws that are under the joint jurisdiction of the FSA and other ministries and agencies).
(ii)

In cases where the Financial Instruments Business Operators, etc., and other business operators are

required to submit reports, regarding the matters pointed out in the said letters of recommendations andinspection reports, for factual confirmation or other purposes, the said orders shall be issued within one monthfrom the receipt of the reports (within two months in cases where the chief of the relevant Local Finance
Bureau needs to consult the FSA Commissioner and in cases where the orders are based on laws that are under
the joint jurisdiction of the FSA and other ministries and agencies).
(Note 1) In determining the timing of the “receipt of a report,” the following points shall be taken into
consideration:(a)

In cases where the submission of a report based on Article 56-2(1) of the FIEA is required

twice or more (limited to cases where the submission of an additional report is required within theprescribed period from the receipt of the most recent report), the receipt of the last report shall be
the starting point of the counting of the standard processing period.
(b)

In cases where the submission of corrected or additional documents (excluding thoseconcerning minor corrections and additions) is required, the receipt of the said documents shall be
the starting point of the counting of the standard processing period.
(Note 2) The time necessary for legal explanations and hearings shall not be included in the counting of thestandard processing period.
(Note 3) The standard processing period shall be applied on the basis of each item of information used as thebasis for determining what supervisory action to take.
II-5-5 Removal of the Requirement for the Submission of Reports on Compliance with Business Improvement
Orders under Articles 51 and 51-2 of the FIEA
In cases where business improvement orders are issued against Financial Instruments Business Operators, etc.,
based on Articles 51 and 51-2 of the FIEA, the supervisor shall follow up on their business improvement efforts
and, in principle, require the submission of reports on the implementation of business improvement plans so as topromote such efforts. Regarding the follow-up and the requirement for the submission of reports, the following
points shall be taken into consideration:(1) In cases where Financial Instruments Business Operators, etc., who have received business improvement orders
based on Article 51 and 51-2 of the FIEA are required to submit reports on the implementation of their business
improvement plans for a specified period of time, the requirement shall be removed upon the arrival of the end of
the said period.
44

(2) In cases where Financial Instruments Business Operators, etc., who have received business improvement orders
based on Article 51 and 51-2 of the FIEA are required to submit reports on the implementation of their business
improvement plans continuously without any set timeframe, the requirement shall be removed when it is recognizedthat sufficient improvement measures have been taken in line with their business improvement plans with regard to
the problems that constituted the basis of the issuance of the orders. A decision on whether to remove the requirement
shall be made in light of the implementation of improvement efforts as identified through the submitted reports andother means.
II-5-6 Relation to the Administrative Procedure Act and Other Laws
(1) Relation to the Administrative Procedure Act
It should be kept in mind that in cases where supervisors intend to take adverse dispositions, including issuingorders for business improvement and business suspension and rescinding registration and licenses, they must holdlegal hearings based on Article 57(2) of the FIEA.
It should also be kept in mind that in the case where supervisors reject permits and licenses requested byapplication, and where supervisors take an adverse disposition, they must indicate the reason for the action basedon Article 8 and Article 14 of the Administrative Procedure Act, respectively (when taking the dispositions in writing,they must indicate the reason for the action also in writing).
Upon doing so, it should be kept in mind that it is required to clarify the facts on which the disposition was
based as well as which laws and ordinances or standards were applied in taking the disposition, instead of simply
indicating the basis provisions alone.
(2) Relation to the Administrative Appeals Act
It should be kept in mind that in cases where supervisors reject permits and licenses requested by application,or intend to require the submission of reports, issue orders for business improvement or business suspension, andrescind registration and licenses, etc., the relevant Financial Instruments Business Operators, etc., must be advisedin writing that they are entitled to request examination to the Commissioner of the FSA, etc., based on Article 82 of
the Administrative Appeals Act.
(3) Relation to the Administrative Case Litigation Act
It should be kept in mind that in cases where supervisors reject permits and licenses requested by application,or intend to require the submission of reports, issue business improvement or business suspension orders, andrescind registration or licenses, etc., the relevant Financial Instruments Business Operators, etc., must be advised inwriting matters concerning the filing of suits to seek the rescission of the said administrative dispositions based on
Article 46 of the Administrative Case Litigation Act.
II-5-7 System for Exchange of Opinions
In cases where adverse dispositions are to be taken, it may be useful for supervisors to exchange opinions with45

the relevant Financial Instruments Business Operators, etc., at several levels upon their request, in addition toholding legal hearings and granting opportunities for making explanations based on the Administrative Procedure
Act, in order to share the recognition of the facts that constitute the basis of the administrative dispositions and theirseriousness.
In cases where a Financial Instruments Business Operator, etc., who has recognized the likelihood of
becoming the target of an adverse disposition during the hearing process concerning the requirement for thesubmission of a report, requests that an opportunity be provided for an exchange of opinions (refer to Note 1)
between senior supervisors (refer to Note 2) and senior officials of the business operator, and where thesupervisory authorities intend to take adverse disposition that involves opportunities for hearings or explanations,an opportunity for an exchange of opinions about the facts that constitute the basis of the adverse disposition andtheir seriousness shall be granted before the notification of the said opportunity for hearings and explanations,
unless it is necessary to take the said administrative disposition urgently.
(Note 1) Requests from Financial Instruments Business Operators, etc., for an opportunity for an exchange of
opinions shall be met only if they are made between the receipt of reports on the facts that constitute thebasis of the relevant adverse dispositions that have been submitted based on Article 56-2(1) of the FIEA
and the notification of opportunities for hearings and explanations.
(Note 2) “Senior supervisors” include the directors-general of the relevant divisions of the FSA and Local
Finance Bureaus.
II-5-8 Notification to Relevant Authorities, including Overseas Supervisory Authorities
In cases where supervisors intend to take adverse dispositions, including issuing orders for business
improvement and business suspension and rescinding registration and licenses, they shall, as necessary, notify otherrelevant authorities, including overseas supervisory authorities
II-5-9 Concept on the Publication of Adverse Dispositions(1) It should be kept in mind that when supervisors have issued orders for business suspension and rescinded
registration and licenses, they must publish the administrative dispositions in official gazettes.
(2) This means that the facts that constitute the basis of adverse dispositions, such as the issuance of orders forbusiness improvement and the contents of the dispositions, should be published, except for cases where thepublication of those matters could undermine efforts to improve the management of the relevant Financial
Instruments Business Operators, etc. The purpose of this publication is to make it easier for financial institutions ingeneral to predict what administrative dispositions will be taken under what circumstances, thereby reducing thepossibility of similar inappropriate incidents arising in the future46

II-6 Application Mutatis Mutandis(1) Application Mutatis Mutandis to Persons Engaging in Businesses Specially Permitted for Qualified Institutional
Investors, etc., Businesses Specially Permitted for Overseas Investors, etc. and Businesses Specially Permitted for
the Transitional Period.
The provisions of II-1-4 (2) to (4), II-1-5(1), II-1-7(1)(v) and (ix), (2)(iii), II-1-8, II-2, II-3, II-4 and II-5 shallbe applied mutatis mutandis to administrative processes regarding persons engaging in businesses speciallypermitted for qualified institutional investors, etc. (referring to businesses specially permitted for qualified
institutional investors (referring to businesses specially permitted for qualified institutional investors prescribed in
Article 63(2) of the FIEA; the same shall apply hereinafter) or specially-permitted investment managementbusinesses (referring to specially-permitted investment management businesses prescribed in Article 48(1) of the
Supplementary Provisions of the Act for Partially Amending the Securities and Exchange Act, etc. (2006 Act No.
65; hereinafter referred to as the "Amendment Act" except for VI-2-11-1); the same shall apply hereinafter);the
same shall apply hereinafter), businesses specially permitted for overseas investors, etc. (referring to businesses
specially permitted for overseas investors, etc. prescribed in Article 63-8(1) of the FIEA; the same shall apply
hereinafter), businesses specially permitted for the transitional period (referring to businesses specially permitted
for the transitional period prescribed in Article 3-3(5) of the Supplementary Provisions of the FIEA; the same shallapply hereinafter), or businesses pertaining to acts prescribed in Article 3-3(7) of the Supplementary Provisions of
the FIEA (hereinafter referred to as "businesses specially permitted for the transitional period, etc." together withbusinesses specially permitted for the transitional period). Additionally, for re-delegation of tasks to directorsgeneral of local finance offices, etc., II-1-7(3) shall apply by replacing the following with the re-delegated tasks. It
should be noted that words and sentences in the relevant format specified in the Attached List of Formats shall be
replaced as necessary.
(i)

Administrative processes for receiving notifications based on Article 63(2), (8) and (13), Article 63-2(2)to (4) of the FIEA (including cases where these provisions are applied mutatis mutandis pursuant to Article63-3(2) of the FIEA or applied pursuant to Article 48(3), (5) or (7) of the Supplementary Provisions of theAmendment Act; the same shall apply in IX) and Article 63-3 (1) of the FIEA(ii) Administrative processes for receiving copies of contracts based on Article 63(9) and (10) of the FIEA
(including cases where these provisions are applied mutatis mutandis pursuant to Article 63-3(2) of the FIEA;
the same shall apply in IX)(iii) Administrative processes for receiving documents based on Article 63-4(2) (including where this provision
is applied mutatis mutandis pursuant to Article 63-3 (2) or applied pursuant to Article 48(3), (5) or (7) of the
Supplementary Provisions of the Amendment Act)(iv) Administrative processes for receiving notification based on Article 63-9(1), (7) and (10) of the FIEA,
Article 63-10(2) to (4) of the FIEA (including cases where these provisions are applied mutatis mutandis
pursuant to Article 63-11(2) of the FIEA or are applied pursuant to Article 3-3(4) of the Supplementary
Provisions of the FIEA; hereinafter the same shall apply in VI-3-3), Article 63-11(1) of the FIEA, and Article
3-3(1) of the Supplementary Provisions of the FIEA.
(v) Administrative process for receiving documents submitted based on Article 63-12(2) of the FIEA (including
47

cases where applied mutatis mutandis pursuant to Article 63-11(2) of the FIEA or applied pursuant to Article
3-3(4) of the Supplementary Provisions of the FIEA).
(2) Application Mutatis Mutandis to Financial Instruments Intermediary Service Providers
The provisions of II-1-4(3) and (4), II-1-7, II-1-8, II-2, II-3, II-4 and II-5 shall be applied mutatis mutandis toadministrative processes regarding financial instruments intermediary service providers, and the provisions of II-15(2)(i) and (ii) shall be applied mutatis mutandis to the coordination and liaison with the competent directors-generalof Local Finance Bureaus regarding the supervisory processes related to financial instruments intermediary service
providers. In addition, the following points shall be taken into account. It should be noted that words and sentencesin the relevant format specified in the Attached List of Formats shall be replaced as necessary.
(i)

When the directors-general of Local Finance Bureaus supervise financial instruments intermediary service

providers who handle financial products on behalf of Financial Instruments Business Operators, etc., under
the jurisdiction of the FSA Commissioner or the directors-general of other Local Finance Bureaus, they shallstrive to cooperate therewith by, for example, providing information necessary for supervising the said
Financial Instruments Business Operators, etc.
(ii)

The directors-general of Local Finance Bureaus, when sales offices or other facilities of financial

instruments intermediary service providers under the jurisdiction of the directors-general of other Local
Finance Bureaus are located in their areas of jurisdiction, shall strive to cooperate with those Local Finance
Bureau directors-general by, for example, providing information necessary for the supervision of the said
financial instruments intermediary service providers.
(3) Application Mutatis Mutandis to Securities Finance Companies
The provisions of II-1-8, II-2, II-3, II-4 and II-5 shall be applied mutatis mutandis to administrative processes
regarding securities finance companies.
(4) Application Mutatis Mutandis to Investment Corporations
The provisions of II-1-4(3) and (4), II-1-8, II-2, II-3, II-4 and II-5 shall be applied mutatis mutandis toadministrative processes regarding investment corporations. It should be noted that words and sentences in therelevant format specified in the Attached List of Formats shall be replaced as necessary.
(5) Application Mutatis Mutandis to Commodities Investment Sales Companies
The provisions of II-1-5(1) and (2)(ii), II-1-6, II-1-7(1), II-1-8, II-2, II-3, II-4 and II-5 (excluding II-5-9(1)) shallbe applied mutatis mutandis to administrative processes regarding commodities investment sales companies, basedon the Act on Regulation on Commodities Investment-Related Business. It should be noted that words and sentencesin the relevant format specified in the attached list of formats shall be replaced as necessary.

48

III. Supervisory Evaluation Points and Various Administrative Procedures (General)
III-1 Governance (General)
In order to realize the sound development of the securities market, it is important for Financial Instruments
Business Operators themselves to endeavor to develop their control environment for legal compliance and conduct
management in a manner to ensure full customer protection. In conducting daily supervisory administrative
processes, it is necessary to examine what the desirable status of governance by a Financial Instruments Business
Operator is, from the viewpoint of whether its management team's checking of the execution of the business
operators’ business is conducted effectively and whether the monitoring and control of the management team isconducted effectively.
(1) Major Supervisory Viewpoints
In order to ensure that governance by a Financial Instruments Business Operator functions effectively, allofficers and employees need to recognize that the business operator bears important social responsibilities as anintermediary of the financial instruments market, and need to be involved in business operations based on a fullunderstanding of the roles assigned to them. In particular, the representative director, individual directors and theboard of directors, individual auditors and the board of auditors, and the internal audit section bear important
responsibilities.
Naturally, the representative director, as the director empowered to represent the Financial Instruments Business
Operator, bears the greatest responsibility for the management thereof. The board of directors, as the highest
decision-making body of the Financial Instruments Business Operator, is not only empowered to make specificdecisions regarding the execution of business, but also has the functions of monitoring the execution of business by
the representative director and the director in charge, and preventing autocratic management. Auditors and the boardof auditors are granted broad and strong authority so as to audit the execution of business by directors, etc., whobear important responsibilities for the management of the Financial Instruments Business Operator as stated above,
thereby bearing important responsibilities for the task of monitoring governance.
In addition, the amendment of the Companies Act in 2014 and the provisions of financial instruments exchanges
stipulate that listed companies secure outside directors, while the provisions also prescribe that listed companies
respect the Corporate Governance Code and make efforts to strengthen corporate governance. As such, listedcompanies are required to meet a higher level of governance than unlisted companies.
Therefore, in monitoring the control environment of governance of listed Financial Instruments Business
Operators, supervisors shall pay attention to whether the business operator is making efforts appropriately inaccordance with the Corporate Governance Code in establishing a control environment of governance of a level
required by the principles of the Corporate Governance Code, and examine whether its functions are appropriately
performed.
With regard to business operators whose parent company is a listed company, supervisors shall check the control
environment of governance of the parent company including the state of efforts regarding compliance with the
Corporate Governance Code within the scope necessary for examining governance of the business operator.
(Note) Supervisors shall pay attention to ensure that the Corporate Governance Code adopts the so-called49

“principles-based approach” and the “comply or explain” (either comply with a principle or, if not, explain
the reasons why not) approach.
It shall also be taken into consideration that the scope of application of each principle of the Corporate
Governance Code is stipulated in each market for listed companies.
In view of the above, it is necessary to examine whether the representative director, directors/the board of
directors and auditors/the board of auditors are fully performing their important responsibilities for the managementof the Financial Instruments Business Operator, by paying attention to the following points, for example:(Note) In the case of Financial Instruments Business Operators that are companies with nominating committees,etc., it is necessary to examine whether the board of directors, committees, executive officers, etc., exercise
their respective authority appropriately. In addition, in the case of business operators that are companies with
an audit and supervisory committee, it is necessary to examine whether the board of directors, audit andsupervisory committee, etc., exercise their respective authority appropriately. In this case, examination should
be conducted with due consideration of the actual status of management based on the purpose of this Guideline.
(i) Representative DirectorA.

Whether the representative director counts matters concerning the execution of business as well as
those concerning the development and establishment of legal compliance and internal control
environment among the most important management issues. Also, whether the director is sincerely
leading efforts to formulate a specific policy for implementing compliance and is ensuring fullcompliance.

B. Whether the representative director fully recognizes that disregard of the risk management division may
have a serious impact on corporate earnings and attaches importance to the said division.
C. Whether the representative director, based on the recognition of the importance of internal audits, sets
appropriate objectives of internal audits and establishes arrangements for enabling the internal audit
section to fully perform its functions (including securing the independence of the internal audit section),and periodically checks the performance of the functions. Whether the representative director approves
basic matters concerning internal audit plans, including an audit policy and priority items, in light of therisk management status, etc., of divisions subject to audits, and implements appropriate measures basedon the results of internal audits.
D. Whether the representative director fully understands that banning any relations with anti-social forces
and firmly excluding such forces are vital for maintaining public confidence in the Financial Instruments
Business Operator and securing the appropriateness and soundness of its business. In addition, based on
this understanding, whether the representative director has made clear, both throughout the company
and to the outside, a basic policy decided by the board of directors with due consideration of the“Guideline for Prevention of Damages from Anti-Social Forces in Industry” (agreed upon at a meetingon June 19, 2007 of cabinet ministers responsible for anti-crime measures; hereinafter referred to as the“Government Guideline”).
(ii) Directors/Board of Directors
A. Whether directors check and prevent autocratic management by the representative director and otherofficers who are responsible for business execution, and are actively involved in the board of directors'
50

decision-making and checking process concerning business execution.
B. Whether the Board of Directors has specified a management policy based on the overall vision of thedesirable status of the Financial Instruments Business Operator. Whether it has established management
plans in line with the management policy and communicated the plans throughout the company. Whether
it regularly reviews and revises the progress status thereof.
C. Whether the board of directors counts not only matters concerning the execution of business, but also
those concerning the development and establishment of legal compliance and internal control
environment among the most important management issues, and is sincerely leading efforts to formulate
a specific policy for implementing compliance and ensuring full compliance. Whether it makes sure tocommunicate the said policy throughout the company. In addition, whether the board of directors has
decided a basic policy based on the Government Guideline, established a framework for implementing
it and clearly positioned the prevention of damage that could be inflicted by anti-social forces as a matterof legal compliance and risk management by, for example, periodically examining the effectivenessthereof.
D. Whether the board of directors fully recognizes that disregarding the risk management division may
have a serious impact on corporate earnings, and attaches importance to the said division. In particular,
whether the director in charge has in-depth knowledge and understanding concerning the methods ofmeasuring, monitoring and managing risks, in addition to an understanding of where risks reside andwhat kind of risks they are.
E. Whether the board of directors has set up a policy for managing various risks based on strategic
objectives. Whether it reviews and revises the risk management policy on a periodic or as-needed basis
so as to adapt the policy to changes in strategic objectives, and the development of risk management
techniques, etc. In addition, whether the board of directors makes use of risk-related information in theexecution of business and the development of risk management systems by, for example, making
necessary decisions based on risk-related information reported periodically.
F. Whether the board of directors recognizes the importance of segregated custody of customer assets basedon their understanding that it contributes to investor protection and the sound development of thefinancial instruments market. In addition, whether the board of directors makes use of information related
to the status of the segregated custody of customer assets when developing systems for ensuring
appropriate segregated custody by, for example, receiving status reports on a periodic or as-needed basis.
G. Whether the board of directors has set appropriate objectives of internal audits and establishedarrangements for enabling the internal audit section to fully perform its functions based on therecognition of the importance of internal audits (including securing the independence of the internal
audit section), and periodically checks the performance of the function. Whether the board of directors
approves basic matters concerning internal audit plans, including an audit policy and priority items, inlight of the risk management status, etc., of divisions subject to audits, and implements appropriate
measures based on the results of internal audits.
(iii) Auditors/Board of Auditors
A. Whether the independence of the board of auditors is ensured in accordance with the purpose of the51

board of auditors system.
B. Whether the board of auditors properly exercises the broad authority granted thereto and conducts auditsof business operations in addition to audits of accounting affairs
C. Whether individual auditors recognize the importance of their own independence within the board ofauditors and actively take the initiative to conduct audits.
D. Whether the board of auditors strives to ensure the effectiveness of its audits by, for example, receiving
reports on the results of external audits, depending on the contents thereof.
(iv) Internal Audit Section
Internal audits are conducted by entities independent from audited divisions, in order to examine andevaluate the status of business execution and the appropriateness, effectiveness and reasonableness of internalmanagement and control, and to provide advice and make recommendations to the management based thereon,
with a view to contributing to the achievement of the management goals of Financial Instruments Business
Operators. Therefore, internal audits constitute one of the most important corporate activities for Financial
Instruments Business Operators if they are to secure autonomous corporate management. In light of theimportance of internal audits, it is necessary to examine whether the function of internal audits is working
effectively at Financial Instruments Business Operators, by paying attention to the following points, forexample.
A. Whether the internal audit section has been established as an organization that is independent fromdivisions subject to audit so as to fully check the actions thereof, and is sufficiently staffed and equipped
to conduct effective internal audits.
B. Whether the internal audit section formulates internal audit plans based on its understanding of the statusof risk management by divisions subject to audits and the types of risks faced thereby with regard to allbusinesses conducted by the Financial Instruments Business Operator.
C. Whether the internal audit section audits divisions subject to audits in an efficient and effective mannerbased on internal audit plans.
D.

Whether the internal audit section reports important issues identified and pointed out in internal audits
without any delay to the representative director and the board of directors.

E. Whether the internal audit section appropriately oversees the improvement status of divisions subject toaudits, with regard to matters pointed out in internal audits and reflects it in future internal audit plans.
(v) Use of External Audits
This Guideline does not obligate Financial Instruments Business Operators to undergo external audits of
their business operations by external auditors (including audits by the head offices and group companies) inaddition to mandatory audits of financial statements, etc., by accounting auditors. However, in order to acquire
the profits and secure the effectiveness of the risk management and internal control environment, it is desirable
to ensure effective use of external audits by accounting auditors and others, as well as internal audits by
Financial Instruments Business Operators themselves. Therefore, examination of the status of external audits
should be conducted by paying attention to the following points, for example.
A. Whether important issues identified and pointed out in external audits are reported without any delay tothe board of directors or to the board of auditors.
52

B. Whether divisions subject to audits make improvements with regard to matters pointed out in external
audits within a certain time period. In addition, whether the internal audit section appropriately identifies
and examines the improvement status.
(2) Supervisory Method and Actions
Supervisors shall examine the status of governance through the following hearings and daily supervisoryadministrative processes.
(i) Hearings Regarding Management Challenges, etc.
Supervisors shall hold hearings regarding Financial Instruments Business Operators’ management
challenges, strategies and the status of risk management and governance, among other matters, as necessary.
In addition, senior supervisors shall directly hold hearings with top managers of Financial Instruments Business
Operators, as necessary.
(ii) Hearings Regarding Internal Audits
Supervisors shall hold hearings with the internal audit sections of Financial Instruments Business
Operators as necessary, with regard to their control environment for internal audits, the status of theimplementation of internal audits and the correction of problems, from the viewpoint of identifying the statusof the divisions’ exercise of their functions.
In addition, supervisors shall hold hearings with Financial Instruments Business Operators’ auditors andoutside directors when a particular need to do so is recognized.
(iii) Examination of Governance through Daily Supervisory Administrative Processes
Supervisors shall examine the effectiveness of governance not only through the hearings described above
but also through daily supervisory administrative processes, such as receiving reports on problematic conduct
in financial instruments business.
(iv) Recording of Monitoring Results
Supervisors shall compile and store records on matters of particular note based on the results of monitoring
conducted through procedures described above, and make effective use thereof in future supervisoryadministrative processes.
(v) Supervisory Method and Actions
In cases where doubt has arisen about the effectiveness of a Financial Instruments Business Operator’s
governance, the supervisor shall monitor voluntary business improvement made by the business operator, by
holding an in-depth hearing regarding the cause of problems and improvement measures and, when necessary,
requiring the submission of a report based on Article 56-2(1) of the FIEA. When the Financial Instruments
Business Operator is deemed to have a serious problem from the viewpoint of protecting public interests andinvestors, the supervisor shall take actions such as issuing a business improvement order based on Article 51of the FIEA. When the business operator is deemed to have committed a serious and malicious illegal act, thesupervisor shall consider necessary actions, including issuing an order for business suspension based on
Article 52(1) of the FIEA.

53

III-2 Appropriateness of Businesses (General)
III-2-1 Control Environment for Legal Compliance(1) Development of Control Environment for Legal Compliance
In order to ensure the development of the Japanese financial market as well as the economy, it is necessary toprovide financial instruments and services in an appropriate manner in a fair and transparent securities market, andthe confidence of users in Financial Instruments Business Operators is one of the important elements thereof.
Financial instruments business operators must make sure to strictly comply with laws and regulations as well as
business rules and maintain sound and appropriate business operations. The development of the control environment
for legal compliance by Financial Instruments Business Operators shall be examined in light of their business profile
with due consideration of the following points, for example.
(i) Whether the Financial Instruments Business Operator has counted compliance as one of the most importantmanagement issues and formulated a basic policy concerning the implementation of compliance, acomprehensive implementation plan (compliance program) and a code of conduct (rules concerning ethics
and a compliance manual, etc.). In addition, whether it has informed all officers and employees of the existence
and contents of the implementation policy, etc., and ensured a full understanding thereof and theimplementation of compliance in daily business operations.
(ii) Whether the Financial Instruments Business Operator conducts evaluation and a follow-up regarding theimplementation policy and the code of conduct on a periodic or as-needed basis. Whether it reviews andrevises the contents thereof.
(iii) Whether the Financial Instruments Business Operator has established a system for ensuring appropriate
communications and reporting of compliance-related information among divisions in charge of sales (whichrefer to all divisions engaged mainly in profit-generating business operations; hereinafter referred to as “sales
divisions”), the division/manager in charge of compliance and the management team.
(iv) Whether the Financial Instruments Business Operator has established robust systems for training andeducating officers and employees on compliance and strives to foster and enhance a sense of complianceamong officers and employees. In addition, whether it strives to ensure the effectiveness of training by, forexample, conducting evaluation and follow-up in a timely manner and by reviewing and revising the contents
thereof.
(v) Whether the Financial Instruments Business Operator has established a system for enabling the person in
charge of supervising the status of compliance with laws, regulations, rules, etc. (the person specified by
Article 15-4(i) of the FIEA Enforcement Order) to perform his or her functions fully so as to enhance theinternal control environment and contribute to appropriate business execution. For example, whether it ensures
independence of the internal control division and gives the internal control division the authority to fully
perform the function to check the sales division. Whether the internal control division conducts an evaluationand follow-up regarding the status of performance of the function of the manager in charge of internal control,
etc.

54

(2) Supervisory Method and Actions
Regarding issues of supervisory concern identified through daily supervisory administration and the reportingof problematic conduct in relation to a Financial Instruments Business Operator’s control environment for legal
compliance, the supervisor shall keep track of the status of voluntary business improvement made by the business
operator by holding an in-depth hearing and, when necessary, requiring the submission of a report based on Article
56-2(1) of the FIEA. When the Financial Instruments Business Operator is deemed to have a serious problem, fromthe viewpoint of protecting public interests and investors, the supervisor shall take actions, including issuing abusiness improvement order based on Article 51 of the FIEA. When the business operator is deemed to havecommitted a serious and malicious illegal act, the supervisor shall consider necessary actions, including issuing anorder for business suspension based on Article 52(1) of the FIEA.
III-2-2 Supervisory Response to Problematic Conduct in Financial Instruments BusinessSupervisory response to problematic conduct in financial instruments business, etc., (refer to Note) shall bemade as follows.
(Note) A “problematic conduct in financial instruments business, etc.” refers to either of the following cases:(a)

An act that constitutes a violation of the provisions of Article 199 (vii) of the FIB Cabinet Office
Ordinance(b)

An indictment of a Financial Instruments Business Operator or officers and employees thereof(c)Other acts which could undermine the soundness and appropriateness of a Financial Instruments
Business Operator’s business operations and which are similar to the acts described in (a) and (b).

(1) Major Supervisory Viewpoints(i) Initial Notification of Problematic Conduct in Financial Instruments Business, etc.
Supervisors shall check the following points upon the receipt of an initial notification of problematic
conduct in a financial instruments business, etc., at a Financial Instruments Business Operator. It should be
noted that cases in which a written report is submitted without an initial notification shall be handled likewise.
A. Whether the Financial Instruments Business Operator has promptly reported to the internal control andinternal audit section as well as to the board of directors, etc., in accordance with compliance rules.
B. In cases where the conduct could constitute a criminal offense, whether the Financial Instruments
Business Operator has reported to the police and other relevant organizations.
C. Whether a division independent of the division involved in the conduct (e.g., the internal audit section)
investigates the conduct.
(ii) Examination of Appropriateness of Business Operations
Supervisors shall examine the appropriateness of a Financial Instruments Business Operator’s business
operations in relation to problematic conduct in a financial instruments business, etc., based on the following
viewpoints:
A. Whether an executive has been involved in the conduct and whether there has been an institutional
involvement.
55

B. What impacts the conduct is expected to have on the management of the Financial Instruments Business
Operator and on customers and the financial instruments market.
C. Whether the internal checks and balances function is properly functioning.
D. Whether the Financial Instruments Business Operator has formulated improvement measuresintended to prevent the recurrence of the conduct, is equipped with a sufficient self-purification
function and has clarified the allocation of responsibilities. For example, whether it has analyzed
the cause of occurrence of the problematic conduct in financial instruments business, etc. and has
formulated measures to prevent the recurrence with active involvement of the management team andhas communicated the measures to the sales division, etc.
E. Whether the Financial Instruments Business Operator acted appropriately immediately after the conduct
came to light.
F. In cases where the Financial Instruments Business Operator provides profits from its assets in order tocompensate for the losses caused by the conduct, whether the business operator compiles records on theprovided profits and the basis of the compensation calculation. In addition, whether the Financial
Instruments Business Operator has established arrangements and procedures for enabling a divisionindependent from the sales division, such as the internal control division, to check the status of thecompilation of the said records.
(2) Supervisory Method and Actions
In cases where supervisors have recognized the occurrence of problematic conduct in financial instruments
business, etc., through reports and notification by Financial Instruments Business Operators, they shall identify andmonitor voluntary business improvement made by the business operators by holding in-depth hearings and, whennecessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When the Financial Instruments
Business Operators are deemed to have a serious problem from the viewpoint of protecting public interests andinvestors, the supervisors shall take actions such as issuing a business improvement order based on Article 51 of the
FIEA. When the business operator is deemed to have committed a serious and malicious illegal act, the supervisors
shall consider necessary actions, including issuing an order for business suspension based on Article 52(1) of the
FIEA.
III-2-3 Control Environment for Customer Solicitation and Explanations
III-2-3-1 Principle of Suitability and Duty of Good Faith and Fair Dealing
In accordance with Article 40 of the FIEA, Financial Instruments Business Operators must ensure thatinvestment solicitation is conducted in an appropriate manner suited to their customers’ attributes, etc., by offeringtransactions with terms and contents that are commensurate with each customer’s knowledge, experience, asset
status and investment purpose as well as his/her ability to make judgment regarding risk management. Additionally,
Financial Instruments Business Operators need to preform their duty of good faith and fair dealing to their customers
under a system developed for ensuring appropriate implementation of investment solicitation.
To this end, Financial Instruments Business Operators need to establish a system for appropriately ascertaining
56

the details of financial instruments they provide as a premise of conducting investment solicitation, and it is also
important to establish a system to manage customers that makes it possible to accurately ascertain customers’
attributes and transaction status. Furthermore, it is necessary to review and evaluate whether there is a rational
reason to prove that the details of financial instruments are suited to respective customers’ attributes. Then, Financial
Instruments Business Operators need to ensure that investment solicitation without such rational reason or
inappropriate or unfaithful investment solicitation would not be conducted for their customers.
Given those points, the supervisor should pay attention to the following issues, for example. As methods ofinvestment solicitation are diverse, including solicitation to customers coming to business offices and solicitation
using a telephone or via the internet, it should be noted that it is necessary to consider appropriate solicitation
methods depending on the characteristics of respective methods.
(1) Major Supervisory Viewpoints(i) Proper Understanding of the Details of Financial Instruments
With regard to individual financial instruments provided by Financial Instruments Business Operators,
whether Financial Instruments Business Operators sufficiently analyze and identify the risks, returns and costs
thereof as well as other information that is necessary for customers in making investment in financial instruments,
and whether Financial Instruments Business Operators have developed a system to ensure that management andemployees accurately understand the relevant information and appropriately provide explanations to customers
in accordance with the characteristics, etc. of respective financial instruments, through the provision of training
and preparation of explanatory documents for customers, while collaborating with originators of respective
financial instruments.
(ii) Efforts for Securing of an Appropriate Identification of Customer Attributes and Actual Status ofTransactions as well as for Appropriate Management of Customer Information
A. Whether, in order to grasp customer attributes such as investment purpose and experiences in a timely
and appropriate manner, the Financial Instruments Business Operator prepares a system of customer
cards, for instance, adequately confirming the investment purpose, and whether the customer’sinvestment purpose registered on the customer cards is shared by both the Financial Instruments
Business Operator and the customer. Furthermore, whether the Financial Instruments Business Operator
appropriately manages customer information in such manner as when the Financial Instruments
Business Operator ascertains any change in the status of a customer’s assets and income or his/her
investment purpose based on a report, etc. by the customer, the Financial Instruments Business Operator
makes changes to the registered details on the customer cards after confirming the customer’s intention
whether or not to make said changes and shares the modified registered details with the customer, upon
conducting investment solicitation thereafter.
B. Whether the Financial Instruments Business Operator refers to transaction conditions, such as trading
profits and losses, evaluation profits and losses, the frequency of transactions and the status of fee
payment with regard to each customer account, for example, as part of its effort to identify the actual
status of transactions conducted by customers.
C. Regarding customers who are deemed to require direct contact in order to check the contents of their57

transactions, whether the Financial Instruments Business Operator strives to identify the actual
transaction status by appropriately, for example, having a sales division manager (this should be a person
other than the employee in charge of handling said customers but may be the manager in charge ofinternal control or the head of a division, a branch office or a person with a similar status; the same shallapply hereinafter) conduct an interview with said customers in a timely and appropriate manner, andwhether the same measures are taken to identify the actual status of transactions of derivatives, etc.,
which continue for a long time after the conclusion of contracts.
(iii) Review and Evaluation of Rational Reason upon Investment Solicitation
A. Prior to conducting investment solicitation for financial instruments, whether the Financial Instruments
Business Operator reviews and evaluates a rational reason to consider that individual financial
instruments, and the frequency and amounts of a series of transactions with a customer are suited to theattributes and investment purpose of the relevant customer that the Financial Instruments Business
Operator has ascertained.
B. From the perspective of securing proper review and evaluation, whether the Financial Instruments
Business Operator has specified concrete methods, including factors to take into consideration andprocedures to follow, in advance, depending on the characteristics of respective financial instruments,
while collaborating with originators thereof.
Whether the Financial Instruments Business Operator conducts careful sales management, such as
adopting a system of management approval for investment solicitation of certain financial instruments
depending on the attributes of respective customers in order to avoid inappropriate solicitation contrary
to a customer’s investment purpose, such as selling multi-currency funds or other high-risk instruments
to customers who are focused on the security of their principal.
(iv) Inappropriate or Unfaithful Investment Solicitation
Whether the Financial Instruments Business Operator does not conduct any of the following inappropriate
or unfaithful acts, for example, when soliciting investment in financial instruments.
A.

An act to solicit purchases and sales of financial instruments with a high frequency contrary to theattributes and investment purpose of a customer seen from the developments of a series of transactions
with the customer as a result of the Financial Instruments Business Operator’s efforts to seek profits, andto cause said customer to bear excessive fees. (When making a judgment as to whether the frequency is
unreasonably high, it should be noted whether the percentage of the aggregated total of paid fees against
the customer’s annual average investment balance and the frequency of his/her past transactions do notsignificantly deviate from the customer’s ordinary investment behavior.)

B.

With the aim of soliciting investment in a financial instrument contrary to the attributes and investment
purpose of a customer, an act to request the customer to change his/her investment purpose in line withthe relevant financial instrument without making the customer accurately understand the meaning of andthe reason for that change.

C.

Under a circumstance where investment in multiple financial instruments is likely to match a customer
based on his/her attributes and investment purpose, an act to solicit the customer to invest in a financial
instrument that requires higher fees without any rational reason.
58

(v) Verification by the Internal Control Division
A. Whether the internal control division verifies (i) to (iv) above and reviews systems based on theverification results, thereby endeavoring to secure the effectiveness.
B. Whether the internal control division has established concrete methods for interviews with customers bya sales division manager, etc. mentioned in (ii), C. above and has made the relevant methods thoroughlyshared among management and employees, and ascertains and verifies the status of the interviews andreviews those methods or otherwise endeavors to establish a system to secure the effectiveness.
(vi) Conversion to a Specified Investor upon Request of an Ordinary Investor
In a case where a customer as an “ordinary investor” requests to convert to a “specified investor” pursuant
to the provision of Article 34-3 (1) of the FIEA, whether the Financial Instruments Business Operator determines
the acceptability of such request after having judged whether it is appropriate to treat the customer as a “specified
investor” in consideration of his/her knowledge, experience, state of property and purpose of investment.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator's control environment related to the principle of suitability, through daily supervisory administration or thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the business operator by holding in-depth hearings and, when necessary, requiring the submission of reports
based on Article 56-2 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to have aserious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions
such as issuing an order for business improvement based on Article 51 of the FIEA. When the Financial Instruments
Business Operator is deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including the issuance of an order for business suspension based on Article 52 (1) of the
FIEA.
III-2-3-2 Control Environment for Managing Sales Staff
From the viewpoint of ensuring that Financial Instruments Business Operators solicit customers in an
appropriate manner suited to the customer attributes, it is important to identify and keep track of the actual state ofcustomer solicitation conducted by the business operators’ sales staff. To this end, particular attention shall be paid
to the following points:(1) Major Supervisory Viewpoints(i) Identification of the Actual State of Customer Solicitation by Sales Staff and Efforts to Ensure Appropriate
Solicitation
A. Whether the manager of each sales division, for example, strives to identify and keep track of the actual
state of customer solicitation by directly holding interviews with customers, and takes appropriate
measures when necessary.
B. Whether the manager of each sales division, in the course of handling securities for specified investors,
takes into consideration that SMEs are included in the scope of specified investors, and from this59viewpoint, strives to identify and keep track of the actual state of such handling and takes appropriate
measures, focusing on points such as whether sufficient arrangements are made to give notice or deliver
documents as required under Article 40-5(1) and (2) of the FIEA.
C. Whether the internal control division has developed a specific method of identifying and keeping trackof the actual state of customer solicitation mentioned in A and B above and communicated it to all
officers and employees, and is striving to establish a control environment that ensures the effectivenessof the method by identifying and examining the status of solicitation and is reviewing and revising themethod when necessary.
(ii) Efforts to Foster and Maintain Sense of Compliance among All Officers and Employees
A. Whether the Financial Instruments Business Operator provides case study training, external training andother types of training with a view to enhancing the sense of compliance among all officers andemployees.
B. Whether the internal control division implements measures to enhance the effectiveness of training, suchas identifying and examining the contents of training programs and the implementation thereof andreviewing and revising the contents of the programs when necessary.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for managing sales staff, through daily supervisory administration or the reportingof problematic conduct, they shall identify and keep track of the status of voluntary improvement made by thebusiness operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on
Article 56-2 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to have a serious problem
from the viewpoint of protecting public interests and investors, the supervisors shall take actions such as issuing anorder for business improvement based on Article 51 of the FIEA. When the Financial Instruments Business Operator
is deemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary
actions, including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
III-2-3-3 Regulation on Advertisements, etc.
The representations in advertisements, etc., of Financial Instruments Business Operators (advertising as
specified under Article 73(1) of the FIB Cabinet Office Ordinance; the same shall apply hereinafter) are the starting
points of their solicitation for customers to make investments, and the most important thing about the said
representations is that they provide clear and precise information. To ensure this, particular attention shall be paid
to the following points.
(Note) “Advertisements etc.” includes written materials for customer solicitation, Web pages, postal mail, letters,
fax messages, e-mails, fliers and pamphlets and other media materials that provide information to a large
number of people. However, judgment as to whether specific media materials are actually advertisements etc.,
shall be made not on the basis of the appearance or form of the materials or the method of providing them,such as an e-mail, etc., exchange, an airing of a commercial message or the provision of a gift, but on thebasis of the specific contents of materials in each case.
60

(1) Major Supervisory Viewpoints(i) Points of Attention Regarding Important Matters that Could Affect Customers’ Judgment
A. Whether the advertisement, etc., contains a representation that could lead customers to erroneously
believe that the fees, commissions, other rewards and expenses they must pay are nil or substantiallylower than the actual levels.
B. Regarding financial instruments whose value could fall below their principal amount or for which theloss amount could exceed the principal amount, whether the advertisement, etc., clearly indicates suchrisks.
(ii) Clear and Precise Representation
In cases where the items specified under Article 37 of the FIEA are indicated in an advertisement, etc.,
supervisors shall judge whether the advertisement, etc., meets the requirement for clear and precise
representation as specified under Article 73(1) the FIB Cabinet Office Ordinance, with due consideration of
the following points:
A. Whether the letters used in the advertisement, etc., to indicate some items are not too inconspicuous interms of size, shape and color compared with the letters used for other items.
In particular, whether the letters used to indicate benchmarks whose movements could cause losses,
such as interest rates and prices, the risk of losses and the reasons for them, the risk of the loss amountexceeding the principal amount, and the direct cause thereof, are not markedly different in size from thelargest letters used in the same advertisement, etc.
B. Whether the advertisement, etc., avoids placing too much emphasis on the advantages of the financial
instruments and indicating its disadvantages in an inconspicuous manner.
C. In the case of an advertisement shown on displays of electric devices, whether sufficient display time issecured for users to read and understand all necessary items.
(iii) Points of Attention Regarding Advertisements Using Exaggerated Descriptions
A. Whether the advertisement does not make definitive predictions of the future movements of the prices
and other numerical features of securities and other financial instruments as well as rewards they haveto pay, or does not unduly stimulate customers’ investment appetites by using descriptions that could
lead them to erroneously believe that profits are guaranteed.
B. Whether the advertisement does not use descriptions that could lead customers to erroneously believethat a certain level of yield is guaranteed or that investment losses will be partially or fully compensatedfor.
C. Whether the advertisement does not use descriptions that could lead users to believe that the application
period and the number of applicants to be accepted are limited whereas in reality they are not limited.
D. Whether the advertisement avoids descriptions that could lead customers to erroneously believe that the
Financial Instruments Business Operator, because of its registration, is recommended by the Prime
Minister, FSA Commissioner or other public officials and organizations, or that the contents of theadvertisement are guaranteed thereby.
E. Whether the advertisement avoids descriptions that constitute or could constitute a violation of61

prefectural ordinances based on the Act Against Unjustifiable Premiums and Misleading
Representations, the Outdoor Advertisement Act or other laws and regulations.
F. Whether the advertisement avoids descriptions that could draw public criticism for being excessive.
(iv) Customer-Soliciting Events
A. In cases where a Financial Instruments Business Operator holds seminars, etc. (events inviting
customers in general for the solicitation purpose regardless of whether they are nominally represented
as lecture speeches, study sessions or briefings), whether the advertisements and invitation fliers clearly
indicate that the events are intended to solicit customers to sign contracts for financial instruments
transactions.
B. In order to meet the above requirement for “clearly indicating that the events are intended to solicit
customers to sign contracts for financial instruments transactions,” the financial institution should
represent the seminars, etc., with titles that clearly indicate association with financial instruments
transactions and also clearly state that the seminars, etc., are held for solicitation purposes.
(v) Advertisement Screening System
Whether the Financial Instruments Business Operator has appointed staff in charge of screening
advertisements, etc., and whether appropriate screening is conducted in accordance with the prescribedscreening criteria from the viewpoint of ensuring compliance with Article 37 of the FIEA.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding advertisements etc., for a Financial
Instruments Business Operator, through daily supervisory administration or the reporting of problematic conduct,
they shall identify and keep track of the status of voluntary improvement made by the business operator by holding
in-depth hearings and, when necessary, requiring the submission of reports based on Article 56-2 (1) of the FIEA.
When the Financial Instruments Business Operator is deemed to have a serious problem from the viewpoint ofprotecting public interests and investors, the supervisors shall take actions such as issuing an order for business
improvement based on Article 51 of the FIEA. When the Financial Instruments Business Operator is deemed tohave committed a serious and malicious violation of law, the supervisors shall consider necessary actions, including
the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
III-2-3-4 Control Environment for Providing Explanations to Customers
Although a fairly high level of expert knowledge is necessary to understand some financial instruments
transactions, ordinary customers may not necessarily have sufficient expert knowledge and experiences. As a result,
it is necessary for Financial Instruments Business Operators to fulfill their responsibility for providing appropriate
explanations by, for example, disclosing correct information that may be used as a basis for investment decisions tocustomers and others in a fair manner. Therefore, supervisors shall pay attention to the following points when
examining the status of a Financial Instruments Business Operator’s provision of explanations, etc., to customers.
(Note) It should be kept in mind that “explanations, etc.” include explanations provided at seminars etc. that are
intended to attract customers in effect for solicitation purposes.

62(1) Major Supervisory Viewpoints Regarding Control Environment for Providing Explanations(i) Development of Control Environment for Providing Explanations Based on Principle of Suitability
Whether the Financial Instruments Business Operator has developed a control environment that ensuresappropriate explanations based on the principle of suitability when providing a pre-contract document, byproperly selecting the method and extent of explanation necessary for enabling customers to understand thecontents of the financial instruments transaction in light of each customer’s knowledge, experiences, asset
status and the transaction purpose.
(ii) Provision of Appropriate Explanations Regarding Products and Services
A.

Whether the Financial Instruments Business Operator avoids placing too much emphasis on theadvantages of the transaction and makes sure to sufficiently explain disadvantages, such as thepossibility of incurring losses and other risks.

B.

Whether the Financial Instruments Business Operator avoids making false statements when promoting
products and services or avoids making definitive claims without sufficient grounds when describing
products and services.

C.

Whether the Financial Instruments Business Operator explains products and transactions in an
objective manner and avoids arbitrary and subjective statements.

D.

Whether the Financial Instruments Business Operator explains the contents of products andtransactions (basic characteristics of products, the nature, types, and variable factors of risks involved,etc.) in a manner that enables the customer to fully understand them.
In particular, whether the Financial Instruments Business Operator strives to prevent the customer fromlosing interest in understanding the contents, by, for example, first explaining important matters that
may affect their investment decisions, in accordance with the purpose of rules concerning the order of
items listed in a pre-contract document.

E.

Whether the Financial Instruments Business Operator avoids providing explanations that could create
misunderstandings regarding the financial instruments transaction. In particular, whether it avoids
providing explanations that could lead customers to erroneously believe that the principal is guaranteed;
whether the Financial Instruments Business Operator, in connection with transactions of derivatives,
avoids providing explanations that could lead customers to erroneously believe, despite the possibilityof the risk of a call for additional margin (referring to additional deposits that must be made when the
total existing deposits have fallen short of the required level; the same shall apply hereinafter) due tothe fluctuations of prices, that such risk rarely exists or that the amount of additional margin to berequired is very small compared with the actual product features.

F.

In cases where sudden changes in market trends or an event having a material impact on markets has
had a serious impact on the net asset value of an investment trust, whether the Financial Instruments
Business Operator strives to provide information to customers in a timely and appropriate manner, andwhether it provides customers with careful support for their investment decisions.
Furthermore, at the time of a sudden change in market trends or an event having a material impact onmarkets, whether an investment trust management company (meaning an investment trust managementcompany as specified under Article 2(11) of the Act on Investment Trusts and Investment Corporations
63

(hereinafter referred to as the “Investment Trust Act”); the same shall apply in VI-2-3-4) promptly
prepares a report on the management status and provides it to the

Financial Instruments Business

Operators that sold them.
G.

In cases where the Financial Instruments Business Operator solicits customers with the use of materials(including newspaper articles, analyst reports) containing third-party market forecasts, whether it avoids
making arbitrary use of forecasts tinged with a particular bias.

H.

Whether the Financial Instruments Business Operator avoids soliciting customers to sign up for
products and transactions that impose an undue burden on customers or lack economic rationality, or
whether it makes sure to provide sufficient explanations regarding matters important for customers
making investment decisions.

(iii) Explanations Regarding Contract Contents
Whether the Financial Instruments Business Operator provides information regarding the contents of thesigned contracts (contract date, amount, value, etc.) to the relevant customers in an appropriate manner upon
their requests.
(iv) Method of Internet-Based Explanations
Regarding “the explanations provided in a method and to an extent necessary for enabling the customer
to understand” specified under Article 117 (1) (i) of the FIB Cabinet Office Ordinance.
In the case of a financial instruments transaction conducted via the Internet, a Financial Instruments
Business Operator shall be deemed to have provided “the explanations provided in a method and to an extent
necessary for enabling the customer to understand” as specified under Article 117 (1) (i) of the FIB Cabinet
Office Ordinance, when the customer has read explanations shown on the computer display and indicatedhis/her understanding with a click of the button.
(2) Points of Attention Regarding Explanation of Documents(i) Financial instruments business operators shall be instructed to be ready to allow customers to view the
explanation documents as specified under Articles 46-4 and 47-3 of the FIEA (referred to as the “Explanation
Documents” in III-2-3-4(2), III-3-1(10) and V-2-2-2(2)) whenever requested by them to do so. On thatoccasion, supervisors shall encourage them to display the Explanation Documents using the internet wherever
possible.
(ii) Financial instruments business operators may include additional items, other than items specified under
law in the Explanation Documents, at their own discretion.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for providing explanations to customers, through daily supervisory administrationor the reporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement
made by the business operator by requiring the submission of reports based on Article 56-2 (1) of the FIEA, whennecessary, while paying consideration to the above viewpoints. When the Financial Instruments Business Operator
is deemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
64

shall take actions such as issuing an order for business improvement based on Article 51 of the FIEA. When the
Financial Instruments Business Operator is deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including the issuance of an order for business suspension based on
Article 52 (1) of the FIEA.
III-2-4 Control Environment for the Management of Information Related to Customers, etc.
It is extremely important to ensure the appropriate management of customer information, as such information
constitutes the basis of financial instruments transactions.
In particular, information regarding individual customers needs to be handled in an appropriate manner inaccordance with the Act on the Protection of Personal Information (hereinafter referred to as the “Personal
Information Protection Act”), the FIB Cabinet Office Ordinance, the Guidelines Concerning Personal Information
Protection Act (General Rules) and its three specific guidelines regarding (i) the provision of personal data to aforeign third party, (ii) verification and recording obligations related to the transfer of data to third parties and (iii)
de-identified information and Anonymously processed information (together, “Personal Information Protection
Guidelines”) ,and the guideline on the protection of personal information in the financial sector (hereinafter referred
to as the “Financial Sector Guidelines”) and the guideline for practical affairs regarding safety control measures
specified in the guideline on the protection of personal information in the financial sector (hereinafter referred to as
the Practical Guideline).
Furthermore, because Financial Instruments Business Operators are in a position where they can accesscorporate information (referring to the corporate information specified under Article 1(4)(xiv) of the FIB Cabinet
Office Ordinance; the same shall apply hereinafter), they are required to control that information strictly and toprevent insider trading and any other unfair acts.
As described above, it is important for Financial Instruments Business Operators to establish a control
environment wherein they can properly manage information related to customers and information related tocorporations (hereinafter referred to as “information related to customers, etc.”). Supervisors shall examine this bypaying attention to the following points, for example.
(1) Points of Attention Regarding Control Environments for the Management of Information Related to Customers,
etc.
(i) Whether the management team recognizes the necessity and importance of ensuring the appropriateness inthe management of information related to customers, etc., based on the principle that access and use of
information related to customers, etc. should be limited to officers and employees who need to know the
information for the execution of business operations (hereinafter referred to as the “Need-to-Know Principle”),
and has developed an internal control environment, including steps such as establishing an organizational
structure (including ensuring appropriate checks between divisions) formulating internal rules, andcooperating with other financial institutions within the financial group (including holding companies) for
ensuring appropriateness, depending on the details and size of business operations.
(ii) Whether the Financial Instruments Business Operator has formulated a specific standard for the handling of
information related to customers, etc. and communicated it to all officers and employees through the provision65

of training and other means. Whether the formulated standard is based on the Need-to-Know Principle
regarding the sharing of information related to customers, etc. internally and externally, or within the samedepartment or between different departments of the Financial Instruments Business Operator. Additionally,
whether the Financial Instruments Business Operator has formulated a standard for the provision of
information related to customers, etc. to third parties, based on careful deliberations, so as to ensure thatnecessary procedures are implemented in accordance with the Personal Information Protection Act, thePersonal Information Protection Guidelines, the Financial Sector Guidelines and the Practical Guideline.
(iii) Whether the Financial Instruments Business Operator has established an environment for appropriately
managing information related to customers, etc. and has established arrangements and procedures necessaryfor examining, in a timely and appropriate manner, the status of the management of information related tocustomers, etc. with the involvement of compliance divisions, including thorough management of access to
information related to customers, etc. (such as preventing the people with access rights from deviating fromthe scope of the Need-to-Know Principle and preventing access rights assigned to certain people from being
used by others), measures to prevent the misappropriation of information related to customers, etc. by insiders,and a robust information management system that prevents illegal access from the outside.
Also, whether the Financial Instruments Business Operator has attempted to implement appropriate
measures for preventing illegal acts utilizing information related to customers, etc., such as the dispersal of
authority concentrated upon specific personnel and the enhancement of the controls and checks over personnel
who have broad powers.
(iv) In cases where the Financial Instruments Business Operator entrusts (Note) the handling of information
related to customers, etc., whether it has implemented the following measures.
(Note) The term “entrust” includes all contracts in which a Financial Instruments Business Operator allows
all or part of the handling of information related to customers, etc. to be conducted by another person,
regardless of the form or type of contract.
A. With regard to the management of outsourced contractors, whether the Financial Instruments Business
Operator has clarified the responsible divisions and confirms that outsourced contractors are properly
managing the information related to customers, etc., such as by monitoring on a periodic or as-neededbasis how business operations are being conducted at outsourced contractors.
B. Whether the Financial Instruments Business Operator has confirmed that the outsourced contractors havesystems in place to take appropriate actions and to promptly report to consignors in the event that
information is leaked.
C. Whether the Financial Instruments Business Operator restricts the rights of outsourced contractors toaccess information related to customers, etc. to the extent necessary according to the nature of theoutsourced business. On that basis, whether the Financial Instruments Business Operator checks that theworkers at outsourced contractors to whom access rights are given and the scope thereof have been
defined.
Furthermore, whether the Financial Instruments Business Operator checks that access to information
is being managed thoroughly at outsourced contractors on a periodic or as-needed basis, such as byconfirming how the access rights are being used (including matching authorized persons against actual66

users) in order to prevent access rights assigned to certain people from being used by others.
D. In cases where information is being successively entrusted more than once, whether the Financial
Instruments Business Operator checks whether the outsourced contractor is adequately supervising thesubcontractors and other such business operators. Also, whether direct supervision of the subcontractor’sbusiness operators and so forth is being conducted inhouse as necessary.
(v) Whether the Financial Instruments Business Operator has established arrangements and procedures forappropriately reporting to responsible divisions, notifying customers and the public, and reporting to theauthorities in a prompt and appropriate manner when information related to customers, etc. has been leaked,
so that secondary damage can be prevented.
Also, whether the Financial Instruments Business Operator analyzes the causes of information leaks andhas implemented measures designed to prevent a recurrence. Furthermore, in light of incidents of information
being leaked at other companies, whether the Financial Instruments Business Operator examines measuresneeded to prevent a similar incident from recurring.
Regarding operationally important cases such as those posing the possibility of exerting a material impact
on customers, whether the management team appropriately gets involved in decision making concerning
actions to be taken.
(vi) Whether audits covering the broad range of business operations pertaining to information related tocustomers, etc. are being conducted by an independent internal audit division or the like on a periodic or asneeded basis. When such broad range of business operations are conducted integrally by the entirety of afinancial group, whether efforts for cooperation are being made among the internal audit divisions, etc. ofother financial institutions within the group (including holding companies).
Also, whether the Financial Instruments Business Operator has implemented appropriate measures, suchas training programs, in order to increase the specialization of the staff engaged in audits pertaining to the
management of information related to customers, etc.
(2) Points of Attention Regarding the Management of Personal Information(i) With regard to information concerning individual customers, in cases where a Financial Instruments Business
Operator entrusts the security control, supervision of employees and handling of the said information to othersin accordance with Article 123(1)(vi) of the FIB Cabinet Office Ordinance, whether the Financial Instruments
Business Operator has implemented the following necessary and appropriate measures with regard tosupervising the contractor in order to prevent such information from being leaked, lost or damaged.
(Necessary and Appropriate Measures Regarding Security Control)
A. Measures based on Article 8 of the Financial Sector Guidelines
B. Measures based on Section I and Attachment 2 of the Practical Guideline(Necessary and Appropriate Measures Regarding the Supervision of Employees)
C. Measures based on Article 9 of the Financial Sector Guidelines
D. Measures based on Section II of the Practical Guideline(Necessary and Appropriate Measures Regarding the Supervision of Contractors)
E. Measures based on Article 10 of the Financial Sector Guidelines
67

F. Measures based on Section III of the Practical Guideline(ii) Whether the Financial Instruments Business Operator has implemented measures to ensure, in accordancewith Article 123(1)(vii) of the FIB Cabinet Office Ordinance, that information regarding the race, religious
belief, family lineage, birthplace, health, and medical and criminal records of individual customers, as well asother specified non-disclosure information (Note), are not used except for the cases specified in Article 5(1)of the Financial Sector Guidelines.
(Note) “Other specified non-disclosure information” includes:(a) Information regarding labor union membership(b) Information regarding ethnicity(c) Information regarding sexual orientation(d) Information regarding provisions under Article 2(iv) of the Order for the Enforcement of the Personal
Information Protection Act(e) Information regarding provisions under Article 2(v) of the Order for the Enforcement of the Personal
Information Protection Act(f) Information regarding the fact that the related customer has been a victim of crime(g) Information regarding social status(iii) Article 44-2 of the FIEA, in principle, prohibits Financial Instruments Business Operators from accepting
an entrustment, etc. for the buying and selling of securities on credit cards. However, in cases where a
Financial Instruments Business Operator meets all of the requirements specified in Article 148 and 149(i)(a)to (c) of the FIB Cabinet Office Ordinance, they will be permitted as an exception.
In such cases, since any leaking of personal information, including credit card information (card numbers,
expiry dates, etc.; hereinafter referred to as “credit card information, etc.”) is likely to result in secondary
damage, such as unauthorized purchases using a stolen identity, whether the Financial Instruments Business
Operator, in addition to (i) and (ii) above, has implemented the following measures in particular.
A. Whether the Financial Instruments Business Operator has set an appropriate period of time for keeping
credit card information, etc., which takes into account the purpose of use and other circumstances, andwhether it limits the locations where such information is kept, and disposes the information in a prompt
and appropriate manner after the retention period has lapsed.
B. Whether the Financial Instruments Business Operator has implemented appropriate measures whendisplaying credit card information, etc. on computer monitors, such as not displaying whole credit card
numbers, unless needed for business operations.
C. Whether the Financial Instruments Business Operator conducts offsite and onsite inspections on aperiodic or as-needed basis on whether the rules and systems for protecting credit card information, etc.
are functioning effectively.
(iv) Whether measures have been taken to comply with Article 12, etc. of the Financial Sector Guidelines withregard to the provision of personal data to third parties. In particular, whether the consent of individual
customers is obtained according to the nature and method of business, while also giving consideration to thefollowing points:
A. When obtaining the consent of an individual customer regarding the provision of personal data to a third
party by a method without any face-to-face contact, such as via a PC or smartphone, whether the wording68

of the consent, font size, screen specifications, or other elements of the method for obtaining the consent
have been optimized to enable the individual customer to clearly recognize the third-party recipient, thecontents of the information to be provided to the recipient, and the purpose of use by the recipient, basedon Article 3 of the Financial Sector Guidelines.
B. Even if the consent regarding the provision of personal data to a third party has been obtained from anindividual customer in the past, whether the consent of the individual customer is obtained again when
the third-party recipient or the contents of the information differ, or when the provision exceeds the scopenecessary for achieving the pre-specified purpose of use by the third-party recipient.
C. If there are multiple third-party recipients or if the purpose of use of the information differs by thirdparty recipient, whether the scope of third-party recipients subject to the consent and the method, timing,
etc. of obtainment of the consent are appropriately considered in order to enable the individual customer
to recognize that the personal information will be provided tomultiple recipients or recognize thepurpose of use by each recipient.
D. When obtaining consent regarding the provision of personal data to a third party, whether consideration
is given so as to prevent adverse effects such as abuse of a superior position or conflict of interest with
the individual customer. For example, whether an individual customer is being forced to consent to an
excessive scope of third-party recipients, purpose of use by the third-party recipient, or contents of theinformation to be provided.
(3) Points of Attention Regarding the Prevention of Insider Trading and Other Unfair Acts Using Corporate
Information(i) Whether the Financial Instruments Business Operator has implemented appropriate measures for preventing
insider trading and other unfair acts using corporate information, by measures such as creating a Chinese wall
(an organizational or physical barrier or a barrier established on a system for information management; the same
shall apply hereinafter) between the private sector (out of sales divisions, divisions that are supposed toconstantly obtain corporate information) and the public sector (out of sales divisions, divisions other than thosein the private sector, such as divisions engaging in solicitation for the sale, purchase and other transactions of
securities or intermediary, brokerage and agency services therefor, and divisions executing principal transactionsor brokerage transactions). Whether the Financial Instruments Business Operator has specifically establishedrequired procedures for the cases where it exceptionally crosses a wall (meaning information sharing across a
Chinese wall; the same shall apply hereinafter), by measures such as recording the names of officers andemployees of divisions who conducted information sharing, the date, and the relevant issue, etc., and requiringa prior consent of compliance divisions, from the perspective of effectively preventing misuse of corporate
information.
When the Financial Instruments Business Operator grants its officers, etc. the access to corporate informationfrom the need for business management, whether it has put in place required measures from the perspective ofeffectively preventing leak or misuse of corporate information by said officers, etc.
(Note) “Organizational barriers” include separation of departments and reporting lines and limitation on
concurrent holding of positions of officers and employees, etc. “Physical barriers” include limitation on
entry to and exit from divisions managing corporate information and management of documents. “Barriers
69on a system” include management of authority to access corporate information.
(ii)

Whether the Financial Instruments Business Operator has established an appropriate internal control

environment, such as by developing internal rules pertaining to the sale, purchase and other transactions of
securities by officers, employees and other persons associated with them, having compliance divisions get
involved appropriately in transactions for which prior consent of compliance divisions is required under theinternal rules, and conducting the revision thereof as necessary.
(iii) Whether the Financial Instruments Business Operator has made efforts for strengthening the sense ofcompliance, such as enhancing professional ethics and ensuring a full understanding of relevant laws andregulations and internal rules, aimed at preventing insider trading and other unfair trading by officers or
employees.
(iv) Whether the Financial Instruments Business Operator grasps the actual state of the sale, purchase and othertransactions of securities by its officers, employees and other persons associated with them, who are in aposition to access corporate information, and whether it has implemented appropriate measures, such asrevising the relevant methods as necessary.
(v) When the Financial Instruments Business Operator has overseas offices or belongs to a financial group that
operates internationally, whether it has developed an appropriate control environment for the management ofcorporate information at a level commensurate to the details and size of its global business operations, bymeasures such as conducting management globally on a group-wide basis: not merely domestically, underorganizational and integrated policies, procedures and systems, while observing laws and regulations ofindividual countries.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for managing information related to customers, etc., through daily supervisoryadministration or the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the business operator, by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2 (1) of the FIEA. When the Financial Instruments Business Operator isdeemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions such as issuing an order for business improvement based on Article 51 of the FIEA. When the
Financial Instruments Business Operator is deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including the issuance of an order for business suspension based on
Article 52 (1) of the FIEA.
III-2-5 Dealing with Complaints, etc. (Including Response to the Financial ADR System)(1) Need for Dealing with Inquiries, Complaints, Disputes, etc. (Complaints, etc.)
Many financial products and services have inherent risks, and coupled with being specialized and invisible innature, it is considered that there is a strong possibility of them leading to problems. Therefore, with regard to thesale and provision of financial products and services, in addition to providing information and adequately
70implementing other advance measures from the viewpoint of preventing problems and protecting customers, dealing
with complaints, etc. after the fact is also important.
In recent years, increasing diversity and complexity of financial products and services has led to the greater
likelihood of problems, and so from the viewpoint of protecting customers and ensuring customer confidence,
dealing with complaints, etc. after the fact has become even more important.
Based on these perspectives, a financial ADR system has been introduced as a framework for simply and
expeditiously processing complaints and resolving disputes related to financial products and services (refer to Note
for description of ADR), and Financial Instruments Business Operators are required to deal appropriately withcomplaints, etc. on the basis of this financial ADR system.
(Note) ADR (Alternative Dispute Resolution)
An alternative method to courts for resolving disputes which is based on agreement by the parties, such as
mediation or arbitration. ADR is expected to result in prompt, simple and flexible dispute resolution in amanner suited to the nature of the case, the circumstances of the parties and so on.
(2) Scope
There are various forms of expression that can be made regarding the business operations of a Financial
Instruments Business Operator. Besides inquiries, there are also expressions of dissatisfaction made by customers,such as complaints and disputes. It is important for Financial Instruments Business Operators to deal with thesevarious forms of expression appropriately, and so they are required to develop appropriate internal control
environments that enable such treatment.
In addition, Financial Instruments Business Operators are also required to develop appropriate control
environments respectively for complaints and disputes in the financial ADR system.
It must, however, be added that the distinction between these complaints and disputes is relative and they areconnected with each other. In particular, in light of the requirement in the financial ADR system for designated ADR
bodies to ensure links between complaint processing procedures and dispute resolution procedures, rather thandealing with individual cases by formally dividing applications made by customers into “complaints” and “disputes,”
it is important that Financial Instruments Business Operators deal with complaints and disputes appropriately while
taking into consideration their relativity and connections.
III-2-5-1 Establishment of Internal Control Environment for Dealing with Complaints, etc.
(1) Significance
Dealing with complaints, etc. in a prompt, fair and appropriate manner is an important activity that carries theconnotation of complementing the accountability to customers after the fact, and is important for ensuring theconfidence of customers in financial products and services. Financial Instruments Business Operators need todevelop internal control environments to deal with complaints, etc. made by customers in a prompt, fair andappropriate manner, including measures and responses required in the financial ADR system.
(2) Major Supervisory Viewpoints
71Supervisors shall examine whether the Financial Instruments Business Operator has, in developing an internal
control environment for dealing with complaints, etc., developed an appropriate and effective control environment
in light of the size and specific characteristics of its business operations. Supervisors shall take the following points,
for example, into consideration, while being mindful of not applying them in a mechanical and uniform fashion.
(i) Role of Senior Managers
Whether the Board of Directors has exercised its functions properly with regard to the establishment of agroup-wide internal control environment for the function of dealing with complaints, etc.
(ii) Internal Rules
A. Whether the division in charge of complaints, etc., its responsibility and authority, and the procedures for
dealing with complaints, etc. have been established in the internal rules so that complaints can be
responded to and dealt with in a prompt, fair and appropriate manner. Also, whether procedures
concerning business improvement have been established so that the views of customers are reflected in
the conduct of business operations.
B. Whether the Financial Instruments Business Operator has developed a control environment, including
making sure that internal rules are thoroughly publicized and enforced by means of training and othermeasures (including the distribution of manuals and so forth) so that business operations for dealing withcomplaints, etc. can be conducted based on internal rules.
Particularly in cases where complaints, etc. are being made frequently by customers, whether
confirmation is first being made of how internal rules (not only those for dealing with complaints, etc.)
are publicized and enforced at branches, and whether the causes and problem areas in terms of control
environments are being examined.
(iii) Control Environment for Dealing with Complaints, etc.
A. Whether the Financial Instruments Business Operator has appropriately appointed staff in charge of
dealing with complaints, etc.
B. Whether the Financial Instruments Business Operator has developed a control environment whereinrelevant departments cooperate and promptly deal with any complaints, etc. made by customers.
In particular, whether the Financial Instruments Business Operator has developed a control
environment wherein the responsible division or person in charge of dealing with complaints, etc. strives
to fully understand the customer complaints, etc. faced by each individual employee, and reports
promptly to the relevant departments.
C. Whether the Financial Instruments Business Operator has developed a control environment wherein it
promptly settles any outstanding cases and prevents the occurrence of any long-term outstanding casesby conducting progress management aimed at the resolution of complaints, etc.
D. Whether the Financial Instruments Business Operator has developed a control environment wherein it
improves the response provided at contact points according to the occurrence of complaints, etc., andwherein it can receive complaints, etc. extensively, such as by setting access hours and means of access(for example, phone, mail, facsimile, email) which are considerate of customer convenience. Also,
whether the Financial Instruments Business Operator has developed a control environment wherein it
extensively publicizes these contact points and ways of making applications, and wherein it makes them72

well known to customers in a way that is easy for them to understand and which also takes into accounttheir diversity.
E. Whether the Financial Instruments Business Operator has developed a control environment for ensuring
the proper handling of personal information in accordance with the provisions of the Personal
Information Protection Act, the Personal Information Protection Guidelines, the Financial Sector
Guidelines and the Practical Guideline when dealing with complaints, etc. (refer to III-2-4 Managementof Customer Information).
F. With regard to complaints, etc. concerning outsourced business operations conducted by an external
contractor, including financial instruments intermediary service providers, etc., whether the Financial
Instruments Business Operator has developed a control environment for dealing with such complaints,
etc. promptly and appropriately, such as by establishing a system of direct communication to the
Financial Instruments Business Operator itself (refer to III-2-7(2), III-2-10(1), VI-2-2-4-2(4) and VII-21-5(2)(iv)).
G. Whether the Financial Instruments Business Operator has developed a control environment for taking
appropriate action when dealing with complaints, etc. in light of the relationship with the provisions
concerning the prohibition of compensation of loss, etc. (Article 39 of the FIEA).
H. Whether the Financial Instruments Business Operator has developed a control environment wherein it
can communicate quickly with relevant departments and cooperate appropriately (where necessary) withthe police and other relevant organizations, in order to distinguish any pressure by anti-social forces
disguised as a complaint, etc. from ordinary complaints, etc. and to take a resolute stance (refer to III-211 Prevention of Damage that May be Inflicted by Anti-Social Forces).
(iv) Dealing with Customers
A. Whether the Financial Instruments Business Operator goes beyond perceiving the handling of complaints,
etc. as a simple problem of processing procedures, and instead regards it as a question of a control
environment for providing after-the-fact explanations and aims to resolve a complaint, etc. with theunderstanding and agreement of the customer wherever possible while suitably interviewing customers
on the circumstances according to the nature of the complaint, etc.
B. Whether the Financial Instruments Business Operator has developed a control environment wherein it
provides customers, who have made a complaint, etc., with appropriate explanations, as necessary,
according to the progress of the procedures for dealing with complaints, etc. while also being considerateof the specific characteristics of the customer, from the time the complaint is made to after its settlement(for example, an explanation of the procedures for dealing with complaints, etc., notification to the effectthat the complaint, etc. has been received, an explanation on the progress, and an explanation of theresults).
C. With regard to complaints, etc. made by customers, whether the Financial Instruments Business Operator
has developed a control environment wherein, rather than only dealing with a complaint, etc. itself, it
refers customers to appropriate external organizations according to the nature of the complaint, etc. andthe wishes of the customer, and it provides information such as an overview of the standard procedures.
In cases where there is more than one means of processing a complaint or resolving a dispute,73

customers should be able to choose freely, and so in referring customers to external organizations, careshould be taken so that a customer’s choice is not unduly restricted.
D. Whether the Financial Instruments Business Operator has developed a control environment wherein, evenduring a period when proceedings for dealing with a complaint, etc. are pending at an external organization,
the business operator takes appropriate action where necessary with respect to the customer who is theother party to the said proceedings (such as ordinarily providing the customer with general materials or
explanations).
(v) Information Sharing, Business Improvements, etc.
A. Whether the Financial Instruments Business Operator has developed a control environment whereincomplaints, etc. and the associated results from dealing with them are categorized and reported to theinternal control division and sales division, and wherein information necessary for the particular case isshared between those concerned, such as reporting important cases to the audit division and senior
managers.
B. Whether the Financial Instruments Business Operator properly and accurately records and storesinformation on the contents of complaints, etc., and the results of dealing with them, including bothcomplaints it deals with itself, and those dealt with through the mediation of an external organization.
Also, whether the Financial Instruments Business Operator has developed a control environment wherein
it analyzes the contents of complaints, etc., and the result of dealing with them, taking into consideration
information, etc., provided by a designated ADR body, and applies this on an ongoing basis to theimprovement of control environments for dealing with customers and conducting administrative
processes and to the formulation of measures for preventing any occurrence or recurrence of complaints,
etc.
C. Whether the Financial Instruments Business Operator has developed a control environment wherein it
checks the status of any complaints, etc. regarding instruments and transactions sold or contracted after
having made efforts, such as to improve its control environment for the solicitation of customers and the
conduct of administrative processes and to formulate measures to prevent the recurrence of certain
conduct, and whether it confirms the effects of the said efforts.
D. Whether the Financial Instruments Business Operator has developed a control environment wherein theinternal checks and balances function, such as of audits, can function properly to ensure the effectivenessof how complaints, etc. are dealt with.
E. Whether the Financial Instruments Business Operator has developed a control environment wherein,when reflecting the treatment of complaints, etc. in the conduct of business operations, senior managers
supervise over any decisions to implement measures needed for business improvement or recurrence
prevention, as well as any examination or ongoing review of how the control environment for dealing
with complaints, etc. should be.
(vi) Relationship with External Organizations
A. Whether the Financial Instruments Business Operator has developed a control environment wherein itcooperates appropriately with external organizations in working toward the prompt resolution of any
complaints, etc.
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B. Whether the Financial Instruments Business Operator has developed a control environment wherein,when filing a petition for dispute resolution procedures itself, rather than simply filing a petition without
fully exhausting its own procedures, it first responds sufficiently to the submission of the complaint, etc.
from the customer and goes through an appropriate internal examination of the need for the petition.
III-2-5-2 Response to the Financial ADR System
III-2-5-2-1 In cases where there is a designated ADR body(1) SignificanceIn order to enhance customer protection and to improve customer confidence in financial products and services,
it is important to ensure substantial equality between Financial Instruments Business Operators and customers, andto resolve any complaints, etc. in a neutral, fair and effective manner. Therefore, in the financial ADR system,complaint processing and dispute resolution from a third-person perspective are conducted by designated ADR
bodies with the participation of experts and others.
Under the financial ADR system, responses to complaint processing and dispute resolution are primarily
regulated according to Basic Agreements to Implement Procedures (Article 156-38(13) of the FIEA) concluded
between Financial Instruments Business Operators and designated ADR bodies.
Financial Instruments Business Operators are required to appropriately address their obligations and so forth
stipulated in their Basic Agreement to Implement Procedures, while bearing in mind the objective of processing thecomplaint or resolving the dispute at the designated ADR body.
(2) Major Supervisory Viewpoints
Supervisors shall examine whether the Financial Instruments Business Operator has, in responding to thefinancial ADR system, developed an appropriate and effective control environment in light of the size and specificcharacteristics of its business operations. Supervisors shall take the following points, for example, into consideration,
while being mindful of not applying them in a mechanical and uniform fashion.
Supervisors shall also refer to the points of attention contained in III-2-5-1 Establishment of Internal Control
Environment for Dealing with Complaints, etc.
(i) Outline
A. Basic Agreement to Implement Procedures
a. Whether the Financial Instruments Business Operator has promptly entered into Basic Agreements
to Implement Procedures with designated ADR bodies which exist for each type of business
related to dispute resolution, etc. (as specified under Article 156-38(12) of the FIEA).
b. For example, even in cases where there is a reassignment of designation, such as a designated ADR
body having its designation rescinded or a new ADR body being designated, whether the Financial
Instruments Business Operator selects the best measure from the perspective of customer
convenience, and in addition to promptly implementing any necessary measures (such as
implementing new complaint processing measures or dispute resolution measures, or concluding75

a Basic Agreement to Implement Procedures), whether it takes appropriate action, such as making
it known to all customers.
c. Whether the Financial Instruments Business Operator has developed a control environment wherein
it can execute the contents of the Basic Agreements to Implement Procedures concluded withdesignated ADR bodies.
B. Publication, Publicity and Response to Customers
a. Whether the Financial Instruments Business Operator has properly publicized the name or tradename and the contact address of designated ADR bodies that are party to any Basic Agreements
to Implement Procedures that it has concluded.
With regard to methods of publication, the Financial Instruments Business Operator needs totake measures that are suited to the size and specific characteristics of its business operations, forexample, presenting information on its website, putting up posters at its branches, producing anddistributing pamphlets, and conducting publicity activities through the mass media. Even
supposing that the Financial Instruments Business Operator has posted information on its website,
if it is feasible that there are customers who cannot view this information, the business operator
needs to give consideration to these kinds of customers.
In publicizing such information, whether the Financial Instruments Business Operator ispresenting it in a manner that makes it easy for customers to understand. (For example, in the caseof publicizing information on a website, the page should be so designed that customers can easily
access the page that provides information on the use of the financial ADR system.)b. With respect to the provision of pre-contract documents, whether the Financial Instruments
Business Operator provides an explanation on the financial ADR system.
Whether the Financial Instruments Business Operator provides sincere support in cases wherea complaint has been made by a customer, and whether it provides an explanation about thefinancial ADR system again in cases where the customer’s understanding cannot be gained
through talk between the two parties or where determining the amount of damages is difficult.
c. Whether the Financial Instruments Business Operator has developed a control environment wherein
it publicizes any necessary information to customers, such as the flow of standard procedures by
the designated ADR body and the effects of using a designated ADR body (such as the effect ofinterruption of prescription), in light of the Basic Agreement to Implement Procedures.
d. In cases in which a Financial Instruments Business Operator sells insurance products arranged byinsurance companies, where multiple operators with varied forms of operation are involved,
including the insurance companies that arranged the products and the Financial Instruments
Business Operator that sold the products, whether the operators involved are responding tocustomers in a careful manner; for example, whether the operators understand what the customers
see as the problem and refer them to designated ADR bodies that are appropriate for the causes ofthe problems.
(Note) In the case of an insurance product, even if the problem is related to explanation at the time
when the Financial Instruments Business Operator (i.e., Insurance Solicitor) sold the product,76the Entrusting Insurance Company, etc., shall be liable for any damage caused by an Insurance
Solicitor to a Policyholder in carrying out Insurance Solicitation activities under provisions ofArticle 283(1) (except in cases provided in (2) of the same Article). As such, supervisors shallbe mindful of the fact that customers are in principle eligible to file applications not only todesignated ADR bodies with whom the Financial Instruments Business Operator signs a Basic
Agreements to Implement Procedures, but also designated ADR bodies with whom theinsurance company signs a Basic Agreements to Implement Procedures.
(ii) Points of Attention Regarding Complaint Processing Procedures and Dispute Resolution Procedures
In light of the fact that, under Basic Agreements to Implement Procedures, Financial Instruments Business
Operators assume various obligations, including those to comply with procedures, submit materials andrespect special conciliation proposals, supervisors shall take the following points, for example, into
consideration when conducting examinations.
A. Common Items
a. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it receives a request from a designated ADR body for compliance with procedures,submission of materials or the like, it responds to the request promptly, unless there is justifiablereason not to.
b. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it refuses a request from a designated ADR body to comply with procedures, submit
materials or the like, rather than the division that caused the complaint or dispute simply deciding
itself to refuse the request, the business operator conducts a proper examination as an organization.
Also, whether the Financial Instruments Business Operator has developed a control environment
wherein, wherever possible, it explains the reasons (justifiable reasons) for that decision.
B. Response to Dispute Resolution Procedures
a. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it is presented with a recommendation to accept a reconciliation plan or with a
special conciliation proposal from a dispute resolution committee member, it makes prompt
decisions on whether to accept or not.
b. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it has accepted a reconciliation plan or a special conciliation proposal, the divisionin charge takes prompt action, and the audit division conducts a follow-up examination on matters
including the progress of its fulfillment.
c. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it rejects acceptance of a reconciliation plan or a special conciliation proposal, it
promptly explains its reasoning and takes necessary action, such as instituting legal proceedings,
in light of operational rules (Article 156-44(1) of the FIEA).
III-2-5-2-2 In cases where there is no designated ADR body77

(1) SignificanceIn the financial ADR system, even in cases where there is no designated ADR body, there is a legal requirementfor Financial Instruments Business Operators to instead implement complaint processing measures and dispute
resolution measures. Financial Instruments Business Operators are required to ensure complete customer protection
and to strive to improve customer confidence in financial products and services by implementing these measuresproperly and by resolving any complaints or disputes regarding financial products and services in a simple andexpeditious manner.
(2) Major Supervisory Viewpoints
Supervisors shall examine whether the Financial Instruments Business Operator has developed a control
environment in light of the size and specific characteristics of its business operations, wherein, in cases where it
implements complaint processing measures and dispute resolution measures, it deals properly with any complaints
or disputes made by customers while bearing in mind the objectives of the financial ADR system. Supervisors shalltake the following points, for example, into consideration, while being mindful of not applying them in a mechanicaland uniform fashion.
Supervisors shall also refer to the points of attention contained in III-2-5-1 Establishment of Internal Control
Environment for Dealing with Complaints, etc.
(i) Outline
A. Selection of Complaint Processing Measures and Dispute Resolution Measuresa. Whether the Financial Instruments Business Operator, in view of the nature of its business
operations, the occurrence of complaints, etc., its trading area and other factors, appropriately
selects one or more of the following matters prescribed by law for each type of registered business(referring to the different Type I financial instruments business, Type II financial instruments
business, the investment advisory and agency business or the investment management business)
as its complaint processing measures or dispute resolution measures. In addition, it is desirable
that the Financial Instruments Business Operator, in doing so, should have measures in place thatenhance convenience for the customer in making complaints or disputes, such as providing anenvironment that makes it easier for the customer to geographically access relevant services.
(a) Complaint Processing Measuresi) The Financial Instruments Business Operator shall have a consumer counselor or the likewith a certain level of experience provide guidance and advice to those employees engaged
in processing complaints.
ii) The Financial Instruments Business Operator shall develop its own operational system andinternal rules, and shall publicize them.
iii) The Financial Instruments Business Operator shall utilize financial instruments firms
associations and certified investor protection organizations.
iv) The Financial Instruments Business Operator shall utilize the National Consumer AffairsCenter of Japan and consumer centers.
v) The Financial Instruments Business Operator shall utilize the designated ADR bodies for78other business types.
vi) The Financial Instruments Business Operator shall utilize corporations that can conduct
complaint processing services in a fair and appropriate manner.
(b) Dispute Resolution Measuresi) The Financial Instruments Business Operator shall utilize certified dispute resolution
procedures prescribed in the Act on Promotion of Use of Alternative Dispute Resolution.
ii) The Financial Instruments Business Operator shall utilize financial instruments firms
associations and certified investor protection organizations.
iii) The Financial Instruments Business Operator shall utilize bar associations.
iv) The Financial Instruments Business Operator shall utilize the National Consumer AffairsCenter of Japan and consumer centers.
v) The Financial Instruments Business Operator shall utilize the designated ADR bodies forother business types.
vi) The Financial Instruments Business Operator shall utilize corporations that can conduct
dispute resolution services in a fair and appropriate manner.
b. Whether the Financial Instruments Business Operator has developed a control environment wherein
it continuously monitors the processing status of complaints and disputes, and where necessary,
reviews and revises its complaint processing measures and dispute resolution measures.
c. In cases where the Financial Instruments Business Operator utilizes a “corporation that can conduct
complaint processing services or dispute resolution services in a fair and appropriate manner”((a)vi and (b)vi), whether the business operator assesses whether the said corporation is a
corporation adequately staffed and with an adequate accounting basis to conduct complaint
processing services and dispute resolution services in a fair and appropriate manner (Article 1152(1)(v) and (2)(v) of the FIB Cabinet Office Ordinance), in a reasonable manner based on
considerable materials and other factors.
d. In cases where the Financial Instruments Business Operator utilizes an external organization,although it is not a requirement for the business operator to necessarily enter an outsourcing
contract with the said external organization, it is desirable that they make arrangements in advancewith regard to such matters as the flow of standard procedures and items regarding the burden of
expenses.
e. With regard to cases where expenses arise when the procedures of an external organization are used,
whether the Financial Instruments Business Operator has taken measures to prevent the expenses
from becoming an impediment to the filing of a petition for complaint processing or dispute
resolution, such as taking measures likely to prevent the customer’s share of expenses frombecoming excessive.
B. Implementation
Whether the Financial Instruments Business Operator implements measures inappropriately, such as
making the scope of the complaint processing measures and dispute resolution measures unduly
restricted. It should also be kept in mind whether the business operator has maintained appropriate
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coordination between complaint processing measures and dispute resolution measures (refer to III-25(2)).
(ii) Points of Attention Regarding Complaint Processing Measures (cases where business operators develop
their own control environments)
A. Cases where a control environment is developed wherein guidance and advice to employees is given by
consumer counselors, etc.
a. Whether the Financial Instruments Business Operator has developed a control environment wherein
it improves the skills of those employees engaged in processing complaints, such as periodicallyconducting training run by consumer counselors and the like.
b. Whether the Financial Instruments Business Operator has developed a control environment wherein
it utilizes the specialized knowledge and experience of consumer counselors and the like, where
necessary, for processing individual cases, such as building network systems with consumer
counselors and the like.
B. Cases where a business operator develops its own operational system and internal rules
a. Whether the Financial Instruments Business Operator has properly developed an operational system
and internal rules according to the occurrence of complaints, and whether it has developed acontrol environment wherein it processes complaints in a fair and appropriate manner based on
the said system and rules.
b. Whether the Financial Instruments Business Operator has made customers aware of the contact
point for making complaints in an appropriate manner, and whether it has properly published theoperational system and internal rules pertaining to complaint processing.
In terms of the content of the publicity and publications, although publishing the full text of
the internal rules is not a necessary requirement, in order for customers to confirm for themselves
whether complaints are being processed in accordance with appropriate procedures, it is importantthat the contact address for processing complaints and the flow of standard operations be clearly
indicated. Therefore, it should be kept in mind whether the business operator has published thesections related to this.
For the methods of publicity and publication, refer to III-2-5-2-1(2)(i)B.
(iii) Points of Attention Regarding Complaint Processing Measures (when using external organizations) and
Dispute Resolution Measures
A. Publicity and Publicationa. In cases where the Financial Instruments Business Operator are using an external organization, fromthe perspective of protecting customers, it is desirable that the business operator publicizes andpublishes information on the external organization, including, for example, the fact that customers
are eligible to use the external organization for raising complaints or disputes, the name of theexternal organization, its contact information, instructions on how to use it and so forth, in waysthat customers can readily understand.
b. With respect to the provision of pre-contract documents, whether the Financial Instruments
Business Operator provides an explanation on the financial ADR system.
80

Whether the Financial Instruments Business Operator provides sincere support in cases wherea complaint has been made by a customer, and whether it provides an explanation about thefinancial ADR system again in cases where the customer’s understanding cannot be gained
through talk between the two parties or where determining the amount of damages is difficult.
c. Whether the Financial Instruments Business Operator has developed a control environment forreferring customers to other external organizations if the petition for complaint processing or
dispute resolution is outside the scope handled by the external organization to which the customer
was first referred because of geographical reasons, the nature of the complaint or dispute or forsome other reason, or if handling of the complaint or dispute by another external organization isappropriate (not limited to external organizations used by the Financial Instruments Business
Operator as complaint processing measures or dispute resolution measures).
d. For cases in which a Financial Instruments Business Operator sells insurance products arranged byinsurance companies, refer to III-2-5-2-1(2)(i)B.d.
B. Response to Procedures
a. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it receives a request from an external organization for compliance with complaint
processing or dispute resolution procedures, a request for an investigation of the facts or a request
for the submission of relevant materials or the like, it responds to the request promptly in light of
the rules, etc. of the external organization.
b. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it refuses a request for compliance with complaint processing or dispute resolution
procedures, a request for an investigation of the facts or a request for the provision of relevantmaterials or the like, rather than the division that caused the complaint or dispute simply deciding
itself to refuse the request, the business operator conducts a proper examination as an organization,in view of such matters as the nature of the complaint or dispute, the nature of the facts or materials
and the rules of external organizations. Also, whether the Financial Instruments Business Operator
has developed a control environment wherein it explains the reasons for the refusal wherever
possible in light of the rules, etc. of the external organization.
c. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it is presented with a proposed solution such as a reconciliation plan or mediation
plan from an external organization that has commenced dispute resolution procedures (hereinafterreferred to as a “proposed solution” in d and e below), it makes prompt decisions on whether toaccept or not, in light of the rules, etc. of the external organization.
d. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it has accepted a proposed solution, the division in charge takes prompt action, andthe audit division conducts a follow-up examination on matters including the progress of its
fulfillment.

81

e. Whether the Financial Instruments Business Operator has developed a control environment wherein,in cases where it rejects acceptance of a proposed solution, it promptly explains its reasoning andtakes necessary action, in light of the rules, etc. of the external organization.
III-2-5-3 Statements in Various Documents
Financial Instruments Business Operators are required to state the details of their response to the financial ADR
system in various documents (such as pre-contract documents, business reports, explanation documents). In cases
where there is no designated ADR body, although business operators are required to state the details of theircomplaint processing measures and dispute resolution measures in these documents, it should also be kept in mind
that appropriate matters should be stated in the context of actual conditions. If, for example, the Financial
Instruments Business Operator utilizes an external organization, then the name, contact address and so forth of thesaid external organization (in cases where part of the services pertaining to the complaint processing or dispute
resolution are entrusted to another organization, then including that other organization) should also be stated.
III-2-5-4 Administrative Response
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for processing complaints, through daily supervisory administration, they shallidentify and keep track of the status of voluntary improvement made by the business operator by holding in-depth
hearings and, when necessary, requiring the submission of reports based on Article 56-2 (1) of the FIEA. When the
Financial Instruments Business Operator is deemed to have a serious problem from the viewpoint of protecting
public interests and investors, the supervisors shall take actions such as issuing an order for business improvement
based on Article 51 of the FIEA. When the Financial Instruments Business Operator is deemed to have committed
a serious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52 (1) of the FIEA.
Also, in cases where there is a designated ADR body, even if the Financial Instruments Business Operator does
not accept a request for to comply with procedures, in the strictest sense, supervisors shall focus on the response of
the Financial Instruments Business Operator while also being mindful of the problem of non-fulfillment pertaining
to the Basic Agreement to Implement Procedures between the Financial Instruments Business Operator and thedesignated ADR body.
It should also be kept in mind that an individual dispute that arises between a customer and a Financial
Instruments Business Operator is, in general, a problem pertaining to a private-law contract, and as such, is a matterto be resolved between the parties, including basically the place of ADR and the judicature.
III-2-6 Measures such as Verification at the Time of Transaction
Financial instruments business operators, which play an important role as market intermediaries, should never
be involved or exploited in cases of organized crime such as the provision of profits to corporate extortionists,
terrorism financing or money laundering.
In order to prevent Financial Instruments Business Operators from being exploited in cases of organized crime,
money laundering, terrorism financing, or contributing to expanding profits gained from criminal activities, it is82necessary to establish an advanced and robust company-wide control environment for legal compliance.
From the viewpoint of preventing abuse of financial services by organized crime groups and maintaining publicconfidence in Japan’s financial and capital markets, it is particularly important to establish an internal control
environment for measures such as verification at the time of transaction, preservation of transaction records, etc.
and reporting of suspicious transactions (meaning verification at the time of transaction, etc. pursuant to Article 11of the Act for Prevention of Transfer of Criminal Proceeds (hereinafter referred to as the “Anti-Criminal ProceedsAct”); hereinafter referred to as the “verification at the time of transaction, etc.”) based on the Anti-Criminal
Proceeds Act.
(1) Major Supervisory Viewpoints
When examining a financial institution’s control environment for implementing verification at the time oftransaction, etc. based on the Act on Prevention of Transfer of Criminal Proceeds and measures stipulated in the“Guidelines on Measures for Anti-Money Laundering and Countering the Financing of Terrorism” (hereinafterreferred to as the “AML/CFT Guideline”), including risk-based approach, supervisors shall pay attention to thefollowing points:(Note1) In properly conducting verification at the time of transaction, etc., reference must be made to the “Points to
Keep in Mind Concerning the Act on Prevention of Transfer of Criminal Proceeds” (Financial Services Agency,
October 2012).
(Note 2) Risk-based approach means that financial institutions, etc. are expected to identify and assess money
laundering and financing of terrorism risks to which they are exposed and take appropriate AML/CFT measures
to mitigate the risks effectively.
(i) Whether the Financial Instruments Business Operator has established a control environment for studying andanalyzing the risk of being exploited in cases of terrorism financing and money laundering, and for properly
conducting measures that take account of the results thereof, based on the Anti-Criminal Proceeds Act.
A. Whether the Financial Instruments Business Operator appropriately studies and analyzes the risk of its
transactions being exploited in cases of terrorism financing and money laundering from the viewpoint of
the nature of the transaction or product and the form of the transaction, the country or region related to thetransaction, and the customer attributes, by taking account of the particulars of the survey of the danger
potential of transfer of criminal proceeds that is prepared and published by the National Public Safety
Commission based on Article 3(3) of the Anti-Criminal Proceeds Act, and prepares a document, etc. that
describes the results of the analysis (hereinafter referred to as the “document, etc. prepared by specificbusiness operators”) and conducts a periodical review thereof.
B. Whether the Financial Instruments Business Operator takes account of the particulars of the document,
etc. prepared by specific business operators, and collects and analyzes the necessary information, as wellas continuously investigating in detail the confirmation records and transaction records it has preserved.
C. When carrying out transactions for which there is especially a strong necessity for conducting rigid
customer management set forth in the first sentence of Article 4(2) of the Anti-Criminal Proceeds Act,
transactions that require special attention in customer management set forth in Article 5 of the Ordinancefor Enforcement of the Act concerning Prevention of Transfer of Criminal Proceeds (hereinafter referred83

to as the “Anti-Criminal Proceeds Act Enforcement Ordinance”), and other transactions that are deemed
to have a high danger potential of terrorism financing and money laundering in consideration of theparticulars of the survey of the potential danger of transfer of criminal proceeds, whether the manager(meaning manager as defined in Article 11(iii) of the Anti-Criminal Proceeds Act; the same shall apply
hereinafter) approves the transaction, and whether the Financial Instruments Business Operator prepares adocument, etc. that describes the results of the collection and analysis of information, and preserves it
along with the conformation record or transaction record.
(ii) Whether the Financial Instruments Business Operator has established a control environment for properly
implementing customer identification based on the Anti-Criminal Proceeds Act.
A. Whether the Financial Instruments Business Operator has established internal rules that specify internalarrangements and procedures for implementing verification at the time of transaction. In addition, whether
it has fully communicated the rules to all officers and employees and ensured their full understanding
thereof.
In particular, the following matters shall be specified:a. The department and manager in charge of implementing verification at the time of transaction and theroles thereof.
b. The department and manager (including a person who makes a final internal decision concerning therelevant operations) in charge of supervising internal administrative processes regarding verification at
the time of transaction, including judgment as to the appropriateness of the verification implemented by
the relevant department, the identification, examination and analysis of the implementation status thereof,
and the roles of the department and manager.
c. Reporting systems at the departments referred to in a. and b. above (including arrangements forcollaboration with other relevant departments).
d. Timely and appropriate compilation and storage of records concerning verification at the time oftransaction for customers and transactions with customers (including the appropriate handling of personal
numbers and basic pension numbers).
B. When implementing verification at the time of transaction, whether the Financial Instruments Business
Operator verifies the credibility and validity of the identity not only by identifying customer attributes
properly, but also by requiring the submission of customer identification documents, for example. Whether
it properly responds to and manages a problem identified in relation to a customer.
Regarding the data of verification at the time of transaction obtained from a customer, whether thebusiness operator constantly strives to keep track of up-to-date customer attributes through ongoing
monitoring of transactions with the customer, for example.
The following are examples of measures that may be implemented in order to identify and keep track ofcustomer attributes:
a. To periodically consolidate customer accounts with the same telephone number or e-mail address, selectfrom among the accounts those for which different addresses or names are registered and check whether
the nominees of the accounts are not fictitious persons by, for example, examining the actual state oftransactions involving the nominee and directly contacting the nominee.
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b. To periodically remind all customers of the need to notify the business operator when there is a change
in their address or other items of data of verification at the time of transaction, thereby grasping any suchchange in a timely manner.
C. Whether the Financial Instruments Business Operator has properly established internal rules that specify
a policy concerning acceptance of customers. In addition, whether it properly applies the said policy to thecustomer attributes identified through the procedures for verification at the time of transaction.
D. Whether the Financial Instruments Business Operator checks the substantial controller of transactions
with corporate customers and whether the customer is a foreign PEP (Note).
(Note) Meaning the head of a foreign country or a person in an important position as set forth in each itemof Article 12(3) of the Order for Enforcement of the Act for Prevention of Transfer of Criminal Proceeds(hereinafter referred to as the “Anti-Criminal Proceeds Act Enforcement Order”) and each item of
Article 15 of the Anti-Criminal Proceeds Act Enforcement Ordinance.
In particular, when conducting transactions for which there is especially a strong necessity for
conducting rigid customer management as mentioned below, based on the first sentence of Article 4(2)of the Anti-Criminal Proceeds Act and each paragraph of Article 12 of the Anti-Criminal Proceeds Act
Enforcement Order, whether (re-)verification at the time of transaction is made in a proper manner (forexample, a customer’s identification matters are confirmed not only in a normal way but also in a morerigid way in which customer identification documents or supplementary documents are additionallyreceived. When confirmation of the conditions of assets and revenues is obligated, whether suchconfirmation is made in a proper manner.
a. A transaction in the case that a counterparty to the transaction is suspected of impersonating a customer,etc., or representative, etc., for whom related verification at the time of the transaction is conducted.
b. A transaction with customer, etc., who is suspected of having falsified matters subject to related
verification at the time of transaction when such verification has been made.
c. A transaction, etc., with a customer, etc., who resides or is located in a country or region in which theestablishment of a system to prevent the transfer or criminal proceeds (as specified under Article 12(2)of the Anti-Criminal Proceeds Act Enforcement Order) is not considered sufficient.
d. A specified transaction with a customer, etc. who is a foreign PEP.
E. Whether the Financial Instruments Business Operator takes measures that take account of the specificcharacteristics of transactions (e.g., transactions conducted over the Internet without any face-to-facecontact) when implementing verification at the time of transaction for customers.
F. When hiring officers and employees, whether the Financial Instruments Business Operator screened
candidates from the viewpoint of, at the minimum, properly implementing anti-terrorism financing andanti-money laundering measures. Also, whether the Financial Instruments Business Operator has
appointed an appropriate person as a manager, such as a management-level compliance manager for antiterrorism financing and anti-money laundering measures.
G. Whether the Financial Instruments Business Operator provides officers and employees with training andeducation concerning verification at the time of transaction on a periodic and ongoing basis. Whether it
evaluates the level of the understanding of the officers and employees receiving training and takes follow85

up measures, when necessary, in light of their implementation of verification at the time of transaction indaily business processes.
H. Whether the Financial Instruments Business Operator ensures the effectiveness of verification at the timeof transaction by identifying and examining the implementation status of the identification throughperiodic internal reviews and internal audits, and by revising and reviewing the implementation method,for example.
(iii) Whether the Financial Instruments Business Operator has established a control environment for properly
implementing the reporting of suspicious transactions based on the Anti-Criminal Proceeds Act.
A. Whether the Financial Instruments Business Operator has established internal rules that specify internalarrangements and procedures for the reporting of suspicious transactions. Also, whether it has fullycommunicated the rules to all officers and employees and ensured their full understanding thereof.
In particular, the following matters shall be specified:a. The department and manager in charge of identifying suspicious transactions and the roles thereof.
b. The department and manager (including a person who makes the final internal decision concerning therelevant reporting) in charge of supervising operations related to the identification of suspicioustransactions within the institution, including the implementation of judgment as to the appropriatenessof suspicious transactions identified through the arrangements and procedures mentioned in A. above
and the identification, examination, and analysis of the implementation status, and the roles of thedepartment and manager.
c. Reporting systems at the departments mentioned in a. and b. above (including arrangements forcollaborating with other relevant departments).
B. Whether the Financial Instruments Business Operator ensures that the supervisory department reports tothe authorities promptly when a certain transaction is judged to constitute a suspicious transaction.
C. In judging whether a certain transaction constitutes a case requiring the reporting of suspicious transactions,
whether the Financial Instruments Business Operator comprehensively takes account of the various
specific information that it has acquired and holds, such as the data of verification at the time of transaction,customer attributes, specific characteristics of the transaction, and the circumstances at the time of thetransaction, as well as the survey of the potential danger of transfer of criminal proceeds, and conducts
appropriate examinations based on Article 8(2) of the Anti-Criminal Proceeds Act and Articles 26 and 27of the Anti-Criminal Proceeds Act Enforcement Ordinance. Whether the business operator properly
responds to and manages any problem identified in relation to the relevant transaction.
(Note 1) Among customer attributes and specific characteristics of the transaction that should be considered
are the customer’s nationality (whether the customer’s home country falls within FATF’s list of noncooperative countries and territories), whether the customer is a foreign PEP, the nature of business inwhich the customer is engaging, the value and number of transactions, and whether it is a foreign ordomestic transaction.
(Note 2) Accumulating data regarding matters that may lead to suspicious transactions and establishingformal criteria for such transactions may serve as an effective means for Financial Instruments
Business Operators to make judgment on whether a certain transaction constitutes a case of suspicious
86transaction. However, if they are to do so, attention must be paid that they make sure tocomprehensively take account of the specific characteristics of each transaction and other various
factors so as to avoid relying exclusively on the said criteria and relegating the reporting procedure toa matter of formality.
D. Whether the Financial Instruments Business Operator detects, monitors and analyzes suspicious customers
and transactions through systems and manuals according to the nature and contents of its own business.
E. When hiring officers and employees, whether the Financial Instruments Business Operator screenscandidates from the viewpoint of, at the minimum, properly implementing anti-terrorism financing andanti-money laundering measures. Also, whether the Financial Instruments Business Operator has
appointed an appropriate person as a manager, such as a management-level compliance manager for antiterrorism financing and anti-money laundering measures.
F. Whether the Financial Instruments Business Operator provides officers and employees with training andeducation concerning the reporting of suspicious transactions on a periodic and ongoing basis. In order topromote understanding by officers and employees, it may be effective to use as a training material the “Listof Referred Cases of Suspicious Transactions” (Refer to the FSA web site), which includes examples that
may constitute cases requiring the reporting of suspicious transactions and examples of past cases in which
Financial Instruments Business Operators actually reported to the authorities.
In addition, whether the business operator evaluates the level of understanding of the officers andemployees receiving training and takes follow-up measures when necessary in light of theirimplementation of reporting in daily business processes.
G. Whether the Financial Instruments Business Operator ensures the effectiveness of the reporting of
suspicious transactions by identifying and examining the implementation status of the reporting throughperiodic internal reviews and internal audits and by reviewing and revising the implementation method,for example.
(iv) Whether the Financial Instruments Business Operator has established an integrated and centralized internal
control environment for judging whether to implement the reporting of suspicious transactions, bycomprehensively taking account of basic customer information

obtained through appropriate

implementation of verification at the time of transaction, the specific characteristics of transactions and othermatters based on the full recognition of the co-relation between verification at the time of transaction and thereporting of suspicious transactions.
(v) Whether overseas offices (branches, subsidiaries, etc.) have a control environment for properly implementing
countermeasures against terrorism financing and money laundering.
A. Whether overseas offices properly implement countermeasures against terrorism financing and money
laundering at the same level as in Japan to the extent permitted by applicable local laws and regulations,etc.
(Note) In particular, overseas offices located in countries or regions where the FATF Recommendations are
not applied or not fully applied must know the fact that they are required to take countermeasures at thesame level as in Japan.
B. If the local obligation to implement countermeasures against terrorism financing and money laundering is
87stricter than in Japan, whether overseas offices implement such stricter local countermeasures.
C. If overseas offices cannot implement appropriate countermeasures against terrorism financing and money
laundering at the same level as in Japan because such countermeasures are prohibited by local applicablelaws and regulations, etc., whether overseas offices immediately provide information on the following to
the Financial Services Agency or the Local Finance Bureau that has jurisdiction over the region where thehead office is located:- The country or region concerned- Specific reasons for the inability to implement appropriate countermeasures against terrorism financing
or money laundering; and- If alternative measures are taken to prevent use for terrorism financing or money laundering, theparticulars thereof.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s internal control environment for verification at the time of transaction, etc. or measures stipulated in the
AML/CFT Guideline through daily supervisory administration or the reporting of problematic conduct, they shallidentify and keep track of the status of voluntary improvement made by the business operator by holding in-depth
hearings and, when necessary, requiring the submission of reports based on Article 56-2 (1) of the FIEA. When the
Financial Instruments Business Operator is deemed to have a serious problem from the viewpoint of protecting
public interests and investors, the supervisors shall take actions such as issuing an order for business improvement
based on Article 51 of the FIEA. When the Financial Instruments Business Operator is deemed to have committed
a serious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52 (1) of the FIEA.
III-2-7 Control Environment for Managing Administrative Risk
(1) Administrative Risk Management
Administrative risk is the risk of Financial Instruments Business Operators and their customers incurring
losses due to their officers and employees failing to conduct administrative work properly, causing accidents orcommitting illegal acts in the course of the administrative work process. Financial instruments business operatorsneed to strive to ensure their reliability and creditworthiness by properly developing an internal control
environment regarding administrative risk and maintaining the soundness and appropriateness of their business
operations. Therefore, supervisors shall pay attention to the following points, for example, when examining a
Financial Instruments Business Operator’s administrative risk management.
(i) Major Supervisory Viewpoints
A. Whether the Financial Instruments Business Operator has developed an appropriate control
environment for managing administrative risk based on the understanding that such risk is involved inall business operations.
B. Whether the Financial Instruments Business Operator has implemented specific measures to reduce88administrative risk based on the recognition of the importance of reducing such risk.
C. Whether the Financial Instruments Business Operator has established a sufficient system of checks andbalances by, for example, ensuring independence of the division in charge of managing administrativerisk from divisions in charge of sales operations. Whether the business operator has specified
procedures regarding administrative processes and reviews and revises them when necessary.
D. Whether the internal audit section properly conducts internal audits in order to examine the control
environment for managing administrative risk. Whether the division in charge of managing
administrative risk has established arrangements and procedures for checking sales divisions’ andbranches’ control environment for managing administrative risk. Whether the administrative risk
management division and the sales divisions and branches cooperate when necessary to improve thestandard of administrative processes.
(2) Outsourcing of Administrative Processes
As Financial Instruments Business Operators are not exempted from the ultimate responsibility regarding
administrative processes outsourced to external contractors, supervisors need to pay attention to the following points,
for example, in light of the business operators’ business profiles, in order to ensure the protection of customers andthe soundness of the business operators’ management. It should be kept in mind that the following points are generalsupervisory viewpoints and that supervisors may need to examine other points, too, depending on the contents of
the outsourced business operations and other factors.
(i) Major Supervisory Viewpoints
A. Whether the Financial Instruments Business Operator has specified a policy and procedures for selecting
the business operations to be outsourced and the contractors to outsource them to.
B. Whether the Financial Instruments Business Operator has developed a control environment that enables
sufficient management of administrative risk regarding outsourced business operations.
C. Whether the Financial Instruments Business Operator has implemented measures to prevent theoutsourcing of business operations from impeding the fulfillment of its obligations to the supervisory
authorities, such as undergoing inspections, making reports and submitting data.
D. Whether the Financial Instruments Business Operator has made it clear that the outsourcing of business
operations does not cause any change in the contractual rights and obligations involving it and its
customers, who continue to have the same rights as if the business operations were conducted by thebusiness operator itself.
E. Whether the Financial Instruments Business Operator has developed a control environment that ensures
the prevention of inconveniences that may be caused to customers should they not be provided theservices guaranteed under their contracts related to outsourced business operations.
F. Whether the Financial Instruments Business Operator has established a system for properly handlingcomplaints and inquiries regarding outsourced business operations by, for example, opening a contact
point through which customers can directly consult the business operator.
(3) Supervisory Method and Actions
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When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for managing administrative risk or for managing the outsourcing of business
operations, through daily supervisory administration or the reporting of problematic conduct, they shall identify andkeep track of the status of voluntary improvement made by the business operator by holding in-depth hearings withthe business operator or the outsourcing contractor and, when necessary, requiring the submission of reports basedon Article 56-2 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to have a serious
problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions such as
issuing an order for business improvement based on Article 51 of the FIEA. When the Financial Instruments
Business Operator is deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including the issuance of an order for business suspension based on Article 52 (1) of the
FIEA.
III-2-8 Control Environment for Managing Information Technology Risk
Information technology risk is the risk that customers and Financial Instruments Business Operators will incur
losses because of a computer system breakdown, malfunction or other inadequacies, or because of inappropriate
or illegal use of computer systems. Information systems used by Financial Instruments Business Operators are
becoming increasingly advanced and complex, in line with the integration of systems due to mergers and othermanagement restructuring moves and an expansion of the range of products and services. This, combined with an
expansion of computer networks, has increased the risk of important information being illegally accessed orleaked.
As secure and stable operation of computer systems is the overriding prerequisite for ensuring publicconfidence in the market for financial instruments and in Financial Instruments Business Operators, it is extremely
important to enhance the control environment for managing information technology risk.
In addition, taking into account the changes in the financial environment in recent years, information technology(IT) strategies of financial institutions have now become priority issues that affect the business models of financial
institutions. Therefore, there is a growing need for financial institutions to consider management strategies and IT
strategies in an integrated manner. From such viewpoint, it has become extremely important that "IT governance,"
which is a mechanism for senior managers to demonstrate leadership, link IT strategies and management strategies,
and create corporate value, functions appropriately. The importance of this point is also the same for Financial
Instruments Business Operators, etc.
(Reference) Discussion Paper on Dialogues and Practices Regarding Financial Institutions’ IT Governance (June2019)(1) Major Supervisory Viewpoints
When examining a Financial Instruments Business Operator’s control environment for managing information
technology risk, supervisors shall pay attention to the following points, for example, in light of the business
operator’s business profile.
(i) Recognition of information technology risk
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A. Whether the board of directors has formulated a basic policy for company-wide management of
information technology risk based on a full recognition of information technology risk.
B. Whether the board of directors recognizes that prevention and efforts for speedy recovery from system
troubles and cybersecurity incidents (hereinafter referred to as "system trouble, etc.") is an important
issue and has developed an appropriate control environment(Note) "Cybersecurity

incidents" refers to instances of cybersecurity being threatened by so-calledcyberattacks, including unauthorized intrusion, theft, modification and destruction ofdata, failure or

malfunction of information systems, execution of illegal computer programs and DDoS attacks,
committed via the Internet through malicious use of information communication networks andinformation systems.
C. Whether the board of directors fully recognizes the importance of information technology risk andhas designated a person who has sufficient knowledge on and experience in computer systems andwho is able to appropriately execute business as an officer that manages computer systems.
D. Whether the board of directors has specified in detail the responsibilities to be fulfilled and themeasures to be taken at a time of crisis in which system trouble, etc. occurs.
In addition, whether it ensures the effectiveness of the responsibilities and measures by, for example,
providing training under its leadership as needed.
(ii) Establishment of Appropriate Control Environment for Risk Management
A. Whether the Financial Instruments Business Operator has specified a basic policy for the managementof information technology risk and developed a relevant control environment. Whether the basic policy
for the management of information technology risk includes a security policy (a basic policy for
appropriately protecting the organization’s information assets) and a policy on outsourced contractors.
B. Whether the Financial Instruments Business Operator has developed its control environment for

managing information technology risk based on guides that allow it to judge the objective levels of
the details of the control environment.
In addition, whether the Financial Instruments Business Operator has constantly reviewed the control
environment for managing information technology risk according to identification and analysis ofsystem trouble, etc., risk management implementation results, and technological progress, etc.
(iii) Assessment of information technology risk
Whether the division managing information technology risk recognizes and assesses risks periodically andin a timely manner by recognizing the fact that risks are becoming diversified due to changes in the external
environment, such as seen in the examples of system troubles induced by large-scale transactions as a result of
increased customer channels and efforts to enhance information networks that bring more diverse and broadbased impact.
Also, whether it is taking sufficient measures to address the risks that have been identified.
(iv) Management of information security
A. Whether the Financial Instruments Business Operator has developed a policy to appropriately manage
information assets, prepared organizational readiness, introduced in-house rules, and developed an internal
control environment. Also, whether it is making continuous efforts to improve its information security
91control environment through the PDCA cycle, taking notice of illegal incidents or lapses at other companies.
B. Whether the company is managing information security by designating individuals responsible for it andclarifying their roles/responsibilities in efforts to maintain the confidentiality,

integrity and availability of

information. Also, whether the individuals responsible for information security are tasked to handle thesecurity of system, data and network management.
C. Whether the company is taking measures to prevent unauthorized use of computer systems, unauthorizedaccess, and intrusion by malicious computer programs such as computer viruses.
D. Whether the Financial Instruments Business Operator identifies important customer information it is
responsible for protecting in a comprehensive manner, keeps its records and manages them.
Whether the Financial Instruments Business Operator, in identifying important customer information, has
set business operations, systems and external contractors as the scope of protection and includes data, suchas listed below, in the scope where it tries to identify those calling for protection.
-Data stored in the areas within the system that are not used in ordinary operations-Data output from the system for analyzing system troubles-Transaction logs stored in ATMs (including those outside of branches), etc.
E. Whether the Financial Instruments Business Operator is assessing importance and risks regarding importantcustomer information that has been identified.
Also, whether it has developed rules to manage information, such as those listed below, in accordancewith the importance and risks of each piece.
-Rules to encrypt or mask information-Rules for utilizing information-Rules on handling data storage media, etc.
F. Whether the Financial Instruments Business Operator has introduced measures to discourage or prevent
unauthorized access, unauthorized retrieval, data leakage, etc. such as listed below, for important customer
information.
-Provision of access authorizations that limits access to the scope necessary for the person's responsibility-Storage and monitoring of access logs
-Introduction of mutual checking functions such as by separating the individuals in charge of development
and those responsible for operations, administrators and those responsible for operations, etc.
G. Whether the Financial Instruments Business Operator has introduced rules for controlling confidential
information, such as encryption and masking. Also, whether it has introduced rules regarding themanagement of encryption programs, encryption keys, and design specifications for encryption programs.
Note that "confidential information" refers to information, such as PIN, passwords, credit card information,etc., whose misuse could lead to losses by customers.
H. Whether the Financial Instruments Business Operator give due consideration to the necessity ofholding/disposing of, restricting access to, and taking outside, of confidential information, and treats suchinformation in a stricter manner.
I. Whether the Financial Instruments Business Operator periodically monitors its information assets to see
whether they are managed properly according to management rules, etc. and reviews the control
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environment on an ongoing basis.
J. Whether the Financial Instruments Business Operator conducts security education (including by external
contractors) to all officers and employees in order to raise awareness of information security.

(Reference) Materials that can be used for ensuring security include “FISC Security Guidelines on
Computer Systems for Banking and Related Financial Institutions” (compiled by the Center for
Financial Industry Information Systems).
(v) Management of cybersecurity
A. Whether the board of directors, etc. recognizes the importance of cybersecurity amid increasingly
sophisticated and cunning cyberattacks and has introduced the necessary control environment.
B. Whether the Financial Instruments Business Operator has introduced systems to maintain cybersecurity,
such as listed below, in addition to making the organization more secure and introducing in-house rules.
-Monitoring systems against cyberattacks-Systems to report cyberattacks and public-relation systems when attacks occur-Emergency measures by Computer Security Incident Response Teams and systems for early detection-Systems of information collection and sharing through information-sharing organizations, etc.
C. Whether the Financial Instruments Business Operator has introduced a multi-layered defence systemagainst cyberattacks that combines security measures respectively for inbound perimeter control, internal
network security control and outbound perimeter control.
-Security measures for inbound perimeter control (e.g. introduction of a firewall, anti-virus software,
Instruction Detection System, Instruction Protection System etc.)-Security measures for internal network securitycontrol (e.g. proper management of privileged
IDs/passwords, deletion of unnecessary IDs, monitoring of execution of certain commands, etc.)-Security measures for outbound perimeter control (e.g. retrieval and analysis of communication/event logs,
detecting/blocking inappropriate communication, etc.)
D. Whether measures such as listed below are implemented to prevent damage from expanding whencyberattacks occur-Identification of IP addresses from which the cyberattacks originate and blocking off of attacks-Functions to automatically spread out accesses when under DDoS attacks-Suspension of the entire system or its part, etc.
E. Whether necessary measures for vulnerabilities in the system, such as updating of the operating system andapplication of security patches, are introduced in a timely manner.
F. Whether the Financial Instruments Business Operator is, as part of cybersecurity measures, assessing its
security levels by taking advantage of tests on network intrusion, vulnerability scanning or penetration tests,
etc. and making efforts to improve security.
G. Whether the Financial Instruments Business Operator, when executing transactions using communication
methods such as the Internet without any face-to-face contact, has introduced appropriate authentication
methods in line with the risks associated with such transactions, such as listed below.
-Authentication methods that do not rely on fixed IDs/passwords, such as variable passwords and digital
certificates93

-Transaction authentication through multiple channels by using, for example, devices other than the PC web
browser used in transactions, such as a mobile phone-Transaction authentication using transaction signatures by means of a hardware token, etc.
(Note) If measures to prevent illegal withdrawals from customer accounts through unauthorized access (e.g.
when, in services to designate or change the accounts to which money can be transferred, changes toaccounts of holders different from the customer are not allowed, and measures are introduced to prevent
transfers to accounts of a holder who is not the customer, for example by sending an application form fordesignating/changing accounts to the customer's address by transfer-prohibited mail) are implemented,
the Financial Instruments Business Operator is deemed to have introduced measures in line with the risks
associated with such transactions.
H. Whether the Financial Instruments Business Operator, when executing transactions using communication
methods without any face-to-face contact, such as the Internet, has introduced preventative measures in linewith operations, such as listed below.
-Provision of security software that allows the user to detect and remove viruses, etc. when executing
transactions-Introduction of software that allows the Financial Instruments Business Operator to detect virus infectionof the user's PC and issue a warning-Adoption of methods to store digital certificates in mediums or devices separate from PCs used intransactions, such as IC cards-Introduction of a system that allows the Financial Instruments Business Operator to detect unauthorized
log-ins, abnormal transactions, etc. and immediately notify such anomalies to users
I. Whether the Financial Instruments Business Operator has developed contingency plans against potential
cyberattacks, conducts exercises and reviews such plans. Also, whether it participates in industry-wide
exercises as necessary.
J. Whether the Financial Instruments Business Operator has formulated plans to train and expand the personnel
responsible for cybersecurity and implements them.
(vi) System planning/development/management
A. Whether the Financial Instruments Business Operator has clearly established a policy for system strategy
as part of its business strategy and developed medium- to long-term development plans. Also, whether suchmedium- to long-term development plans are approved by the board of directors.
B. Whether the Financial Instruments Business Operator is making continuous efforts to identify the risks
inherent in the current system and making scheduled investment to maintain and improve it.
C. Whether rules to authorize plans, development and transitions of development projects are clearly
established.
D. Whether individuals responsible for development projects are designated and progress of the development
plans are managed accordingly.
E. Whether the Financial Instruments Business Operator works out plans to test the system and its systemdevelopment efforts and conducts tests in an appropriate and sufficient manner, such as by involving user
divisions in them.
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F. Whether the Financial Instruments Business Operator works out specific plans for the current system
structure and development technology to be inherited and to train specialized personnel, and implementsthem(vii) Computer System Audits
A. Whether an internal audit section that is independent from the computer system division conducts
periodic audits of the computer system.
B. Whether the Financial Instruments Business Operator conducts internal audits by subject matter about
computer systems and is taking of external audits by information system auditors.
C. Whether the audited division accounts for all business operations involving information technology risk.

D. Are the results of computer system audits properly reported to the board of directors?
(viii) Management of Outsourcing of Business Operations
A. Whether the Financial Instruments Business Operator is assessing outsourced contractors (including
system-related subsidiaries) against selection standards, giving careful consideration and selecting them.
B. Whether the Financial Instruments Business Operator sets out division of roles and responsibilities withoutsourced contractors, supervising authority of auditors, procedures to renew contracts, level of services
provided, etc. in outsourcing contracts. Also whether the Financial Instruments Business Operator presents
to outsourced contractors rules their officers and employees are required to adhere to and security
requirements, as well as defines them in contract forms, etc.
C. Whether risk management is carried out properly in outsourced system-related work (including work further
subcontracted). In particular, whether the Financial Instruments Business Operator has risk management
arrangements and procedures that have been developed with full awareness that a higher level of risk
management is required when there are multiple outsourced contractors as the management work becomes
more complicated.
And whether risk management is carried out properly in system-related office functions contracted out, asin system-related work..
D. Whether the Financial Instruments Business Operator, as a consigner, periodically checks to confirm that
outsourced work (including work further subcontracted) is carried out appropriately.
Also, whether there is a system that allows the consigner to monitor and track the status of customer data
being processed at outsourced contractors(ix) Contingency Plan
A. Whether the Financial Instruments Business Operator has formulated a contingency plan and has
established arrangements and procedures for dealing with emergencies.
B. Whether the Financial Instruments Business Operator is basing the details of its contingency plan on guides
that allows it to judge objective levels of its details (such as "Guide to Formulate Contingency Plans at
Financial Institutions" compiled by the Center for Financial Industry Information Systems)
C. Whether the Financial Instruments Business Operator, in developing a contingency plan, assumes not only
contingencies due to natural disasters but also system troubles, etc. due to internal or external factors.
Also, whether it assumes risk scenarios of sufficient extent for cases such as a major delay in batchprocessing.
95

D. Whether the Financial Instruments Business Operator reviews assumed scenarios in its contingency plan by,
for example, taking into consideration case studies of system troubles at other financial institutions andresults of deliberations at the Central Disaster Management Council, etc.
E. Whether exercises in accordance with the contingency plan involve the entire company and are periodicallyconducted jointly with outsourced contractors, etc.
F. Whether off-site backup systems, etc. are introduced for important systems whose failure could seriously
affect business operations, and that a control environment is in place to address disasters, system troubles,
etc. so that normal business operations can be speedily brought back.
(x) System Integration Risk / Project Management
A. Whether the Financial Instruments Business Operator has developed a control environment for
managing system integration risk by ensuring that its officers and employees fully recognize the risk.
B. Whether the Financial Instruments Business Operator has established arrangements and procedures for
conducting tests. Whether its test plan is suited to the nature of the system development necessitated by
the system integration.
C. Whether the Financial Instruments Business Operator has established a control environment that enables
itself to be proactively involved in the system integration when this task is outsourced.
D. Whether the Financial Instruments Business Operator makes use of third-party evaluation, such as
evaluation by a system auditor, when making judgment regarding important matters related to the system
integration.
E. Whether the Financial Instruments Business Operator has developed a contingency plan for dealing withan unexpected incident.
(Reference) As for supervisory viewpoints in examining system integration risk / project management,“Approach to and Viewpoints Concerning the Control Environment for Managing System Integration Risk
(Detailed Description)” attached to the Discussion Paper on Dialogues and Practices Regarding Financial
Institutions’ IT Governance (June 2019) could also serve as a reference.
(xi) Actions to System Troubles
A. Whether the Financial Instruments Business Operator is prepared to implement appropriate measures toavoid causing unnecessary confusion among customers when system troubles, etc. occur and take actions to
speedily recover the system or activate alternative measures.
Also, whether it has developed a worst-case scenario in preparation for system troubles and is prepared totake necessary measures accordingly.
B. Whether the Financial Instruments Business Operator has prepared procedures that also subjects outsourced
contractors to reporting system troubles, and has a clearly defined system of command and supervision.
C. Whether the Financial Instruments Business Operator is prepared to immediately notify the representative
director and other directors when a system trouble that may significantly affect business operations occurs,
and report the largest potential risk it poses under the worst-case scenario (for example, if there is apossibility that the failure could gravely affect customers, the reporting persons should not underestimate
the risk but immediately report the biggest risk scenario).
96

In addition, whether it is prepared to launch a task force, have the representative director issue appropriate
instructions and orders, and seek resolution of the issue in a swift manner.
D.When system trouble, etc. occurs, whether the Financial Instruments Business Operator publicizes thedetails of the trouble, the cause of occurrence, expectation of restoration, etc. as needed, and promptly
establishes a call center to precisely respond to inquiries from customers.
In addition, whether the method and contents of information provision to related business divisions
have been made clear to prepare for the occurrence of system trouble, etc.
E. Whether the Financial Instruments Business Operator precisely carries out investigation of the cause of thesystem trouble, etc., investigation of the impact the system trouble, etc. has until the restoration,
improvement measures, measures to prevent recurrence, etc.
Also, whether it periodically analyzes tendencies of factors that have led to system trouble, etc. andintroduces measures to address them.

F. Whether the Financial Instruments Business Operator has developed a systemic mechanism, such as
circumventing the troubled part, in order to minimize the impact of system trouble, etc.
G. Whether the Financial Instruments Business Operator has established arrangements and procedures for
immediately reporting system trouble, etc. to the authorities.

(Reference) Reference materials on information technology risk include “FISC Security Guidelines on
Computer Systems for Banking and Related Financial Institutions” (compiled by the Center for
Financial Industry Information Systems).
(2) Supervisory Method and Actions(i) At the Time of Problem Recognition
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments
Business Operator’s control environment for managing information technology risk, through daily
supervisory administration or the reporting of problematic conduct, they shall identify and keep track of thestatus of voluntary improvement made by the business operator, by holding in-depth hearings with thebusiness operator and the outsourcing contractor and, when necessary, requiring the submission of reports
based on Article 56-2 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to havea serious problem from the viewpoint of protecting public interests and investors, the supervisors shall takeactions such as issuing an order for business improvement, etc., based on Article 51 and 52(1) of the FIEA.
(ii) At the Time of System Integration
When Financial Instruments Business Operators have announced plans to integrate computer systems as
part of planned mergers and other management restructuring moves, they shall be required, as necessary, tosubmit specific plans for smoothly implementing the system integration, including the schedules andtimetables, and documents regarding the internal control environment for managing information technology
risk (including internal audits) and other matters, as well as to continue periodically submitting reports basedon Article 56-2(1) of the FIEA until the integration is completed.
(3) In times of system trouble
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(i) Financial Instruments Business Operators shall be required to notify the authorities of the occurrence of any
computer system trouble and cyber security incidents as soon as they have recognized it, and submit a “Reporton Problem Occurrence, etc.” (in the format specified in Attached List of Formats III-1) to the authorities.
After the computer system operation has been restored to normal and the cause of the problem has been
identified, they shall be required to report to the authorities again (It should be kept in mind that they shall be
required to report to the authorities on the current state within one month even if the computer system
operation has not been restored to normal or the cause of the problem has not been identified within the onemonth period.)
It should be noted that when a Local Finance Bureau has received a report from a Financial Instruments
Business Operator, it shall immediately notify the FSA division in charge.
(Note) Computer System Trouble Subject to Reporting to the Authorities
Problems that must be reported to the authorities are those which affect systems and equipment(including both hardware and software) used by Financial Instruments Business Operators andcontractors undertaking business operations outsourced by Financial Instruments Business Operators,
and which could affect the business operators’ abilities to identify and keep track of the status of financial
instruments transactions, financial settlements, cash deposits and withdrawals, fund-raising andfinancial conditions, and undermine customer convenience in other ways.
However, the reporting requirement is not applicable to such system troubles in cases where abackup system has started up and effectively prevented adverse effects. (For example, when an ordertaking system has broken down in off-market hours but a backup system has quickly started up to takeorders in time for the start of market hours, a report is not necessary.)
It should be noted that even if any computer system troubles have not occurred, a report must be
made in cases where customers and business operations are affected or the probability that these may
be affected is deemed to be high, including cases where a Financial Instruments Business Operator hasreceived a warning of a cyber attack on its computer system or where it has detected the possibility ofsuch an attack.
(ii) A Financial Instruments Business Operator who has reported computer system troubles to the authorities
shall be required to submit an additional report based on Article 56-2(1) of the FIEA when necessary. Whenthe business operator is deemed to have a serious problem from the viewpoint of protecting public interestsand customers, the authorities shall take actions such as issuing an order for business improvement based on
Article 51 of the FIEA. When the business operator is deemed to have committed a serious and malicious
violation of law, the authorities shall consider necessary actions, including the issuance of an order for businesssuspension based on Article 52 (1) of the FIEA.
III-2-9 Control Environment for Crisis Management
Given the increased diversity and complexity of risks faced by Financial Instruments Business Operators andchanges in the business environment for them in recent years, such as the increasing use of information systems,
the possibility cannot be denied that a crisis that cannot be dealt with by ordinary methods of risk management will
occur, which means that crisis management has become more important than ever. It is desirable that if risk has
98materialized at a Financial Instruments Business Operator, the business operator avoids causing unnecessary
disruptions to market and social activities by maintaining its functions as much as possible. With this in mind, whensupervising a Financial Instruments Business Operator, supervisors shall pay attention to the following points, forexample, in light of the business operator’s business profile.
(1) Major Supervisory Viewpoints(i) Preparations to Be Made in Normal Times
A. Whether the Financial Instruments Business Operator recognizes what constitutes an emergency and is
striving as much as possible to prevent or guard against any emergency (prepare countermeasures against
an emergency that may be unpreventable) by, for example, conducting inspections and anti-crisis
practices periodically in normal times.
B. Whether the Financial Instruments Business Operator has formulated a crisis management manual.
Whether it has established a control environment that maintains the effectiveness of the crisis
management manual by, for example, constantly reviewing and revising it in light of the actual state ofits business operations and its risk environment. It should be noted that it is desirable that Financial
Instruments Business Operators use objective benchmarks as a basis for the formulation of their crisis
management manuals(Reference) Examples of Conceivable Emergency-

Natural disasters (earthquakes, typhoons, abnormal weather, epidemics of infectious diseases)-

Acts of terrorism and wars (including those that occur outside Japan)-

Accidents (large-scale power failures, computer system breakdowns, etc.)-

Unfounded rumors (word-of mouth rumors, Internet messages, e-mail messages, news articles
based on speculation, etc.)-

Crimes committed against Financial Instruments Business Operators (blackmail, intervention byanti-social forces, data theft and abduction of officers or employees)-

Problems involved in business processes (inappropriate response to complaints and inquiries,
errors in data entry, etc.)-

Problems related to personnel management affairs (accidents and crimes involving officers andemployees, internal disputes, sexual harassment cases, etc.)-

Problems related to labor affairs (cases of whistle-blowing, deaths from excessive workloads,
occupational diseases, drain of human resources, etc.)

C. Whether the crisis management manual notes the importance of initial responses, such as accurate
identification and objective judgment of the situation and dissemination of information in the period
immediately after the occurrence of the emergency.
D. Whether the crisis management manual clarifies the allocation of responsibilities in the event of an
emergency and specifies arrangements and procedures for reporting the occurrence of the emergency
throughout the institution and to other parties concerned (including the relevant authorities). Whether
the crisis management manual specifies arrangements and procedures for reporting the occurrence ofan emergency to relevant overseas organizations, including overseas supervisory authorities,
99

depending on the extent of its possible impact abroad as well as its level and type. It is desirable thatanti-crisis arrangements and procedures be established under the supervision of the crisis
management headquarters that oversees institution-wide response in light of the levels and types of
emergencies assumed for each division and branch.
E. Whether the Financial Instruments Business Operator is striving to disseminate and gather informationin normal times in a conscientious manner.
(ii) Actions to Emergencies
A. When supervisors have recognized the occurrence of an emergency or the possibility of an emergency
occurring, they shall hold hearings periodically and check the situation first-hand so that they canidentify and keep track of how the relevant Financial Instruments Business Operator is responding to
the emergency, including whether the response (status of the development of a control environment forcrisis management, communications with relevant parties and dissemination of information) is sufficientin light of the level and type of the emergency, until the situation is stabilized. In addition, they shallrequire the submission of a report based on Article 56-2(1) of the FIEA when necessary.
B. In the above case, supervisors shall make sure to maintain close cooperation with relevant departments
and sections, by, for example, immediately reporting to the FSA division in charge.
(iii) Post-Crisis Actions
In cases where supervisors have concluded, after the emergency has been brought under control, that it isnecessary to examine the Financial Instruments Business Operator’s response to the emergency, they shallrequire the business operator, under Article 56-2 (1) of the FIEA, to submit a report regarding the outline of
the emergency, its response, the analysis of the cause and measures to prevent a recurrence.
(iv) Control Environment for Crisis Management Regarding Reputational Risk
A. Whether the Financial Instruments Business Operator has developed a control environment for
managing reputational risk. Whether it has specified how the headquarters, divisions and sales offices
should respond to the circulation of unfounded rumors. It is desirable that Financial Instruments
Business Operators consider how to respond when unfounded rumors regarding other business
operators or their business clients are circulated.
B. Whether the Financial Instruments Business Operator regularly checks whether there are unfounded
rumors circulating in each media category (e.g. Internet messages, news articles based on speculation).
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s control environment for crisis management, through daily supervisory administration or the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by the business
operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on Article 562 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions such as issuing an order forbusiness improvement based on Article 51 of the FIEA. When the Financial Instruments Business Operator isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,100

including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
III-2-10 Measures to Prevent Violation of Law by Financial Instruments Intermediary Service Providers(1) Points of Attention Regarding Prevention of Violation of Law by Financial Instruments Intermediary Service
Providers
When Financial Instruments Business Operators entrust businesses to financial instruments intermediary service
providers, it is important for them to give guidance on the development of a control environment for customer
management that enables the intermediary service providers to precisely identify the attributes of customers and theactual state of transactions from the viewpoint of ensuring appropriate investment solicitation suited to the attributes.
It is also important for Financial Instruments Business Operators to identify the actual state of investment solicitation
by financial instruments intermediary service providers and urge them to ensure thorough legal compliance. In
examining a Financial Instruments Business Operator’s control environment for preventing violation of law byfinancial instruments intermediary service providers, supervisors shall pay attention to the following points inparticular:(i) Precise Identification of Customer Attributes and Thorough Management of Customer Information
A. Whether the Financial Instruments Business Operator shares information regarding the attributes andinvestment experiences of customers with the entrusted financial instruments intermediary service
provider only when it has obtained the customers’ consent, and whether it gives the intermediary service
provider guidance on how to identify customer attributes as necessary. Whether the Financial
Instruments Business Operator has prescribed specific procedures for the intermediary service provider
to solicit customers in an appropriate manner suited to the attributes of the customers, has communicatedthe procedures to the intermediary service provider, and strives to ensure compliance therewith.
B. Whether the Financial Instruments Business Operator has prescribed specific guidelines for the financial
intermediary service provider to manage customer information, such as customer attributes, based on
careful deliberations made from the viewpoint of the confidentiality obligation, and has communicated
the guidelines to the intermediary service provider and strives to ensure compliance therewith.
C. Whether the division in charge of customer due diligence strives to keep track of the Financial
Instruments Business Operator’s status concerning the identification of customer attributes and the
management of customer information, and also establish a control environment that ensures theeffectiveness of customer information management by examining, as necessary, whether customer
solicitation is conducted in an appropriate manner in light of the attributes of the relevant customers,
and by requesting revisions of the method of customer information management, for example.
(ii) Identification of the Actual State of Financial Instruments Intermediary Service Provider’s Solicitation for
Investment and Efforts to Ensure Appropriate Solicitation
A. Whether the manager of the division in charge of customer due diligence, for example, strives to identify
and keep track of the actual state of the entrusted financial instruments intermediary service provider’ssolicitation for investment by directly holding interviews with customers and taking appropriate
measures when necessary.
101B. Whether the division in charge of customer due diligence has prescribed a specific method for
identifying and keeping track of the actual state of the financial instruments intermediary service
provider’s solicitation for investment and has communicated the method to them, and is striving toestablish a control environment that ensures the effectiveness of the method by identifying andexamining the implementation and reviewing and revising the method when necessary.
C. Whether the division in charge of customer due diligence checks whether the entrusted financial
instruments intermediary service provider provides appropriate explanations, and requests improvement
and takes other measures when necessary.
(iii) Efforts to Foster and Maintain Sense of Compliance at Financial Instruments Intermediary Service
ProvidersA. Whether the Financial Instruments Business Operator provides case study training, external training andother types of training with a view to enhancing the entrusted financial instruments intermediary service
provider’s sense of compliance.
B. Whether the division in charge of customer due diligence strives to enhance the effectiveness of training
by, for example, identifying and examining the contents of training programs and the implementation
thereof and reviewing and revising the contents when necessary.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a Financial Instruments Business
Operator’s measures to prevent violation of law by an entrusted financial instruments intermediary service provider,through daily supervisory administration or the reporting of problematic conduct, they shall identify and keep trackof the status of voluntary improvement made by the business operator by holding in-depth hearings and, whennecessary, requiring the submission of reports based on Article 56-2 (1) of the FIEA. When the Financial Instruments
Business Operator is deemed to have a serious problem from the viewpoint of protecting public interests andinvestors, the supervisors shall take actions such as issuing an order for business improvement based on Article 51of the FIEA. When the Financial Instruments Business Operator is deemed to have committed a serious andmalicious violation of law, the supervisors shall consider necessary actions, including the issuance of an order forbusiness suspension based on Article 52 (1) of the FIEA.
III-2-11 Prevention of Damage that May be Inflicted by Anti-Social Forces(1) Significance
Eliminating anti-social forces from society is a task critical to ensuring the order and safety of society, so it isnecessary and important for corporations to promote efforts to ban any relations with anti-social forces from theviewpoint of fulfilling their social responsibility. In particular, as Financial Instruments Business Operators have apublic nature and play an important economic role, they need to exclude anti-social forces from financial
instruments transactions in order to prevent damage from being inflicted not only on their officers and employees
but also on their customers and other stakeholders.
Needless to say, if Financial Instruments Business Operators are to retain public confidence and maintain the102soundness and appropriateness of their business operations, it is essential that they deal with anti-social forces inaccordance with laws and regulations without bowing to pressure from them. Therefore, Financial Instruments
Business Operators must strive, on a daily basis, to develop a control environment for banning any relations with
anti-social forces in accordance with the purpose of the “Guideline for How Companies Prevent Damage from AntiSocial Forces” (agreed upon at a meeting on June 19, 2007 of cabinet ministers responsible for anti-crime measures).
In particular, anti-social forces have become increasingly sophisticated in their efforts to obtain funds, disguising
their dealings as legitimate economic transactions through the use of affiliated companies in order to develop
business relations with ordinary companies. In some cases, the relations thus developed eventually lead to problems.
There are also cases in which anti-social forces such as “boryokudan” crime syndicates intervene in the financial
instruments market through initial public offering in stock markets for emerging companies and through equity
financing deals in markets for listed companies in an attempt to obtain funds. In order to deal with such cases
properly, the management teams of Financial Instruments Business Operators need to take a resolute stance andimplement specific countermeasures.
It should be noted that if a Financial Instruments Business Operator delays specific actions to resolve a problem
involving anti-social forces on the grounds that unexpected situations, such as the safety of officers and employees
being threatened, could otherwise arise, the delay could increase the extent of the damage that may be ultimately
inflicted on the business operator.
(Reference) “Guideline for How Companies Prevent Damage from Anti-Social Forces” (agreed upon at a meetingon June 19, 2007 of cabinet ministers responsible for anti-crime measures)(i) Basic principles on Prevention of Damage That May be Inflicted by Anti-Social Forces-

Institutional response-

Cooperation with external expert organizations-

Ban on any relations, including transactions, with anti-social forces-

Legal responses, both civil and criminal, in the event of an emergency-

Prohibition of engagement in secret transactions with and provision of funds to anti-social forces(ii) Identification of anti-social forces
In judging whether specific groups or individuals constitute “anti-social forces,” which are defined asgroups or individuals that pursue economic profits through the use of violence, threats and fraud, it isnecessary not only to pay attention to whether they fit the definition in terms of their affiliation, such aswhether they constitute or belong to “boryokudan” crime syndicates, “boryokudan” affiliated companies,“sokaiya” racketeer groups, groups engaging in criminal activities under the pretext of conducting social
campaigns or political activities and crime groups specialized in intellectual crimes, but also to whether they
fit the definition in terms of the nature of their conduct, such as whether they are making unreasonable
demands that go beyond the limits of legal liability. (Refer to the “Key Points of Measures against Organized
Crime,” a directive issued in the name of the Deputy Commissioner-General of the National Police Agency
on December 22, 2011.)(2) Major Supervisory Viewpoints
The Financial Instruments Business Operator should not have any relations with anti-social forces and, in cases
103where it has established a relationship with an anti-social force unwittingly, supervisors, while also giving
consideration to the characteristics of specific transactions, shall pay attention to such as the following points inorder to examine its control environment for banning any relations with anti-social forces as soon as possible after
the counterparty has been found to be an anti-social force and its control environment for dealing with unreasonable
demands by anti-social forces appropriately.
(i) Institutional response
In light of the need and importance of an action to ban any relationship with anti-social forces organically,
whether the responsibility of responding to the situation is not left solely to the relevant individuals or
divisions but the management including directors are appropriately involved, and there is a policy for theentire organization to respond. In addition, whether there is a policy calling for the corporate group as a whole,
not just the involved Financial Instruments Business Operator alone, to take on an effort to prevent any
relationship with anti-social forces.
(ii) Developing of a Centralized Control Environment through anti-social forces response division
Whether the Financial Instruments Business Operator has established a division in charge of supervising
responses to ban any relationship with anti-social forces (hereinafter referred to as the “anti-social forces
response division”) so as to develop a centralized control environment for preventing anti-social forces frominflicting damage, and whether this division is properly functioning.
In particular, whether the Financial Instruments Business Operator pays sufficient attention to thefollowing points in developing the centralized control environment.
A. Whether the anti-social forces response division is actively collecting and analyzing information on antisocial forces and has developed a database to manage such information in a centralized manner and has
a system to appropriately update it (i.e., addition, deletion or change of information in the database).
Further, whether the division is making efforts to share information within the group in the process ofcollecting and analyzing such information, while making appropriate use of information provided by
self-regulatory organizations, etc. Whether the anti-social forces response division has a system to takeadvantage of information on anti-social forces for screening counterparties of transactions andevaluating the attributes of shareholders of the Financial Instruments Business Operator.
B. Whether the Financial Instruments Business Operator makes sure to maintain the effectiveness ofmeasures to ban any relations with anti-social forces by, for example, having the anti-social forces
response division develop a manual for dealing with anti-social forces, provide on-going training, foster
cooperative relationships with external expert organizations such as the police, the National Center for
the Elimination of Boryokudan and lawyers on an ongoing basis. In particular, whether the Financial
Instruments Business Operator is prepared to report to the police immediately when it faces theimminent prospect of being threatened or becoming the target of an act of violence, by maintaining close
communications with the police on a daily basis so as to develop a systematic reporting system andbuild a relationship that facilitates cooperation in the event of a problem.
C. Whether the Financial Instruments Business Operator has a structure in which relevant information isswiftly and appropriately conveyed to the anti-social forces response division for consultation whentransactions with anti-social forces are found or such forces have made unreasonable demands. Further,104

whether the anti-social forces response division has a structure to swiftly and appropriately report
relevant information to the management. In addition, whether the anti-social forces response division
has a structure to ensure the safety of individuals encountering anti-social forces in person and to support
divisions involved in dealing with them.
(iii) Execution of Appropriate Prior Screening
Whether the Financial Instruments Business Operator bans allowing anti-social forces to become acounterparty to a transaction by conducting appropriate advance screening using information on such forcesin order to prevent transactions with anti-social forces, and makes sure provisions regarding the exclusion of“boryokudan” crime syndicates are introduced in all contracts and terms of transactions.
(iv) Execution of Appropriate Follow-up Review
Whether, for the purpose of making sure any relationships with anti-social forces are eliminated, there isa structure to conduct an appropriate follow-up review on existing contracts.
(v) Measures to Terminate Transactions with Anti-Social Forces
A. Whether the Financial Instruments Business Operator has a system under which information confirming
the existence of a transaction with anti-social forces is swiftly and appropriately reported to the
management, including directors, etc., via the anti-social forces response division, and responds to thesituation under appropriate directions and involvement by the management.
B. Whether the Financial Instruments Business Operator regularly communicates with external expert
organizations, including the police, the National Center for the Elimination of Boryokudan, lawyers andso forth, and promotes efforts to eliminate any transactions with anti-social forces.
C. Whether the Financial Instruments Business Operator, when it has learned through a follow-up review
after initiating a transaction that the counterparty is a member of an anti-social force, takes measures toprevent the provision of benefits to anti-social forces, such as terminating relationships with such forces.
D. Whether the Financial Instruments Business Operator has a structure to prevent providing funds orengaging in inappropriate or unusual transactions for whatever reason if the counterparty has been foundto be an anti-social force.
(vi) Dealing with Unreasonable Demands by Anti-Social Forces
A. Whether the Financial Instruments Business Operator has a system under which the information that antisocial forces have made unreasonable demands is swiftly and appropriately reported to the management,
including directors, etc., via the anti-social forces response division, and responds to the situation underappropriate directions and involvement by the management.
B. Whether the Financial Instruments Business Operator actively consults external expert organizations suchas the police, the National Center for the Elimination of Boryokudan, and lawyers, when anti-social
forces make unreasonable demands, and responds to such unreasonable demands based on guidelines
set by the National Center for the Elimination of Boryokudan and other organizations. In particular,
whether the operator has a structure to report to the police immediately when there is an imminent
prospect of a threat being made or an act of violence being committed.
C. Whether the Financial Instruments Business Operator, in response to unreasonable demands by antisocial forces, has a policy to take every possible civil legal action and to avoid hesitating to seek the105

initiation of criminal legal action by pro-actively reporting damage to the authorities.
D. Whether the Financial Instruments Business Operator ensures that the division in charge of handlingproblematic conduct promptly conducts a fact-finding investigation upon request from the anti-social
forces response division, in cases where unreasonable demands from anti-social forces are based on
problematic conduct related to business activity or involving an officer or employee.
(vii) Management of Shareholder Information
Whether the Financial Instruments Business Operator manages shareholder information properly, throughmeans such as checking the transaction status of its own shares and examining information regarding theattributes of its shareholders.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a financial institution’s control
environment for banning any relations with anti-social forces, through inspection and daily supervisoryadministration, they shall identify and keep track of the status of voluntary improvement made by the business
operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on Article 562 (1) of the FIEA. When the Financial Instruments Business Operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, because its internal control environment is extremely fragile,as shown by, for example, a failure to take appropriate steps toward dissolving relations with anti-social forces
despite recognizing the provision of funds thereto and the presence of inappropriate business relations therewith,supervisors shall take actions such as issuing an order for business improvement based on Article 51 of the FIEA.
When the Financial Instruments Business Operator is deemed to have committed a serious and malicious violationof law, the supervisors shall consider taking strict actions based on Article 52 (1) of the FIEA.
III-2-12 Information Disclosure Regarding Corporate Social Responsibility (CSR), etc.
(1) Significance(i) CSR is a concept generally interpreted to include the economic, environmental and social responsibilities acompany recognizes in relation to its diverse range of stakeholders, and activities conducted on the basis of
those responsibilities. CSR is significant in that the company can enhance its sustainability by fulfilling those
responsibilities.
(ii) It should be left to individual Financial Instruments Business Operators to decide, based on the principle ofself-responsibility, not only whether to engage in CSR activity but also whether to make information
disclosure regarding such activity. Evaluation of a Financial Instruments Business Operator’s CSR activity
should be made by users and other stakeholders under the principle of market discipline.
(iii) However, if easy-to-understand information disclosure regarding CSR activity is made in a timely andappropriate manner, users are expected to more easily obtain information useful for judging the sustainabilityof business operators and their financial products and services when deciding which business operators tomake transactions with. From this viewpoint, by clarifying supervisory viewpoints regarding CSR-related
information disclosure by Financial Instruments Business Operators as a minimum standard, supervisors shall106

promote information disclosure that is appropriate and useful for users.
(2) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator makes information disclosure appropriate from theviewpoints of the following matters in order to enable a diverse range of stakeholders, including users, to properly
evaluate its CSR and to contribute to the improvement of the convenience for users.
(i) Suitability with Objective
Whether the Financial Instruments Business Operator’s CSR report comprehensively covers the fields of
economy, environment and society and whether its contents suit the objective of meeting the needs of a diverse
range of stakeholders, including users, by using comprehensive descriptions and reflecting social backgrounds.
Whether disclosure is made in a timely and effective manner.
(ii) Reliability
Whether the Financial Instruments Business Operator compiles its CSR report through a transparent
process and uses precise and objective data and information, thereby ensuring that the report is highly reliable
and widely acceptable.
(iii) Readability
Whether the Financial Instruments Business Operator strives to make its CSR report as easy-to-understandas possible so that a diverse range of stakeholders, including users, can understand it. Whether the Financial
Instruments Business Operator pays sufficient attention to the need to enable comparison between recent andpast reports by, for example, maintaining consistency.
(3) Supervisory Method and Actions
A Financial Instruments Business Operator’s CSR-oriented efforts and information disclosure are voluntary
activities made in accordance with management decisions based on the principle of self-responsibility. Therefore,
even if the business operator’s CSR report fails to take account of the above supervisory viewpoints, supervisors do
not need to take supervisory measures.
However, in cases where information disclosure is imprecise or inappropriate, the disclosure practice shall be
examined from the viewpoint of the appropriateness of business operations.
III-2-13 Response to Disabled Persons(1) The Act Concerning the Promotion of Elimination of Discrimination on the Grounds of Disabilities (Law No.
65 of 2013; hereinafter referred to as the “Disabled Persons Anti-Discrimination Act”) imposes prohibition of
discriminatory treatment and best-effort obligations for reasonable accommodation of disabled persons on business
operators.
With regard to Financial Instruments Business Operators, specific treatments are indicated in the “Guidelines
for the Promotion of Elimination of Discrimination on the Grounds of Disabilities in Business Fields Under theJurisdiction of the Financial Services Agency” (Notice No. 3 of 2016; hereinafter referred to as the “Disabled
Persons Anti-Discrimination Guidelines”).
107Supervisors shall pay attention to matters such as whether, in responding to disabled persons, the business
operator has developed an internal control environment such as making appropriate responses in accordance with
the Disabled Persons Anti-Discrimination Act and the Disabled Persons Anti-Discrimination Guidelines, including
customer protection and user convenience perspectives, as well as grasping and examining the status of the
responses and reviewing response methods.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding responses to disabled persons by
Financial Instruments Business Operators, through daily supervisory administration or complaints from disabled
persons, they shall check the status of the development of an internal control environment by holding in-depth
hearings with the business operator. When there is doubt about the development status of the internal control
environment at a Financial Instruments Business Operator, supervisors shall request reporting (including reports
based on the provisions of Article 56-2(1) of the FIEA) and examine the situation as needed. If said development
status is deemed problematic, the supervisor shall urge improvement.
III-2-14 Points of Attention Regarding Crypto-and Other Assets
While the design and specifications of crypto-and other assets (meaning the crypto-and other assets prescribedin Article 2(24)(iii)-2 of the FIEA; the same shall apply hereinafter) are varied, some crypto-and other assets havea high risk of being exploited in cases of terrorism financing and money laundering, such as those of which thetransactions are difficult to trace because the transfer records are not disclosed. Generally, crypto-and other assets
have no assets, etc. to back up their value, so their intrinsic value is difficult to conceptualize. Given that their prices
fluctuate substantially, it is necessary to carefully confirm the suitability of customers. In addition, the managementof crypto-and other assets also involves information technology risks, such as computer system malfunction andcyberattacks.
In light of these aspects, supervisors shall conduct supervision on the handling of crypto-and other assets by
Financial Instruments Business Operators, etc. in relation to purchase and sale or other transactions of securities,
etc. by paying attention to the following points, for example.
Meanwhile, it should be kept in mind that in order for a Financial Instruments Business Operator, etc. to manage
crypto-assets (meaning the crypto-assets prescribed in Article 2(14) of the Payment Services Act; the same shallapply hereinafter) deposited by customers in relation to financial instruments transactions, it needs the registrationreferred to in Article 63-2 of the Payment Services Act.
(1) Identification, Assessment, and Reduction of Risks Based on the Specific Characteristics, etc. of Crypto-and
Other Assets
Whether the Financial Instruments Business Operator, etc. takes the following measures, for example, in orderto make crypto-and other assets, etc. (meaning the crypto-and other assets, etc. prescribed in Article 185-23(1) of
the FIEA; the same shall apply hereinafter) not subject to transactions if they are deemed likely to compromise theprotection of investors or proper and reliable performance of financial instruments business in light of the specific108characteristics of crypto-and other assets and its own business arrangements and procedures:(i) When making new crypto-and other assets, etc. subject to transactions, whether the Financial Instruments
Business Operator, etc. identifies and assesses risks that may be caused by making the crypto-and otherassets, etc. subject to transactions (hereinafter referred to as "transaction risks"), and has developed a control
environment for precisely screening whether the crypto-and other assets, etc. should be made subject totransactions from the viewpoint of protection of investors and proper and reliable performance of business.
(ii) Whether the Financial Instruments Business Operator, etc. periodically reviews the contents of transaction
risks involved in crypto-and other assets, etc. that are already subject to transactions, and as necessary, rescreens whether the crypto-and other assets, etc. should be made subject to transactions.
(iii) When newly making crypto-and other assets, etc. subject to transactions, whether the Financial Instruments
Business Operator, etc. makes the decision in an organized manner, such as gaining the approval of the boardof directors, based on the results of the screening as to whether the crypto-and other assets, etc. should bemade subject to transactions.
(iv) Whether the division that screens whether crypto-and other assets, etc. should be made subject totransactions has arrangements and procedures to be able to appropriately examine transaction risks, such as
being independent from the sales division and staffed with personnel having expert knowledge.
(2) Measures against Cases of Money Laundering and Terrorism Financing
Whether the Financial Instruments Business Operator, etc. carefully determines the scope of crypto-and otherassets to be handled in light of the risk that the crypto-and other assets would be exploited in cases of money
laundering and terrorism financing, and other factors. For example, it should be kept in mind that crypto-and otherassets of which transfer records are extremely difficult to trace should not be received as consideration for purchaseand sale or other transactions of securities, etc. and securities for which such crypto-and other assets are distributed
as dividends, etc. should not be handled, as the risk of such crypto-and other assets becoming exploited in cases ofmoney laundering and terrorism financing is particularly high.
In addition, in the case of conducting purchase and sale or other transactions of securities, etc. in considerationof crypto-and other assets, whether the Financial Instruments Business Operator, etc. has developed a control
environment for effectively reducing the risk of money laundering and terrorism financing associated with thehandling of crypto-and other assets based on III-2-6 and the Guidelines for Anti-Money Laundering and Combating
the Financing of Terrorism, and whether it appropriately confirms that the transactions are unlikely to fall under the
category of suspicious transactions. In particular, whether it has determined the need for the suspicious transaction
reporting by appropriately considering whether there are any suspicious aspects about the counterparty to thetransaction being the true holder of the crypto-and other assets in respect to the attributes of the counterparty to thetransaction and the management method of the crypto-and other assets, etc.
Moreover, whether the Financial Instruments Business Operator, etc. has a control environment for
appropriately confirming that the issuer and manager of and other persons concerned in the crypto-and other assets
do not fall under the category of those subject to sanctions or anti-social forces, etc.
(3) Control Environment for Customer Solicitation and Explanations
109

(i) Points of Attention Regarding Crypto-and Other Assets-Related Business
When a Financial Instruments Business Operator, etc. conducts the crypto-and other assets-related
business prescribed in Article 43-6 of the FIEA and Article 146-3 of the FIB Cabinet Office Ordinance,
supervisors shall pay attention to whether it appropriately explains the matters prescribed in Article 146-4
of the FIB Cabinet Office Ordinance by delivering a document or the like.
Of those matters, "the outline and specific characteristics of the crypto-and other assets" prescribed in
Article 146-4(2)(iv) of the FIB Cabinet Office Ordinance and "matters which should be noted by thecustomer in relation to the nature of crypto-and other assets" prescribed in item (v) of that paragraph could
include, for example, the following matters:
A. Main uses of the crypto-and other assets
B. Matters concerning the scheme of holding or transferring the crypto-and other assets
C. Total volume of issuance of the crypto-and other assets, and if there is an upper limit to the issuable
volume, the upper limit
D. Status of distribution of the crypto-and other assets
E. Inherent risks of the crypto-and other assets
In addition, "a representation that could cause the customer to have a misconception about the nature of
the crypto-and other assets or other particulars specified by Cabinet Office Order" provided in Article 436(2) of the FIEA could include, for example, the following matters:
A. A representation that could cause the customer to have a misconception regarding the fact that pricefluctuations of the crypto-and other assets could generate a loss
B. A representation that could cause the customer to have a misconception regarding the fact that transfer ofthe crypto-and other assets will be restricted for a specific period according to the scheme of the cryptoand other assets
C. A representation that could cause the customer to have a misconception regarding the financial conditionsof the issuer of the crypto-and other assets or the status of progress of business conducted by the issuer(ii) If the customer is planned to receive crypto-and other assets as dividends or consideration in relation topurchase and sale or other transactions of securities, etc., supervisors shall pay attention to whether the
Financial Instruments Business Operator, etc. confirms the suitability of the customer by checking thecustomer's knowledge and trading experience concerning crypto-and other assets, and whether it appropriately
explains the scheme, nature, price fluctuation risk, etc. of the crypto-and other assets based on (i) above.
(4) Securing Financial Soundness
If a Type I Financial Instruments Business Operator holds crypto-and other assets, it is necessary to examine not
only the points stated in (1) through (3) above, but also the effects that the price fluctuation risk, etc. of the cryptoand other assets have on its financial soundness. Therefore, whether the Type I Financial Instruments Business
Operator has developed a control environment necessary for securing its financial soundness, such as identifying
various risks involved in the holding of the crypto-and other assets in a timely and appropriate manner andappropriately managing those risks, based on IV-2, in light of the specific characteristics of the crypto-and otherassets and the contents, specific characteristics, size, etc. of business relating to the holding of the crypto-and other110assets.
III-2-15 Supervisory Response in Cases of Long-term Suspension of Business, etc.
(1) When it is found that the circumstance may fall under cases where a Financial Instruments
Business Operator does not commence business (where a Financial Instruments Business Operator
engages in two or more types of businesses, any one of those businesses; the same applies here in
III-2-15) within three months of the day on which it is permitted to begin engaging in financial
instruments business, or suspends business for three months or more continually, supervisors shallascertain the cause therefor promptly by holding in-depth hearings with or requesting a report basedon the provisions of Article 56-2(1) of the FIEA as needed from the Financial Instruments Business
Operator regarding the justice in the relevant circumstance, while taking into account the actual
conditions of the Financial Instruments Business Operator’s business.
(2) For example, if any of the following situations is found as a result of the aforementioned
examination, it is considered that “there is no just cause” (provided however, that the situation is
not limited to the following, which are only examples).
(i) Where the Financial Instruments Business Operator has not prepared a business plan, etc.
for commencing or resuming business based on reasonable grounds and it is found that there is
no prospect that a business plan, etc. will be prepared(ii) Where it is found that there is the possibility that the continuation of the suspension ofbusiness for three months or more may cause unpredictable damage to investors(3) When it is found that a Financial Instruments Business Operator has not commenced businessor has suspended business without just cause, supervisors shall take necessary actions, including a
recommendation for notification of the suspension of business based on the provisions of Article
50(1)(i) of the FIEA or notification of the discontinuance of business based on the provisions of Article50-2(1)(ii) of the FIEA (where a Financial Instruments Business Operator engages in two or moretypes of businesses, and discontinues any one of those businesses, a recommendation for registrationof a change based on the provisions of Article 31(4) of the FIEA), and issuance of a business
improvement order based on the provisions of Article 51 of the FIEA. When it is obvious thatcommencement or resumption of business is not expected or otherwise there is no just cause for notcommencing or suspending business and no improvements are expected, supervisors shall consider
actions such as issuance of a business suspension order based on the provisions of Article 52 of the
FIEA or rescission of registration based on the provisions of Article 54 of the FIEA.

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III-3 Various Administrative Procedures (General)
III-3-1 Registration(1) Trade Name
It shall be confirmed that a trade name given in the application for registration does not infringe Article 25(2)of the Amendment Act.
From the viewpoint of preventing misunderstandings by investors, etc., it shall be ensured that the use of thenames of securities companies, financial futures transaction companies, investment trust management companies,
and investment advisory service companies that existed in the past is avoided as much as possible, except for thecase where a business operator, which is allowed to continue the business due to business transfer, etc., uses such a
name.
(2) Business Site or Office
The business site or office to be listed in the application for registration shall refer not to representative offices,liaison offices or any other facilities devoted to work other than the financial instruments business, but to a certain
facility or utility to be established for the purpose of conducting whole or part of the financial instruments business.
In the case of an unmanned business site or office, the number of stores located within the jurisdiction of eachfinance bureau and the name of the business site or office that controls such stores shall be entered.
It must be noted that it is necessary to post a sign at unmanned business sites or offices, pursuant to the provisionof Article 36-2(1) of the FIEA.
(3) Name and Location of the Head Office, etc.
With regard to the “name and location of the head office, etc.” to be listed in the application for registration(Article 7(xii), Article 44(xiii) and Article 258(iv) of the FIB Cabinet Office Ordinance), when stating the “nameand location of the head office and other business site or office (in the case of a foreign corporation: the head officeand the principal business site or office or other business site or office in Japan)” (Appended Form 1 Attachment 6,
Appended Form 9 Attachment 4 and Appended Form 24 Attachment 2 of the FIB Cabinet Office Ordinance),
supervisors shall check that this is done by stating the head office, etc. first (in the case of a foreign corporation: bystating the head office first, followed by the principal business site or office in Japan).
In cases where the said head office and the principal business site or office are different, such as the head officelisted on the certificate of registered matters not having the functions of a principal business site or office, it should
be kept in mind that it is necessary to state the said principal business site or office first.
(4) Documents to be Attached to the Application for Registration(i)

The abstract of residence certification to be submitted shall contain the following items:
A. address,
B. name, andC. date of birth.
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(ii)

A copy of the residence card or a copy of the special permanent resident certificate submitted by a foreign

resident living in Japan, and a copy of residence certification of the home country submitted by a foreigner
living outside Japan, or any other documents equivalent thereto (a Japanese translation shall be attached to all
documents in English, etc.) shall fall under the “documents in lieu thereof” pursuant to the provisions ofArticle 9(ii)(B), (iii)(B) and (ix) (A)(1) of the FIB Cabinet Office Ordinance.
(5) Points to Consider before Granting Registration(i)Applicants shall be reminded to abstain from conducting any business activities until they are registeredin a registry of Financial Instruments Business Operators.
(ii)

In the case where an applicant for registration is engaged in another business related to laws andregulations under the supervision of the Financial Services Agency and an administrative reprimand
concerning the said business has been issued, the details of such a reprimand shall be confirmed and, whennecessary, the progress of improvement measures shall be verified in a hearing session, etc.
In the case where the said disposition is related to legal compliance, attention shall also be paid to III-2-1.
(6) Handling of Registration Numbers(i)Each registration shall be identified by a serial number (however the following numbers shall not be used,

4, 9, 13, 42, 83, 103, and 893), which is assigned by each local finance bureau, and the registration number tobe entered into the registry of Financial Instruments Business Operators shall be subject to the following rules:e.g., Director General of Finance Bureau …… (Financial instruments business) No. ……
(ii)

When a registration is no longer valid, its registration number shall be retired and no new number shallbe issued in its place.
(iii) Registration numbers shall be managed by the registration number file of Financial Instruments Business
Operators using appended form III-2.
(7) Notification to Applicants for Registration
When registration is made in the registry of Financial Instruments Business Operators, appended form III-3 shallbe used to issue notification of registration to the applicant for registration.
(8) Refusal of Registration(Refer to II-5-6)(i)When registration is refused, appended form III-4 shall be used to issue notification of refusal ofregistration to the applicant. The notification shall include the grounds for refusal and state that the applicant
is entitled to make a request to the Commissioner of the Financial Services Agency for an examination andfile a claim against the government to rescind the decision, etc.
(ii)

The Director-General of the Financial Bureau shall enter the grounds for refusal and the corresponding

numbers of items set out in Article 29-4(1) of the FIEA as grounds for refusal, or specifically indicate the partof the application for registration or attached documents that lists false information or has important facts
missing, in the notification of refusal of registration.

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(9) Registry of Financial Instruments Business Operators(i)

The registry of Financial Instruments Business Operators shall be prepared according to the section frompage 2 to 11 of the copy of the application for registration.
(ii)

When a notification of change in items of application for registration is submitted, the relevant page ofthe registry for Financial Instruments Business Operators shall be replaced by the revised page of theapplication for registration attached to the said notification.
In addition, with respect to the notification of change in the amount of capital due to the issuing of awarrant by a Financial Instruments Business Operator that issues warrants or bonds with warrants, adeclaration of the amount of capital at the end of every month shall be submitted by the 15th of the following
month and the registry of the relevant Financial Instruments Business Operator shall be revised monthly.
(iii) When Financial Instruments Business Operators under the supervision of the Agency submit notificationsof change in the items in the application for registration, the Agency shall compile such notifications every
month and send the revised pages of the application forms to the finance bureaus that registered the relevant
Financial Instruments Business Operators, by the 20th of the following month.
(iv)

The date of inspection of the registry of a Financial Instruments Business Operator shall be a day otherthan a holiday as specified in Article 1 of the Act on Holidays of Administrative Organs, and the inspection
period shall be within the duration designated by the Director-General of the Finance Bureau. However, when
it is necessary to organize the registry of financial instruments business operations, etc., the inspection date ortime may be changed.
(v)

The Inspector of the registry of financial instruments business operations shall use appended form III-5

to enter the necessary items into the inspection book of the registry of Financial Instruments Business
Operators.
(vi)

The registry of Financial Instruments Business Operators shall not be taken out of the premises designatedby the Director-General of the Finance Bureau.
(vii) When any inspector falls under the following category, the inspection may be suspended or refused:
A. Any person who does not follow the items from (iv) to (vi) or the instructions of the bureau.
B. Any person who has defaced or damaged the registry of a Financial Instruments Business Operator, or
who may do so.
C. Those who have caused trouble to other inspectors, or who may do so.
(viii) When a request is made for the inspection of a Financial Instruments Business Operator that has beenregistered by the another Director-General of another Local Finance Bureau, the applicant for inspection shallbe informed that such inspection can be supplied by the Local Finance Bureau that granted theregistration.,However, under unavoidable circumstances the Local Finance Bureau that granted theregistration is located in a remote area, an inspection shall be carried out by referring the registered items to
the Director-General of the relevant Finance Bureau.
III-3-2 Notification
When accepting and processing various notifications, etc., prescribed in the FIEA, the following points shall beconsidered:114

(1) Change in the Location of Head Office, etc., to an Area Beyond the Jurisdiction of the Director-General of theCompetent Finance Bureau(i)

A Director-General of the Finance Bureau who has received a notification of change in the location ofhead office, etc., to an area beyond his/her jurisdiction shall send the necessary documents to a DirectorGeneral of the Finance Bureau who will process the new registration; such necessary documents include therelevant sections of the notification of change and the registry of Financial Instruments Business Operatorsprescribed in Article 20(2) of the FIB Cabinet Office Ordinance together with other documents, including the
copy of the application for registration, other attached documents, and a report of the most recent inspection.
(ii)

A Director-General of the Finance Bureau who has received the above documents shall send a copy of

notification of registration to the Director-General of the Finance Bureau who processed the previous
registration, after completing the new registration for the Financial Instruments Business Operator concerned.
(iii) A Director-General of the Finance Bureau who processed the previous registration of the said Financial
Instruments Business Operator shall delete the previous registration upon receiving a copy of the notificationof new registration.
(2) Points of Attention Regarding Submission of Notifications of Holding Subject Voting Rights
The abstract of residence certification (limited to that containing nationality, etc.), a copy of the residence cardor a copy of the special permanent resident certificate submitted by a foreign resident living in Japan, and a copy ofresidence certification of the home country submitted by a foreigner living outside Japan, or any other documents
equivalent thereto (a Japanese translation shall be attached to all documents in English, etc.) shall fall under the“documents in lieu thereof” pursuant to the provisions of Article 38(i) of the FIB Cabinet Office Ordinance.
(3) Points of Attention Regarding Notification of Discontinuation of Business, etc.
(i) When a notification pursuant to Article 50(1)(vii) and Article 50-2(7) of the FIEA and Article 199(v) of the
FIB Cabinet Office Ordinance, is received from a Financial Instruments Business Operator, the following
points shall be verified by, for example, conducting inspections:A. There are no grounds for rescission of the registration prescribed in the provision of Article 52(1) of the
FIEA.
B. All liabilities to clients are expected to be paid in full.
C. It is confirmed that there are no unlisted liabilities in the form of an outstanding balance ofclaims/liabilities to clients.
(ii)

In the case where a Financial Instruments Business Operator submits a notification prescribed in theprovision of Article 199(xi)(g) of the FIB Cabinet Office Ordinance, and when the reason for the terminationof entrustment to a financial instruments intermediary services provider is that the said financial instrumentsintermediary services provider is to discontinue the financial instruments intermediary services, aconfirmation shall be made at the time of the submission of the notification that the said Financial Instruments
Business Operator has confirmed that there are no grounds for rescission of registration of the said financial
instruments intermediary services provider pursuant to the provision of Article 66-20(1) of the FIEA.
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III-3-3 Books and Documents Related to Business Activities
The obligation to formulate and retain books and documents related to business activities (hereinafter referred
to as “books and documents” [excluding in VI-3-2-4, VI-3-5-3, VII-2-3 and XI-2-3]) is stipulated in laws andregulations in order to contribute to the protection of investors, by means of making books and documents accuratelyreflect the status of operations and assets of Financial Instruments Business Operators and by examining theappropriateness of business activities and the financial soundness. Based on these principles, the following points
shall be considered when examining books and documents.
(1) Basic Points to Consider(i)Books and documents may serve as other books and documents within a rational scope, part of the records

may be listed in other books, and names other than those prescribed in Article 157 and Article 181 of the FIB
Cabinet Office Ordinance, may be used, but only in cases where all the items to be listed are entered inaccordance with the type of each business-related document.
(ii)

For foreign corporations to which III-3-3 is applicable, the term “head office” shall be replaced with“principal business site or office in Japan” and the term “branch office” shall be replaced with “other businesssite or office.”(iii) When creating order forms concerning self-transaction, the term “order received” in Article 158 of the
FIB Cabinet Office Ordinance, shall be replaced with “order shipped.”(iv) The items directly corresponding to the relevant items among those to be listed in the books anddocuments shall be replaced with those of the compatible items and those with no applicable items may beomitted.
(v)

A copy of the document prescribed in Article 157(1)(i)(A)(4) of the FIB Cabinet Office Ordinance, (adocument upon conclusion of the contract prescribed in Article 37-4(1) of the FIEA) shall be prepared bymachine concurrently with the said original document, and may be substituted by another book and document
which lists all the items to be listed in the said document.
(vi) Individual books and documents may be substituted by the transaction contracts that list all the items to
be listed in the respective books and documents, when creating: order forms; transaction records concerningintermediary or agency services; transaction records concerning public offering, secondary distribution or
private offering; transaction records concerning the handling of public offering or secondary distribution or
the handling of private offering; or transaction records concerning agency or intermediary services forconcluding investment advisory contracts or discretionary investment contracts. The said transaction contracts
shall be prepared separately.
(vii) Items to be listed in the books and documents may be entered using codes, brevity codes or any othersymbols that have been standardized by the said Financial Instruments Business Operator.
(viii) In the cases where part of the items to be listed in books and documents is linked using the transaction
contract that lists the appropriate items and the contract number, and they are managed and stored together,
this package may be regarded as the relevant books and documents.
(ix) The second sentence of both the proviso to Article 157(3) and the proviso to Article 181(4) of the FIB
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Cabinet Office Ordinance permits to keep the books and documents specified in the items of paragraph (1) of
those Articles outside Japan when they are prepared by means of an electronic or magnetic records anddocuments indicating matters recorded in the electronic or magnetic records is made available for inspection
without delay at a business office or other office established in Japan, regardless of whether or not they areprepared in a business office or other office established in a foreign state; provided, however, that Financial
Instruments Business Operators need to pay sufficient attention to Control Environment for the Managementof Information Related to Customers, etc. (III-2-4) and Control Environment for Managing Information
Technology Risk (III-2-8), etc. and need to properly take into consideration risks of information leaks to athird party, not limited to unauthorized access, and any hindrance to stable operation of systems in the relevant
foreign state.
(2) Formulation and Storage of Books and Documents on Microfilm(i)

In the cases where books and documents are three or more years-old, and an inspection has been conductedon such books and documents by inspection departments during this period, such documents may be stored
on microfilm that is prepared according to the generally accepted standards for formulation.
(ii)

Original books and documents may be created and stored on microfilm in the following cases:
A. When the books and documents in question correspond to the items listed in Article 157(1) items(i)(A)(4), (ix), (xi), (xvi) (limited to (B) and (C)), and (xvii) (excluding (A)) of the FIB Cabinet Office
Ordinance;
B. When it is possible to prepare written books and documents within a reasonable period of time at eachbusiness site for the inspection, etc., by inspection departments; andC. When personnel in charge of microfilm formulation and storage have been appointed and management
procedures have been developed.

(3) Centralized Storage of Books and Documents at the Head Office(i)

In the cases where books and documents are three or more years-old, and an inspection has been conductedon such books and documents by inspection departments during this period, such books and documents may
be stored in the head office (including the administrative center, etc., the same shall apply to (ii) below) in an
integrated manner.
(ii)

Books and documents may be stored in an integrated manner, from the time of their creation, at thecompanies which are entrusted by a head office or a Financial Instruments Business Operator to create thebooks and documents, under the condition that the following requirements are met:
A. A system has been established to allow quick response to referrals from clients;
B. A system has been established to enable books and documents to be accessed at a head office within areasonable period of time; andC. It does not impede internal audits.
(4) Creation of Forms for Receiving Orders by Direct Entry into a Computer
In the cases where a form for receiving orders is completed by directly entering data into a computer, the117following points shall be considered:(i)

Details of orders received shall be entered into a computer when the orders are received (in the case of

self-transaction, when orders are shipped).
(ii)

The system enables prompt response to referrals from clients.

(iii) Backups of input data are made and stored.
(iv) The system automatically records input time.
(v)

The system can track deleted/corrected records, if deletion/correction of input history is made.

(vi) Handwritten forms for receiving orders shall be prepared, as was done previously, in the cases where theorder form cannot be made by directly inputting data into a computer at the same time as receiving orders.
Examples of such cases are when the details of orders are communicated to executing offices by telephone,where orders for the following day are received after the computer system is shut down for the day, or where
computers are not usable due to a disaster, etc. However, a postscript may be omitted if a handwritten form
for orders received, which has been created at the same time as orders were received, is stored together withthe form for receiving orders that has been prepared by a computer that shows whether

all order informationagrees if the details of the orders received are input later.
(vii) The system can respond to internal audits.
(5) Formulation of Form for Shipping Orders by Direct Entry into a Computer
In the cases where a form for shipping orders is created by directly entering data into a computer, the following
points shall be considered:(i)

Details of shipping orders shall be entered into a computer when orders are shipped.

(ii)

Handwritten forms for shipping orders shall be prepared in the cases where order forms cannot be

formulated by direct entry of data into a computer at the same time as orders are shipped, such as when
computers cannot be used due to a disaster, etc. However, a postscript may be omitted if a handwritten form
for shipping orders, which has been created at the same time as orders were shipped are stored together witha form for shipping orders that has been prepared by a computer that shows whether all information agrees if
the details of the orders shipped are input later.
(iii) In addition to (i) and (ii) above, the cases corresponding to items (4) (iii) to (v) and (vii) above.
(6) Storage of Books and Documents Using Electronic MediaThe following points shall be considered when using electronic media to store books and documents.
(i)

Handwritten books and documents shall be saved as image data.

(ii)

The electronic media for storage shall have sufficient durability to last for the storage period prescribedin Article 157(2) and Article 181(3) of the FIB Cabinet Office Ordinance.
(iii) One of the electronic media used for data storage shall be designated as “original” and shall be clearlylabeled to that effect (judgment on the condition of storage of books and documents shall be made inconformity with this “original”).
(iv) A backup of the “original” mentioned above (iii) shall be created and stored as a “copy.”(v)

The system enables prompt response to client referrals.
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(vi) The system allows hard copies of books stored as data to be created within a reasonable period of time(vii) The system can track deleted/corrected records, if deletion/correction of input history is made;(viii) The system can accommodate internal audits;(ix) Personnel in charge of formulation and storage have been appointed and in-house regulations on the said
formulation and storage have been developed.
(x)

When a handwritten postscript or supplement to a hard copy of a book or document created electronicallyis made, a copy of the said hard copy shall be made and saved as image data. If it is not stored as image data,
the said hard copy shall be stored as the original.
III-3-4 Matters Related to the Industrial Competitiveness Enhancement Act
Matters related to the plans specified in the Enhancement Act, etc., concerning business reorganization,
reorganization of specific businesses, and small-and-medium-enterprise succession and business turnaround shallbe listed in compliance with the preparation method of financial statements, etc., of Financial Instruments Business
Operators, with due consideration to the following points.
(1) Matters Regarding the Setting of Targets Concerning the Improvement of Productivity and Financial Soundness
Through Business Reorganization in 1. of the Guidelines for the Implementation of Business Reorganization(Hereinafter Referred to as the “Implementation Guidelines”):(i) In 1.A.(2) of the Implementation Guidelines, “turnover ratio of tangible fixed assets” refers, for example, tooperating revenue divided by the carrying amount of tangible fixed assets.
(ii) In 1.A.(3) of the Implementation Guidelines, “the amount of added value per employee” refers, for example,
to the sum of operating income, personnel expenses and depreciation per employee.
(iii) In 1.B.(1) of the Implementation Guidelines, “total amount of interest-bearing debt” refers, for example, toall of debt financing means.
(iv) In 1.B(2) of the Implementation Guidelines, “current revenue” refers, for example, to the total amount ofoperating revenues and non-operating revenues, while “current expenditure” refers, for example, to the total
amount of operating expenditures and non-operating expenditures.
(2) Matters Regarding the Definition of Business Reorganization in 2.A. of the Implementation Guidelines(i) In 2.A.(3) of the Implementation Guidelines, “net sales” refers, for example, to operating revenue.
(ii) In 2.A.(5) of the Implementation Guidelines, “sales expenses on the provision of said product or service”
refers, for example, to sales and general administrative expenses.
(3) Criteria for Industries or Business Fields with Excessive Supply in 2.B.(3) of the Implementation Guidelines
In 2.B(3)(ii) of the Implementation Guidelines, “net sales” in “operating profit on sales” refers, for example, tooperating revenue.
(4) Matters Regarding the Setting of Targets Concerning the Improvement of Productivity and Financial Soundness
Through Reorganization of Specific Businesses in 3. of the Implementation Guidelines119

(1) above shall be applied mutatis mutandis to 3.A.(2) and (3), and B.(1) of the Implementation Guidelines.
(5) Matters Regarding the Definition of Reorganization of Specific Businesses in 4.A. of the Implementation
Guidelines
In 4.A.(4) and (5) of the Implementation Guidelines, “net sales” refers, for example, to operating revenue.
(6) Matters Regarding the Setting of Targets Concerning the Enhancement of Business Through Small-andMedium-Enterprise Succession and Business Turnaround in 1. of the Guidelines for the Implementation of Smalland-Medium-Enterprise Succession and Business Turnaround (Hereinafter Referred to as the “Turnaround
Implementation Guidelines”)(i) In 1.A. of the Turnaround Implementation Guidelines, “total amount of interest-bearing debt” refers, forexample, to all of debt financing means.
(ii) In 1.B. of the Turnaround Implementation Guidelines, “current revenue” refers, for example, to the total
amount of operating revenues and non-operating revenues, while “current expenditure” refers, for example, tothe total amount of operating expenditures and non-operating expenditures.

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IV. Supervisory Evaluation Points and Various Administrative Procedures (Type I Financial Instruments
Business)
IV-1 Governance (Type I Financial Instruments Business)
Supervisors shall pay attention to the following points when examining the governance of Financial Instruments
Business Operators (limited to Type I Financial Instruments Business Operators; the same shall apply in IV).
It should be noted that in cases where the provisions of III-1 Governance (general) are applied to foreign
corporations engaging in Type I financial instruments business, the “representative director” shall be replaced withthe “representative in Japan” and “the Board of Directors, etc.” with “the highest decision-making organization ofa sales branch or business office in Japan.”IV-1-1 Officers of Financial Instruments Business Operators(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator appropriately takes into consideration the following
eligibility requirements in the decision-making process regarding proposals for the appointment of officers (those
who are subject to dismissal order under Article 52(2) of the FIEA; hereinafter referred to as “officers” in IV-1-1,
V-1-1, VI-1-1 and VII-1-1).
(i)

A person who does not meet any of the ineligibility criteria (Article 29-4(1)(ii)(a) to (i) of the FIEA) and

who did not meet any of them at the time of registration.
(ii)

A person who has not violated laws and regulations regarding financial instruments business or related

business operations (excluding Article 46-6(2) of the FIEA), or a person who has not been subjected toadministrative actions taken based on laws and regulations.
(iii) A person who has not damaged the interests of investors in relation to the conduct of the investment
advisory and agency business and the investment management business.
(iv)

A person who has not engaged in an illegal or markedly inappropriate act regarding financial instruments

business under particularly grave circumstances.
(v)

A person who has not violated the conditions attached to authorization under Article 30(1) of the FIEA.

(2) Supervisory Method and Actions
In cases where an officer of a Financial Instruments Business Operator is deemed to meet the ineligibility criteria
specified under any of Article 29-4(1)(ii)(a) to (i) of the FIEA, or is found to have done so at the time when thebusiness operator obtained registration under Article 29 of the FIEA, or where an officer of a Financial Instruments
Business Operator is deemed to meet the ineligibility criteria specified under any of Article 52 (1) (vii) and (ix) to(xi) of the FIEA, supervisors shall consider taking actions such as ordering the dismissal of the said officer basedon Article 52(2) of the FIEA.
In addition, they shall hold an in-depth hearing regarding the decision-making process concerning the proposal
for the appointment of the said officer and, when necessary, require the submission of a report based on Article 56121

2(1) of the FIEA. Furthermore, supervisors shall consider taking actions such as issuing an order for business
improvement, if the Financial Instruments Business Operator’s control environment for governance is deemed tohave a serious problem and the action is deemed to be necessary and appropriate, from the viewpoint of protecting
public interests and investors.
IV-1-2 Adequate Staffing for Properly Conducting Financial Instruments Business(1) Major Supervisory Viewpoints
Supervisors shall examine whether Financial Instruments Business Operators are adequately staffed to properly
conduct financial instruments business (limited to Type I financial instruments business; the same shall apply to IV),in light of IV-4-1, and whether Financial Instruments Business Operators, etc. have established operating
structures/system necessary to operate financial instruments business appropriately.
(2) Supervisory Method and Actions
Provisions in IV-4-1 are part of a comprehensive set of elements that should be taken into consideration whensupervisors examine whether a Financial Instruments Business Operator is adequately staffed to properly conduct
financial instruments business, etc. Even if an officer or an employee is deemed to not meet the requirements, it
should not automatically lead to the conclusion that the Financial Instruments Business Operator is not adequately
staffed, etc. The important thing is, first and foremost, that Financial Instruments Business Operators strive to ensure
on their own responsibility that they are adequately staffed, etc. in light of those requirements and other elements.
However, supervisors shall hold in-depth hearings regarding Financial Instruments Business Operators’ view on
their staffing, etc. and their decision-making process concerning the proposed appointments of officers andemployees, in cases where a Financial Instruments Business Operator is deemed to have failed to take those elements
into consideration sufficiently in the said decision-making process, and where it is deemed to be necessary andappropriate from the view point of protecting the public interest and investors to hold such hearings. In addition,
they shall require the submission of reports based on Article 56-2(1) of the FIEA when necessary.
Supervisors shall consider taking actions such as issuing an order for business improvement under Article 51 of
the FIEA, in cases where the Financial Instruments Business Operator’s control environment for governance isdeemed to have a serious problem as a result of the examination of the submitted report, and where the action isdeemed to be necessary and appropriate from the viewpoint of protecting public interests and investors.
Furthermore, when the Financial Instruments Business Operator is deemed to not be adequately staffed toproperly conduct financial instruments business, etc. as a result of the examination of the submitted report,
supervisors shall consider taking necessary measures, including issuing an order for business suspension based on
Article 52(1) of the FIEA.
IV-1-3 Development of Conflict of Interest Management Systems(1) Basic Ideas for the Development of Conflict of Interest Management Systems
Along with the diversification of services provided by financial institutions and advances in the formation of122international groups across business types, multiple interests competing or conflicting with one another are createdwithin each financial institution or financial group, posing a growing risk of conflict of interest. In view of such asituation, securities companies, etc. (referring to those engaging in Type 1 Financial Instruments Business (limited
to such business related to securities); the same shall apply hereinafter) are required to manage transactions that arelikely to cause a conflict of interest, depending on the contents, characteristics, scales, etc. of the businesses
conducted by the securities companies, etc. and their group member companies, so as to ensure that such a conflictof interest will not unduly harm customers’ interests.
From this perspective, it is important for securities companies, etc. to develop appropriate systems for the
management of conflict of interest of their own and of their subsidiary financial institutions, etc. pursuant to Article
36(2) of the FIEA.
Securities companies, etc. are permitted to exchange non-disclosure information with their parent corporations,etc. or subsidiary corporations, etc. (hereinafter referred to as “parent/subsidiary corporations, etc.”) under certain
conditions. In line with this, it is recommended that securities companies, etc. conduct governance with due
consideration to a conflict of interest that may occur in relation to all businesses carried out within the securities
companies, etc. and their financial groups (including businesses other than financial instruments businesses). In
such case, it is also recommended that they also pay attention to the likelihood of materialization of reputation risk
(referring to the risk of damage to the reputation in society or confidence in financial markets; the same shall apply
hereinafter) of the securities companies, etc. or their financial groups, in addition to the risk of directly harming
customers’ interests.
On the other hand, considering that some member companies within the groups of securities companies, etc.
may engage in businesses irrelevant to the customers of the securities companies, etc., there is no necessity to require
all securities companies, etc. to conduct conflict of interest management at the same level or to the same extent.
Furthermore, if securities companies, etc. choose not to share non-disclosure information with their group member
companies, they may be deemed to have taken necessary and sufficient measures to manage conflict of interest withsuch group member companies. Thus, it should be noted that when securities companies, etc. conduct conflict ofinterest management at different levels or to different extents within their groups, they are required to give sufficient
explanation on such different treatment to external parties.
In addition, even in cases where conflict of interest management, which must be conducted by securities
companies, etc., is actually conducted by their parent companies, etc., if the securities companies, etc. properly
understand the management method and implementation status and participate in the management process as
appropriate, they may be deemed to have taken necessary and sufficient measures.
With all these matters in mind, supervisors shall perform supervision, focusing on the following points.
(2) Development of Systems for Identifying Transactions with the Risk of Conflict of Interest(i)Whether the securities company, etc. has identified and categorized (Note) transactions with the risk of

conflict of interest in advance.
(Note) In 2022, deregulation (see IV-3-1-4(2)) was conducted and it was made possible to share nondisclosure information of listed companies, etc. between a securities company, etc. and its parent/subsidiary123

corporations, etc. until the relevant listed companies, etc. undertake procedures for opting out. Accordingly,
securities companies, etc. and their parent financial institutions, etc. or subsidiary financial institutions, etc.
(referred to as “parent/subsidiary financial institutions, etc.”; hereinafter the same applies in (2)(Note)) are
required to properly and strictly manage conflicts of interest in order to ensure that the interests of thecustomers are not unjustly impaired. In light of this point, concrete examples of “transactions with the riskof conflict of interest” are as follows; provided, however, that the following are only examples, and it should
be noted that transactions with the risk of conflict of interest must be properly identified depending on theactual status of the business model of securities companies, etc. and business types of other financial
institutions within financial groups to which individual securities companies, etc. belong.
(Reference) “Second Report by the Working Group on Capital Market Regulations – To Create an Attractive
Capital Market toward the Post-COVID Era” (June 18, 2021)[Related to M&A]
・A case where a securities company, etc. offers advisory services to a candidate purchaser in an M&A and the
securities company, etc. or its parent/subsidiary financial institutions, etc. have provided loans to anothercompeting candidate purchaser or have had any balance of loan receivables from the seller’s side (including
the company subject to the M&A and its parent company and sponsors; the same shall apply hereinafter).
・A case where a securities company, etc. offers advisory services to the seller’s side in an M&A and the
securities company, etc. or its parent/subsidiary financial institutions, etc. provides loans to a single or multiple
candidate purchasers.
・A case where a securities company, etc. or its parent/subsidiary financial institutions, etc. offers advisory
services to both candidate purchasers and the seller’s side in an M&A.
[Related to underwriting]・A case where in procurement of funds in the capital markets by a non-financial company through the issuanceof securities (including straight bonds, subordinated debts, share options, and bonds with share options), a
securities company, etc. serves as the lead managing underwriter and the securities company, etc. or its
parent/subsidiary financial institutions, etc. provides loans to said non-financial company.
・A case where a securities company, etc. or its parent/subsidiary financial institutions, etc. provides advice, etc.
on underwriting and customers’ issuance of securities, and the securities company, etc. or its parent/subsidiaryfinancial institutions, etc. recommends transactions of said securities to other customers.
[Other]・A case where a securities company, etc. recommends or sells securities issued or composed by the securities
company, or its parent/subsidiary financial institutions, etc. to customers.
・A case where a securities company, etc. or its parent/subsidiary financial institutions, etc. offers advisory
services on M&A, such as conducting underwriting or providing advice, etc. in relation to fund procurementin the capital markets, or provides loans to a customer, and the securities company, etc. provides a research
report on said customer to other customers.
(ii)

Whether the securities company, etc. has developed a control environment wherein the contents,characteristics, scales, etc. of the securities company, etc. and its parent/subsidiary financial institution, etc.
can be taken into consideration appropriately in the process of identifying transactions with the risk of conflict124

of interest.
(iii)

Whether the securities company, etc. has developed a control environment for examining theappropriateness of the transactions that are found to involve the risk of conflict of interest, periodically, forexample, upon starting new operations.
(3) Methods of Conflict of Interest Management(i)Whether the securities company, etc. has developed a control environment wherein it can properly identify

transactions with the risk of conflict of interest prior to conducting relevant transactions, and whether it hasdeveloped a control environment wherein it can choose or combine appropriate methods of conflict of interest
management, depending on the characteristics of relevant transactions,while paying attention to the following
points.
A.

In cases where the securities company, etc. conducts management separately for departments, whethera Chinese wall (see III-2-4(3)(i)) has been created between the departments.

B.

In cases where the securities company, etc. conducts management by changing terms or methods oftransactions or suspending transactions of either party involved in the conflict, including cases where
officers, etc. of its parent/subsidiary financial institutions, etc. participate in making decisions on suchchange or suspension, whether the authority and responsibility for making such decisions are clearlyspecified.

C.

In cases where the securities company, etc. conducts management by notifying the customer of the riskof conflict of interest, whether the customer is provided with appropriate explanation, depending on thecustomer’s attributes, so that the customer can fully understand the content of the possible conflict ofinterest and the reasons for choosing the management method (including reasons for not choosing othermethods), before the customer concludes a contract for the transaction.

D.

In cases where the securities company, etc. conducts management by supervising the parties who share
information, whether an independent division or department appropriately supervises the transactions
carried out by such parties.

(ii)

Whether the securities company, etc. has developed a control environment wherein it can confirm, whennecessary, whether there is any transaction that may be in conflict with a new transaction to be conducted by
the securities company, etc. or its subsidiary financial institution, etc.
(iii)

Whether the securities company, etc. has developed a control environment for examining the method of

conflict of interest management periodically for the purpose of securing its effectiveness. Whether the
securities company, etc. is creating and storing records appropriately to enable examinations ex post facto as
to whether it is identifying transactions with the risk of conflict of interest and selecting and implementing themethod of conflict of interest management in an appropriate manner.
(4) Formulation of the Conflict of Interest Management Policy and Publication of its Summary(i)

Whether the securities company, etc. has formulated a conflict of interest management policy (referringto the policy prescribed in Article 70-4(1)(iii) of the FIB Cabinet Office Ordinance; the same shall apply
hereinafter), while taking into consideration the contents, characteristics, scales, etc. of the securities company,
125

etc. and its parent/subsidiary financial institutions, and whether such policy specifies the following matters:
the types of transactions with the risk of conflict of interest; major examples and the identification process ofsuch transactions; the methods of conflict of interest management (if conflict of interest management isconducted at different levels and to different extents, the content of and reasons for such difference); the conflictof interest management system (the responsibility and independence of the person who controls the companywide management system regarding the identification of the transactions involving the risk of conflict ofinterest and the conflict of interest management (hereinafter referred to as the “conflict of interest manager”),
as well as the review system for the methods of identifying transactions involving the risk of conflict of interest
and conducting conflict of interest management); and the scope of companies subject to conflict of interest
management. Whether examples of such transactions and methods of conflict of interest management are
specified for each type of transactions involving the risk of conflict of interest.
(ii)

Whether the securities company, etc. has prepared a summary of the conflict of interest management

policy to be publicized, while taking into consideration the contents, characteristics, scales, etc. of the securities
company, etc. and its parent/subsidiary financial institutions, and whether such summary specifies, in an easily
understandable manner, the types of transactions involving the risk of conflict of interest, methods of conflictof interest management, conflict of interest management system, and scope of companies subject to conflict ofinterest management.
(iii)

Whether the securities company, etc. publicizes the summary of the conflict of interest management policy

by appropriate means, such as posting or providing for inspection the summary at its branches or presenting
the same on its website.
(5) Personnel Structure and Operational System(i)

Whether the management team of the securities company, etc. and its subsidiary financial institution, etc.

recognize the importance of conflict of interest management and sincerely take the lead in carrying out the
management by such means as cooperating with other financial institutions within the financial group(including holding companies). Additionally, regarding operationally important cases such as those posing thepossibility of exerting a material impact on customers, whether the management team appropriately gets
involved in decision making concerning actions to be taken, such as the selection of the methods of conflict ofinterest management.
(ii)

Whether the operational procedures based on the conflict of interest management policy are clarified inwriting; whether matters concerning conflict of interest management are communicated to officers andemployees of the securities company, etc. and its subsidiary financial institution, etc., through training
programs regarding the conflict of interest management policy and the said procedures.
(iii)

Whether the securities company, etc. has developed a centralized system for identifying transactions withthe risk of conflict of interest and conducting conflict of interest management, for example by appointing a
conflict of interest management, for example by appointing a conflict of interest manager in divisions engaging
in conflict of interest management (hereinafter referred to as “conflict of interest management divisions”).
(iv)

Whether the conflict of interest manager, and conflict of interest management divisions and their staff

members (hereinafter referred to as the “conflict of interest manager, etc.”) identifies transactions with the126risk of conflict of interest and conducts conflict of interest management properly in accordance with the conflictof interest management policy, and appropriately examines the effectiveness of the policy.
(v)

Whether the conflict of interest manager, etc. secures his/her independence from the sales division andfully checks the sales division. Whether the securities company, etc. has developed a control environment
wherein the conflict of interest manager, etc. can make decisions independently when judging whether atransaction falls under a transaction with the risk of conflict of interest or deciding the methods of conflict ofinterest management even in cases where the sales division gets involved in conflict of interest management
work.
(vi)

Whether the conflict of interest manager, etc. collects information necessary for conflict of interest

management, including information on the transactions of its parent/subsidiary financial institutions, etc.,
thereby preparing a control environment for conducting conflict of interest management appropriately.
(vii) Whether the securities company, etc. has developed a control environment wherein an independentinternal audit division, etc. examines the personnel structure and operational system for conflict of interest
management periodically. When conflict of interest management is conducted integrally by the entirety of afinancial group, whether efforts are being made to ensure cooperation with the internal audit divisions, etc. ofother financial institutions within the group (including holding companies).
(viii) When the securities company, etc. has overseas offices or belongs to a financial group that operates
internationally, whether it has developed an appropriate control environment for identifying and properly
managing transactions with the risk of conflict of interest at a level commensurate to the details and size of its
global business operations, by measures such as conducting conflict of interest management globally on agroup-wide basis: not merely domestically, under organizational and integrated policies, procedures andsystems, while observing laws and regulations of individual countries.
(6) Supervisory Method and Actions
Securities companies, etc. should develop a conflict of interest management system through their own efforts,
depending on the contents, characteristics, scales, etc. of their businesses. The matters listed in (1) to (5) above
provide a basic framework of such efforts. Securities companies, etc. are required to independently develop
appropriate conflict of interest management systems, depending on the contents, characteristics, scales, etc. of thebusinesses of their own and of their subsidiary financial institutions, etc.
However, where there is likelihood that customers’ interests would be unduly harmed, irrespective of the statusof the development of a conflict of interest management system, supervisors shall hold an in-depth hearing if it
seems necessary and appropriate to do so in order to protect public interests and investors, and shall require thesubmission of a report under Article 56-2(1) or (3) of the FIEA. Furthermore, supervisors shall consider taking
actions such as issuing an order for business improvement under Article 51 of the FIEA or an order for businesssuspension under Article 51 of the FIEA in cases where the conflict of interest management system of the securities
company, etc. is deemed to have a serious problem as a result of the examination of the submitted report, and where
the action is deemed to be necessary and appropriate from the viewpoint of protecting public interests and investors.

127IV-2 Soundness of Financial Condition (Type I Financial Instruments Business)
With due consideration of the susceptibility of the business of Financial Instruments Business Operators tochanges in the market environment, regulation on the capital adequacy ratio aims to ensure the soundness of theirfinancial conditions and the protection of investors, even if the business operators face a decline in their income due
to rapid changes in the market conditions or a decline in the value of their asset holdings. Through efforts to maintainan adequate level of capital adequacy ratio, Financial Instruments Business Operators must identify and manage
risks involved in their businesses in a comprehensive manner and keep liquid assets (non-fixed capital) in sufficientquantity and quality, to enable them to withstand losses that may be caused by the materialization of various risks.
For their part, supervisors need to encourage Financial Instruments Business Operators to make voluntary efforts tomaintain the soundness of their financial conditions through their offsite monitoring, which should complement theefforts the business operators make on their own responsibility to maintain an appropriate level of capital adequacy
ratio.
IV-2-1 Preciseness of Capital Adequacy Ratio
Supervisors shall examine the preciseness of a Financial Instruments Business Operator’s capital adequacy ratio
by paying attention to the following points, with due consideration of Article 46-6(1) of the FIEA and the FIB
Cabinet Office Ordinance.
(1) Eligibility of Subordinated Debts and Subordinated Bonds(i)

Regarding the notification of the borrowing of a subordinated loan or the issuance of a subordinated bond,whether the terms of the contract give preference to senior creditors in accordance with Article 50(1) of the
FIEA (Article 199 (xii) of the FIB Cabinet Office Ordinance.) by including a legal provision stipulating thatwhen a condition for subordination, such as bankruptcy or court-administered corporate rehabilitation, arises,
subordinate creditors’ claims are voided temporarily and their claims become effective only after all payments
to senior creditors have been made.
(ii)

Whether the subordinated loan/bond has all of the characteristics described in the individual items of

Article 176(2) and (3) of the FIB Cabinet Office Ordinance.
(iii) Whether the contract for the subordinated loan/bond stipulates that contractual revisions disadvantageous
to senior creditors and payments made in violation of the special provision for subordination are deemed to
be ineffective.
(iv) In the following cases, whether the Financial Instruments Business Operator acknowledges the intentional
provision of funds to the subordinated loan lender/the subordinated bond holder as specified under Article
176(4)(iii) of the FIB Cabinet Office Ordinance and accordingly deducts the amount of the said funds fromthe subordinated loan/bond amount.
A. The Financial Instruments Business Operator has provided a subordinated loan to the subordinated loanlender/the subordinated bond issuer, or holds a subordinate bond issued thereby (excluding cases where
the Financial Instruments Business Operator acquired the subordinated bond as its underwriter and theholding period does not exceed six months, and cases where the business operator holds the subordinated128bond temporarily for market-making and other similar purposes).
B. The Financial Instruments Business Operator has provided funds to the subordinated loan lender/
subordinated bond issuer for the purpose of supporting business rehabilitation or recapitalization.
C. The Financial Instruments Business Operator has underwritten new stocks and other securities issued
by the subordinated loan lender/subordinated bond issuer for the purpose of supporting businessrehabilitation or recapitalization (excluding the case where the Financial Instruments Business Operator
has purchased the said stocks and securities in the secondary market and holds them purely for theinvestment purpose or for purposes other than supporting business rehabilitation or recapitalization, withthe holding period not exceeding six months, and the case where it holds the stocks and securities
temporarily for market-making and other similar purposes).
(2) Collateral Deducted from Deductible Assets
In cases where a Financial Instruments Business Operator has deducted the appraisal value of land and buildings
based on Article 177(2) and (3) of the FIB Cabinet Office Ordinance or where it has deducted the appraisal valueof funds and assets pledged as collateral based on Article 177(5) of the same act and Article 2(5) of the Capital
Regulation Notice, supervisors shall examine whether the deducted value is appropriate by paying attention to thefollowing points:(i)

In cases where the appraisal value of land and buildings is deducted, whether the appraisal value has been

calculated in an appropriate manner.
(ii)

In cases where the appraisal value of collateral and other assets is deducted, whether the funds and otherassets pledged as collateral are eligible as collateral, and whether the appraisal value and the value of themarket risk equivalent that should be deducted therefrom have been calculated in an appropriate manner.
(3) Identification of Value of Market Risk Equivalent
Based on Article 178(2) of the FIB Cabinet Office Ordinance supervisors shall check, with due consideration of
the following points, whether a Financial Instruments Business Operator identifies and keeps track of the values ofthe market risk equivalent and the counterparty risk equivalent on a daily basis with a rational method suited to thecharacteristics of their business.
(i)

Whether the Financial Instruments Business Operator properly identifies the market risk equivalent basedon the appraisal values of all securities that it holds (the appraisal values verified for objectivity at the end ofeach month). It should be noted that except for at the end of each month, a rough estimate is permissible withregard to items of little relevance, such as those regarding which the Financial Instruments Business
Operator’s position is usually small relative to the amount of its non-fixed capital.
(ii)

Whether the Financial Instruments Business Operator properly identifies the value of the counterparty

risk equivalent based on the total value of the credit equivalent, including all relevant transactions and assets.
It should be noted that except for at the end of each month, accounts receivable and accrued income thatconcerns financial income and those which are booked on the execution dates on a provisional basis (excluding
those regarding which the payment was not made on the delivery date) may be excluded.
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(iii) Whether the director in charge of risk management keeps track of the values of the market risk equivalentand the counterparty risk equivalent on a daily basis.
In the case of a Financial Instruments Business Operator who accepts margin deposits from customers inamounts corresponding to a certain proportion of the contracted principal amount, and conducts foreignexchange transactions through net settlements (so-called foreign exchange margin transactions) in particular,
whether it has developed a risk management and internal control environment that enables the precise andappropriate identification of the impact that rapid movements in the foreign exchange market could have on
the soundness of its financial condition and its capital.
(4) Checkpoints Regarding Loaned Securities
Regarding securities lent to other entities, whether the Financial Instruments Business Operator has calculated
the value not only of the counterpart risk equivalent but also of the market risk equivalent.
(5) Basic Risk Equivalent Related to Crypto-and Other Assets and Electronically Recorded Transferable Rights That
Must Be Indicated on Securities, etc.
In holding or managing crypto-and other assets and electronically recorded transferable rights that must be
indicated on securities, etc., it is not only necessary to identify the points stated in (3)(i) through (iii) above, but
given that crypto-and other assets and electronically recorded transferable rights that must be indicated on securities,
etc. for which private keys are managed in a state connected to the internet in particular have a risk of leakage, it isalso necessary to appropriately identify the basic risk equivalent relating to such risk. Therefore, whether the
Financial Instruments Business Operator identifies and keeps track of the values of such basic risk equivalent on adaily basis.
IV-2-2 Supervisory Response to Cases of Financial Instruments Business Operators’ Capital Adequacy Ratio
Falling Below Prescribed Level
As the “early corrective action” based on the capital adequacy requirement is prescribed under Article 46-6(1)of the FIEA as a means to ensure the soundness of Financial Instruments Business Operators’ management, suchbusiness operators need to make continuous efforts to improve their management so that they can maintain andenhance the soundness of the management.
Therefore, when a Financial Instruments Business Operator’s capital adequacy ratio falls below a legallyprescribed level, supervisors shall take the following measures in order to urge the business operator to make
improvement quickly.
(1) When supervisors have received a notification based on Article 179(3) of the FIB Cabinet Office Ordinancefrom a Financial Instruments Business Operator, they shall check the contents of the Plan Regarding Specific
Voluntary Measures to Be Taken in Order to Maintain the Capital Adequacy Ratio attached to the notification. In
addition, they shall check the future outlook on the business operator’s capital adequacy ratio through hearings andurge it to make voluntary improvement efforts.
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It should be noted that in cases where the capital adequacy ratio stays below 140% for a long period of time orwhere the ratio repeatedly falls below 140%, supervisors shall strive to identify and keep track of the Financial
Instruments Business Operator’s capital adequacy ratio by, for example, requiring the submission of a report basedon Article 56-2(1) of the FIEA.
In addition, over the period until a notification based on Article 179(5) of the FIB Cabinet Office Ordinance issubmitted, they shall strive to identify and keep track of the Financial Instruments Business Operator’s capital
adequacy ratio and the status of its management of various risks by, for example, checking a notification regarding
the capital adequacy ratio on a daily basis and holding hearings.
(2) When the above notification shows that the Financial Instruments Business Operator’s capital adequacy ratio is
below 120%, supervisors shall check the contents of the Plan Regarding Specific Voluntary Measures to Be Taken
in Order to Improve the Capital Adequacy Ratio” attached to the notification and, when necessary, identify the
specific method with which to bring the capital adequacy ratio back above the prescribed level and the estimateddate of the recovery, as well as the status of segregated management of customer assets and fund-raising by, forexample, requiring the submission of a report based on Article 56-2(1) of the FIEA.
(3) Regarding the above capital adequacy shortfall, supervisors shall issue an order for the implementation of thefollowing measures, for example, based on Article 53(1) of the FIEA when it is deemed to be necessary andappropriate to do so from the viewpoint of protecting public interests and investors, in light of the Financial
Instruments Business Operator’s conditions that have been identified through the submitted report and hearings.
(i)

To draft and implement measures (including the drafting of specifics and the implementation schedule) tobring the capital adequacy ratio back above the legally prescribed level and maintain the ratio above that levelon a permanent basis.
(ii)

To implement measures to ensure the protection of investors in preparation for an unexpected event,through appropriate management of securities and cash and careful management of fund-raising.
(iii) To avoid activities that could lead to wasteful use of corporate assets.
(iv) To compile the projections of the balance sheet and fund-raising status on a daily basis and the projectionof capital adequacy ratio in ways to reflect the specific measures to be implemented, in order to bring thecapital adequacy ratio back above the legally prescribed level.
IV-2-3 Control Environment for Managing Market Risks
Market risks include the risk of a Financial Instruments Business Operator incurring losses due to fluctuationsin prices of its asset holdings (including positions related to off-balance transactions) caused by changes in various
market-related risk factors, such as prices of securities and other financial instruments, interest rates and exchange
rates, as well as credit and other risks associated therewith. It is important for Financial Instruments Business
Operators to properly manage market risks.
(1) Major Supervisory Viewpoints
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Whether the Financial Instruments Business Operator properly manages market risks by developing acomprehensive control environment for risk management, properly recognizing and evaluating the risks, properly
setting and managing position limits and establishing a system of checks and balances based on the clear allocationof roles and responsibilities.
(2) Supervisory Method and Actions
Supervisors shall strive to identify and keep track of the status of a Financial Instruments Business Operator’smarket risk and its risk management through monthly offsite monitoring reports and hearings based thereon and,
when necessary, require it to submit a report based on Article 56-2(1) of the FIEA and urge it to make improvement
efforts.
(3) Specific Procedures(i)

Risk Management Regarding Proprietary Trading

When identifying and managing market risks regarding proprietary trading, a Financial Instruments Business
Operator must pay attention to the following points, in addition to identifying the value of the market risk
equivalent on a daily basis, based on Article 178(2) of the FIB Cabinet Office Ordinance.
A. Appropriate Risk Management Regarding Proprietary Stock Trading
a. A Financial Instruments Business Operator should set the maximum allowable value of market
risks that may be allotted to proprietary stock trading or reasonable limits and risks equivalent
thereto (hereinafter referred to as the “allowable market risk value, etc.”), based on an appropriate
capital adequacy ratio target set with due consideration of its own financial condition and otherfactors.
b. A Financial Instruments Business Operator should monitor on a daily basis whether its proprietarystock trading operations are conducted properly within the allowable market risk value, etc.
c. From the viewpoint of maintaining the capital adequacy ratio above the target level, a Financial
Instruments Business Operator should take necessary measures regarding the allowable market
risk value, etc., such as reviewing and revising it in a timely manner, in light of changes in its own
financial condition, including profits/losses from proprietary stock trading.
B. Appropriate Management of Proprietary Trade Operations during Daytime
a. A Financial Instruments Business Operator should develop a control environment for managing
proprietary stock trading operations so as to keep them within the allowable market risk value, etc.
b. Instead of using the management method described in A. above, a Financial Instruments Business
Operator may manage proprietary stock trading operations so as to keep them within the allowable
market risk value, etc., during the daytime with similar methods using the position amount, as
described below:i) To make sure that the value obtained by multiplying the total amount of positions at specificpoints during the daytime with the internally prescribed volatility margin for loss cutting does
not exceed the allowable market risk value, etc.
132ii) To make sure that the value obtained by multiplying the value of positions accumulated by
specific points during the daytime with the internally prescribed volatility margin for loss
cutting does not exceed the allowable market risk value, etc.
iii) To allocate position limits set in light of the allowable market risk value, etc., as specified in
A. above by trader and unit, and check the status of compliance with the allocated position
limits as necessary.
C. A Financial Instruments Business Operator should develop a control environment that ensures theimplementation of appropriate measures when it has recognized a situation that could have a significant
impact on the soundness of its financial condition.
(ii)

Checkpoints regarding Rational Reason for Selecting Calculation Method of Market Risks
In cases where a Financial Instruments Business Operator selects the standard approach or the internal

control model-based approach by either risk category or business type for the calculation of the value of themarket risk equivalent based on Article 3(4) of the Capital Adequacy Notice, supervisors shall examine
whether there is a rational reason for the selection, by paying attention to the following points:
A. When the calculation method of market risks is selected by risk categorya. Whether the Financial Instruments Business Operator can better identify market risks by selecting
different calculation methods for different risk categories.
b. Whether the division in charge of comprehensively identifying the overall market risks is
independent from other divisions.
B. When the calculation method of market risks is selected by business typea. Whether the Financial Instruments Business Operator can better identify market risks by selecting
different calculation methods for different business types.
b. Whether the Financial Instruments Business Operator has developed a control environment that
ensures that the division in charge of comprehensively identifying the overall market risks
identifies the value of the market equivalent by risk category.
(iii) Representative Stock Price Indexes of Designated Countries
In cases where a Financial Instruments Business Operator calculates the stock risk equivalent based on thestandard approach, and has selected stock price indexes other than those listed below as the representative
stock price indexes of the designated countries, supervisors shall examine whether the selected indexes are
suited to be treated as the representative stock price indexes of the relevant countries, in light of the transaction
status and other factors.
A. Japan: Nikkei Stock Average, Nikkei 300 Stock Index, TOPIX Index
B. United States: S&P500
C. Italy: MIB 30
D. Australia: ASX200
E. Netherlands: AEX
F. Canada: S&P Toronto Composite Index
G. United Kingdom: FTSE100
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H. Switzerland: SMI
I.

Sweden: OMX

J.

Spain IBEX35

K. Germany: DAX
L. France: CAC40
M. Belgium: BEL20
N. Hong Kong: Hang Seng(iv) International Organizations
In cases where a Financial Instruments Business Operator calculates the value of the interest rate risk
equivalent based on the standard approach, the following shall be deemed to fall under the category ofinternational organizations:International Bank for Reconstruction and Development
International Finance Corp.
Multilateral Investment Guarantee Agency
Asian Development BankInter-American Development Bank
African Development Bank
European Investment Bank
European Investment Fund
Nordic Investment Bank
European Bank for Reconstruction and Development
Caribbean Development Bank
Islamic Development BankInternational Finance Facility for Immunisation
Council of Europe Development Bank(v)

Checkpoints Regarding External Audits of Internal Control Model
Regarding a Financial Instruments Business Operator using an internal control model-based approach,supervisors shall annually check the results of external audits of the risk measurement process and the risk
measurement model used in the previous year.
(vi) Pre-Auction Trading of Government Bonds
It should be kept in mind that in cases where a Financial Instruments Business Operator engages in preauction trading of government bonds, the calculation of the capital adequacy ratio prior to the announcementof the coupon rate and other items should be made according to the following procedures:
A. In calculating the value of the risk equivalent, the Financial Instruments Business Operator should use
a coupon rate calculated in a reasonable manner in light of the prevailing rate in the secondary market
at the time of the calculation, or use the coupon rate on the most recent government bond with the same
maturity and the same issuance format with the relevant government bond (in the case of a government
bond whose coupon rate is determined through the formula “standard interest rate – α of the previous
134bond,” “the most recent standard interest rate – α”) as a provisional coupon rate, and the same calculation
method should continue to be used.
B. After the auction of the relevant government bond has been conducted and the issue name, coupon rate
and other details have been announced, the Financial Instruments Business Operator should recalculate
the value of the risk equivalent based on the actual coupon rate without any delay, and use it for the
calculation of the capital adequacy ratio on and after the announcement date of the said coupon rate.
(vii)

Risk Management of Credit Investments Such as Securitization Products
In the case of investments in marketable credit products such as securitization products, whether the

Financial Instruments Business Operator conducts risk management with due regard to the following points.
It should be noted that similar consideration is required for marketable loans (regardless of whether theoperator originates them or acquires them in the secondary market) and transactions of CDS.
A. Proper price evaluation of products
Whether the Financial Instruments Business Operator evaluates the price of marketable credit products(including marketable loans and CDS transactions) with due consideration to the following points.
a. Whether the Financial Instruments Business Operator evaluates price in as objective a manner as
possible through such measures as evaluating the price by referencing the frequently-traded pricewhen such a price is available, and, in cases where such a price does not exist, by referencing theprice of similar products. In addition, in cases where a price evaluation model is used, whether theoperator understands that such a model is based on certain assumptions and verifies theappropriateness of the model by reviewing the assumptions and reasoning behind it.
b. In cases where a product price calculated by the front-end divisions is used as the market value forrisk management purposes, whether such price is independently verified by the risk management
divisions, etc.
c. In cases where a price evaluation is obtained from brokers and external vendors, whether the operator
is seeking as much information as possible regarding the methods of price evaluation and making
efforts to verify the appropriateness of the relevant price evaluation. Furthermore, in cases where aprice appraisal model provided by external vendors is used, whether the operator requests thesevendors to provide as detailed information as possible and makes efforts to understand theassumptions, characteristics and limitations of such a model.
d. In cases where a price evaluation model is used and the liquidity risk or uncertainty risk of the priceevaluation model is deemed to be significant, whether the operator gives due consideration to suchrisks.
B. Proper understanding of product details in the investment of securitization products, etc.
a. Whether the Financial Instruments Business Operator has established a control environment in order
to avoid relying excessively on external credit ratings for investments in securitization products, etc.
and for its intra-term management by, for example, precisely understanding the rating methods usedby the credit rating agencies and the meaning of such ratings before using them.
b. Whether the operator, when investing in securitization products, makes efforts to understand the135nature of the securitization products, etc., such as by understanding the contents of underlying assets;
analyzing their structures by looking into the priority-subordinate structure (extent of leverage) andthe status of liquidity support, credit enhancement, and details of credit events; and understanding
the situation of price fluctuations.
c. Whether the operator investing in securitization products makes efforts to understand and monitor theskills and qualifications of the relevant parties and the organizational structure, as the operation andmanagement of the portfolio of underlying assets rely on relevant parties such as the originators andmanagers.
d. When the originator, in structuring the underlying assets, intends to transfer the entirety of theunderlying assets to vehicles of securitization for securitization products at the initial stage, the risksof the interests in the relevant securitization products may be heightened as a result of inappropriate
structuring of the underlying assets due to, for example, inadequate analysis of the investments. As
such, it is desirable that the originator continuously retain the part of the risks associated with suchsecuritization products.
In view of this, whether the operator checks if the originator continuously retains the part of the risks
associated with the securitization products.
In cases where the originator does not retain such risks, whether the operator thoroughly analyzes
the status of the originator's involvement in the underlying assets, and the quality of such assets.
C. Management of market liquidity riska. Whether the Financial Instruments Business Operator properly verifies the market liquidity forinvestments in securitization products and for their intra-term management. It should be noted thatthe following methods can be considered for verifying market liquidity.
i) Check whether the operator's invested amount represents an excessive share relative to the overallmarket sizeii) Assess the bid-offer spread in the market, and the price level at which the products can actually
be sold, through hearings etc.
iii) Monitor changes in market conditions through analysis of available indices (such as those of
securitization products)iv) Design stress scenarios regarding the market liquidity drying up, and assess the profit/loss etc. ofthe securitization portfolio
b. Whether the operator has a control environment in order to promptly consider measures to addressrisks related to the market liquidity of securitization products, etc. when concerns regarding themarket liquidity are observed
D. Management of risks associated with the structuring of securitization products, etc.
a. Whether the Financial Instruments Business Operator has taken into consideration the possibility thatrisks attributable to the underlying assets (or the risk associated with relevant loans) might become
difficult to transfer to investors due to changes in market conditions (pipeline risk) during the processfrom the structuring of the securitization products to their sale (or the sale of marketable loans). Also,136

whether the operator has considered measures to be taken after the buy-back (measures such as
securing new investors, the inclusion of the product in the proprietary portfolio, etc.) when it buys
back a securitization product, as well as the risk that it may retake the risks associated with theunderlying assets after their sale as a result of, for example, clauses such as a buy-back clause in thesale contract. Whether the operator judges the relevant risks and returns in the provision of
securitization (syndication) services, taking the above risks into consideration.
b. Even if the risks associated with the underlying assets are transferred to investors by structuring andselling securitization products through unconsolidated special purpose companies, etc., the operator
may retake the risks associated with underlying assets due to, for example, reputational risk,
depending on the changes in market conditions.
As such, whether the operator has previously considered the above possibility through measures suchas reflecting this possibility in its stress tests.
Whether the operator judges the relevant risks and returns in providing securitization (syndication)
services, taking the above risks into consideration.
IV-2-4 Counterparty Risk Management Framework
Counterparty risk refers to risk arising from holding the obligations of a counterparty, namely the risk that a
Financial Instruments Business Operator will incur losses due to a failure by the counterparty to fulfill its contractual
obligations. It is important for Financial Instruments Business Operators to properly manage counterparty risk.
(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator properly manages counterparty risk by developing acomprehensive control environment for risk management, properly recognizing and evaluating the risks, conducting
internal screening when a new product or a new business is introduced and establishing a system of checks andbalances based on the clear allocation of roles and responsibilities.
(2) Supervisory Method and Actions
Supervisors shall strive to identify and keep track of the status of a Financial Instruments Business Operator’scounterparty risk and its risk management, through monthly offsite monitoring reports and hearings based thereon
and, when necessary, require it to submit a report based on Article 56-2(1) of the FIEA and urge it to make
improvement efforts.
(3) Specific Procedures(i)

Checkpoints Regarding Collateral Deducted from Value of Credit Equivalent
In cases where a Financial Instruments Business Operator has deducted the appraisal value of funds andother assets pledged as collateral based on Article 15 (5) and (6) of the Capital Adequacy Notice, supervisors
shall examine whether the deducted value is appropriate by paying attention to the following points:
A. Whether the relevant funds and other assets pledged as collateral are eligible as collateral.
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B. Whether the appraisal value of the relevant funds and other assets and the value of the market risk
equivalent that should be deducted therefrom have been calculated in an appropriate manner.
(ii)

Checkpoints Regarding Legally Valid Bilateral Netting Contract
In cases where a Financial Instruments Business Operator calculates the value of the credit equivalentregarding a transaction made under a legally valid bilateral netting contract based on the netted value and uses
it for the calculation of the value of the counterparty risk equivalent, supervisors shall check the following
points:A. Whether the Financial Instruments Business Operator has obtained a confirmation, in writing whennecessary, of a legal opinion that indicates that if the counterparty to the transaction goes bankrupt or adispute with the counterparty arises, the rational judgment of the court of jurisdiction or the authorities
concerned will be that the business operator’s provision of credit should be limited to the netted value
under the relevant netting contract in light of the relevant laws.
B. Regarding the relevant laws, whether the Financial Instruments Business Operator has checked, at theminimum, the following ones:a. The laws of the country that has granted an establishment license or authorization to thecounterparty to the transaction and the laws of the countries where the counterparty’s overseas
sales branches and business offices are located.
b. The laws related to the specific transactions covered by the netting arrangement and the legal basis
for the nettingc. The laws related to the contracts necessary for the netting and the legal basis for the netting(iii) Checkpoints Regarding Commitment to Guarantee
Supervisors shall check whether the Financial Instruments Business Operator recognizes a contract
assuring a future conclusion of a loan guarantee contract as a commitment to guarantee, regardless of in whatform or name the contract is made, and includes it in the calculation of the value of the counterparty risk. A
document made in the name of a “management guidance promise note” (which is submitted by a parent
company to a financial institution that provides a loan to its subsidiary in order to acknowledge its
responsibility for supervising the subsidiary and providing management guidance) shall be deemed to fallunder the category of commitments to guarantee, if its contents are deemed to have a legal force similar tothat of a loan guarantee or a commitment to guarantee, and if it needs to be noted in the balance sheet under
Article 58 of the Rules on the Terminology, Formats and Compilation Method of Financial Statements(hereinafter referred to as the “Rules on Financial Statements, etc.”).
(iv) Checkpoints Regarding Corporations Deemed to Be Insolvent
A corporation deemed to be insolvent as a result of inspection by an inspection department or through anexternal audit shall be deemed to fall under the category of the “corporations deemed to be insolvent from an
objective standpoint” as specified under Article 15(3)(iii) Table (Note 3)(4) of the Capital Adequacy Notice.
(v)

Checkpoints Regarding Consolidated Financial Statement-Submitting Companies
Supervisors shall keep in mind that consolidated subsidiaries for which a consolidated-financial statement-

submitting company, as specified under Article 15(3)(iii)(refer to Note 1), is allowed to calculate the value of138

the counterparty risk equivalent based on a eligible rating assigned to itself, are companies which are coveredby the said company’s consolidated financial results and which are subject to appropriate external audits
regarding the relevant consolidated financial results, and supervisors shall check on this point as necessary,
based on audit reports. In addition, supervisors shall monitor, as necessary, a consolidated-financial-statementsubmitting company’s calculation of the values of the credit equivalent and the counterparty risk equivalentrelated to its transactions with affiliated companies in order to make sure, in reference to contracts, audit
reports and other documents and materials, that the calculation is appropriate.
(vi) International Organizations
In cases where a Financial Instruments Business Operator calculates the value of the counterparty risk
equivalent based on the standard approach, the following shall be deemed to fall under the category ofinternational organizations:International Bank for Reconstruction and Development
International Finance Corp.
Multilateral Investment Guarantee Agency
Asian Development BankInter-American Development Bank
African Development Bank
European Investment Bank
European Investment Fund
Nordic Investment Bank
European Bank for Reconstruction and Development
Caribbean Development Bank
Islamic Development BankInternational Finance Facility for Immunisation
Council of Europe Development Bank
(4) Non-Cleared Over-The-Counter Derivative Transactions(i) Variation Margin
Whether a Financial Instruments Business Operator (including Financial Instruments Business Operators
whose average total notional amount of outstanding over-the-counter derivative transactions falling under
Article 123, paragraph(11), item(iv)B of the FIB Cabinet Office Ordinance is less than 300 billion yen) has
made effort to develop a framework for the appropriate management of variation margin for non-cleared
over-the-counter derivative transactions with financial institutions, in accordance with Article 123,
paragraph(1), item(xxi-viii) of the FIB Cabinet Office Ordinance and other related provisions, as well as withthe “Final Report on Margin Requirements for Non-Centrally Cleared Derivatives” published by the BaselCommittee on Banking Supervision and the International Organization of Securities Commissions (March
2015), and taking into consideration, for example, the following:
A. Conclusion of an appropriate agreement with counterparties pertaining to variation margin (for instance,139

an ISDA Master Agreement and a CSA Agreement).
B. Consideration of relevant foreign exchange risks when variation margin is collected in cash in a currency
other than a major currency (such as Japanese yen, U.S. dollars, or Euro) and such currency differs fromany currencies previously agreed upon by the parties, given that Article 123, paragraph (10),item (i) of the
FIB Cabinet Office Ordinance does not require a haircut for foreign exchange risk in connection withvariation margin posted in cash.
Whether a Financial Instruments Business Operator with an average total notional amount of outstanding
non-cleared over-the-counter derivative transactions of less than 300 billion yen that falls under Article
123, paragraph (11), item (iv)B of the FIB Cabinet Office Ordinance has made efforts to develop aframework for calculating the mark-to-market value of its non-cleared over-the-counter derivativetransactions and exchanging variation margin with sufficient frequency, as well as for exchanging variation
margin in response to ad-hoc calls (ad-hoc margin demands), taking into consideration the volume of its
transactions and its risk profile.
(ii) Initial Margin
Whether a Financial Instruments Business Operator subject to the provisions of Article 123, paragraph (1),item(xxi-ix) (initial margin) of the FIB Cabinet Office Ordinance has made efforts to develop a framework forthe appropriate management of initial margin for non-cleared over-the-counter derivative transactions subject
to that provision, in accordance with that provision and other related provisions, as well as the “Final Reporton Margin Requirements for Non-Centrally Cleared Derivatives” published by the Basel Committee on
Banking Supervision and the International Organization of Securities Commissions (March 2015), and taking
into consideration, for example the following:.
A. Conclusion of an appropriate agreement with counterparties pertaining to initial margin (for instance, an
ISDA Master Agreement and a CSA Agreement as well as an agreement pertaining to the initial margin
management (such as an agreement for the establishment of a trust)).
B. Proper ensuring of the safety of any initial margin collected in the form of cash places into trust that is
managed as permitted in Article 123, paragraph (1), item (xxi-ix)E of the FIB Cabinet Office Ordinance.
C. Calculation of Initial Margin
a. Calculation of potential future exposure using transaction categories that are capable of appropriately
capturing risks associated with the transactions using either a quantitative calculation model or the
standardized margin schedule as provided in Article 1 of the “Calculation Method of Potential Future
Exposure Designated by the Commissioner of the Financial Services Agency in accordance with theProvision of Article 123, paragraph (1), item(xxi-ix) of the Cabinet Office Ordinance Concerning
Financial Instrument Businesses” (hereinafter referred to as the “Notice on Calculation of Potential
Future Exposure”).
b. When a quantitative calculation model is used, development and implementation of appropriate
management procedures and verification through back testing or other means by the model control unit
in accordance with items (ii) through (v) of Article 6 of the Notice on Calculation of Potential Future
Exposure.
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c. When a quantitative calculation model is used, implementation of proper internal audits in accordancewith Article 6, item(vi) of the Notice on Calculation of Potential Future Exposure.
(iii) Initial Margin and Variation Margin
Whether the Financial Instruments Business Operator with respect to (i) and (ii), above, has made efforts todevelop a framework forappropriate management of initial margin and variation margin, taking into

consideration, for example, the following.
A. Appropriate diversification of assets used as margin, such as by imposing certain limits on, for example,
the use of illiquid securities
B. Establishment in advance of a dispute resolution mechanism, implementation of appropriate responses todisputes that arise, and recording and preservation of the details of any such disputes.
C. Appropriate risk management related to non-cleared over-the-counter derivative transactions, for which
the exchange of margin is not required because the transactions involve counterparties that are financial
institutions in a foreign jurisdiction where the validity of close-out netting arrangements has not been
confirmed.
IV-2-5 Control Environment for Managing Liquidity Risk
Liquidity risk refers to the risk that because of deterioration in business performance or other factors, aFinancial Instruments Business Operator will face a credit crunch as it fails to raise necessary funds, or incurs
losses as it is forced to obtain funds at markedly higher interest rates than under normal circumstances (fundingrisk). It also refers to the risk that a financial institution will incur losses because it is unable to conduct market
transactions or is forced to conduct transactions at far more unfavorable prices than under normal circumstances,because of market turmoil and other emergency market developments (market-liquidity risk). It is important for
Financial Instruments Business Operators to properly manage liquidity risks.
(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator properly manages liquidity risk by taking measures suchas the following, depending on the contents and scale of its business, with the aim of developing a comprehensive
control environment for risk management, properly recognizing and evaluating the risks and establishing a systemof checks and balances based on the clear allocation of roles and responsibilities.
(i)Managing fund-raising on a daily basis, and compiling projections and managing fund-raising on a

medium and long-term basis(ii)

Establishing and controlling the limits for asset management(iii)

Comprehensively managing transactions in yen or foreign currency, and domestic or overseas transactions(iv)

Securing financing methods (cash reserves) in preparation for a sudden change in the nature of thebusiness or market climate(v)

Vesting the person in charge of liquidity risk management with the authority to collect information andcontrol operations141

(2) Supervisory Method and Actions
Supervisors shall strive to identify and keep track of the status of a Financial Instruments Business Operator’sliquidity risk and its risk management through monthly offsite monitoring reports and hearings based thereon and,
when necessary, require it to submit a report based on Article 56-2(1) of the FIEA and urge it to make improvement
efforts.
IV-2-6 Early Warning System
As a means to maintain the soundness of the management of Financial Instruments Business Operators, thescheme for “prompt corrective actions” has been established under Article 46-6(1) of the FIEA. As well as Financial
Instruments Business Operators to which the scheme is applicable, those to which it is not applicable need to makecontinuous efforts to improve their management so as to maintain and enhance the soundness of the management.
Therefore, in cases where a Financial Instruments Business Operator meets the prescribed criteria regarding
changes in the capital adequacy ratio and in prices of securities listed below, supervisors shall strive to quickly
identify risks by, for example, holding a hearing and requiring the submission of a report based on the early warning
system.
(Note) Although supervisors shall take supervisory actions, including holding hearings, against Financial
Instruments Business Operators which meet the said criteria under the early warning system, the managementof such business operators should not automatically be deemed to be unsound, or supervisors shall notnecessarily urge them to make management improvement efforts.
Also, from the viewpoint of reducing the cost to be imposed on Financial Instruments Business Operatorsand increasing the efficiency of supervisory processes, the early warning system shall be flexibly operated ina manner suited to the size and the risk profiles of individual business operators.
(1) Change in Capital Adequacy Ratio
Supervisors shall identify the margin and rate of change in Financial Instruments Business Operators’ capital
adequacy ratios each month, based on offsite monitoring data, and analyze the risks that have materialized.
(2) Change in Prices of Securities
Supervisors shall identify the amount of Financial Instruments Business Operators’ securities holdings, basedon offsite monitoring data, and analyze market risks through stress testing that assumes a prescribed level of pricechange.
(3) Impact of Change in Foreign Exchange Rates
Supervisors shall identify the impact of changes in foreign exchange rates on Financial Instruments Business
Operators engaging in over-the-counter financial futures transactions, based on offsite monitoring data, and analyze
the risk of the business operators’ capital being eroded by changes in foreign exchange rates, in light of their methodof segregated management, their leverage ratio and the characteristics of their transactions.

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(4) Supervisory Method and Actions
In cases where a Financial Instruments Business Operator is deemed to meet the prescribed criteria regarding(1) to (3) above, based on the analysis of the relevant data, supervisors shall strive to quickly identify risks by, forexample, holding a hearing with it and requiring it to submit a report under the early warning system.
In addition, supervisors shall take actions, including issuing an order for business improvement based on Article
51 of the FIEA, when the action is deemed to be necessary in order to ensure the implementation of improvement
measures.

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IV-3 Appropriateness of Business Operations (Type I Financial Instruments Business)
IV-3-1 Appropriateness of Business Operations Related to Securities Businesses
IV-3-1-1 Control Environment for Legal Compliance
Securities companies, etc., act as market intermediaries that enable individual investors, institutional investors
and securities-issuing companies to make transactions smoothly in the financial instruments market. As theirbusiness operations have a highly public nature, securities companies, etc., must exercise their market intermediaryfunction in an efficient and stable manner by executing business operations in a highly reliable way while properly
protecting investors. To this end, they must also manage their business operations in a sound and appropriate mannerin their capacity as market players, while maintaining a high level of self-discipline.
Their control environment for legal compliance shall basically be examined based on the supervisory viewpoints
and method specified in III-2-1. However, it shall also be examined in relation to a broad range of matters, including
the status of compliance with voluntary rules adopted from the viewpoint of ensuring an appropriate exercise of themarket intermediary function.
IV-3-1-2 Control Environment for Customer Solicitation and Explanations(1) Points of Attention Regarding Explanation Documents“The Key Points of the Status of Internal Control” in the Explanation Documents as specified under Article 464 of the FIEA (Article 174(iv) of the FIB Cabinet Office Ordinance) shall describe specific arrangements andprocedures for handling complaints and inquiries from customers and for conducting internal audits.
(2) Points of Attention Regarding Notification of Necessary Information Related to Delivery of Securities and Other
Matters
In cases where a securities company, etc., has failed to properly notify customers of the following items(including cases where the securities company, etc., has failed to notify customers of (iv) below through the method
agreed to by the relevant customers), the situation shall be deemed to fall under the category of “situations in which
information necessary for customers with regard to the status of delivery and other items regarding the customers’
securities transactions is deemed not to have been properly provided,” as specified under Article 123(1)(viii) of the
FIB Cabinet Office Ordinance.
(i)

Items that must be specified in writing when a contract is signed under Article 37-4(1) of the FIEA must

be notified to the customer.
(ii)

In cases where a customer has made a pre-auction government bond transaction, the issue name and priceof the government bond, the transaction amount and items notified in the transaction report at the time of theexecution of the relevant transaction (excluding the scheduled redemption date and the contracted yield) must
be notified to the customer after the auction of the relevant government bond.
(iii) In cases where a customer has made a pre-auction government bond transaction and where the condition144

precedent regarding the transaction has not been met, the fact of the condition being unmet and items regarding
the execution or non-execution of the relevant transaction (excluding cases where the customer has agreed tothese items not being notified) must be notified to the customer.
(iv)

In addition to the items described in (i) to (iii) above, items related to the delivery of cash and securities(excluding cases where the transaction does not involve the direct delivery of cash and securities between thecustomer and the Financial Instruments Business Operator, such as when the delivery of cash is made througha financial institution and when the delivery of securities is made through a transfer settlement.) must be
notified to the customer.
(3) Points of Attention Regarding Solicitation Targeting Elderly Customers
Even when they have ample investment experience, elderly customers can be physically weak and their ability
to make investment decisions may change quickly. As such, solicitation of investment targeting elderly customers
calls for, based on the Principle of Suitability, securing a discreet solicitation and sales structure and having amonitoring system to discover problematic solicitation or sales activities. It is necessary to follow up carefully suchcustomers also after sale of products by a Financial Instruments Business Operator. In light of the above, supervisor
shall perform supervision, focusing on the following points.
(i) Whether the operator has internal rules on solicitation and sales activities targeting elderly customers and asystem to monitor the status of compliance with such internal rules, based on the self-regulatory regulationsof the Japan Securities Dealers Association, entitled “Regulations Concerning Solicitation for Investments
and Management of Customers, etc., by Association Members,” and "How to Interpret Article 5(3) ofRegulations Concerning Solicitation for Investments and Management of Customers, etc., by Association
Members," (guidelines on sales through solicitation targeting elderly customers).
(ii) Whether the operator follows up elderly customers in a careful manner even after the sale of the product, forexample by trying to understand their issues from their viewpoint, advising them on their issues in every minor
detail and assisting them with their investment judgment.
(4) Points of Attention Regarding Solicitation of Investment Trusts
Given that investment trusts are instruments that are solicited and sold to a broad range of customer groups,
including ordinary customers who do not have sufficient expert knowledge and experiences, it is important tocorrectly grasp customer needs taking into consideration their stages of life, status of their assets, purpose of theirinvestment, etc. and provide products that meet such needs, and conduct solicitation that is appropriate according
to the customer’s knowledge, experience and investment intention.
In addition, building an organizational structure for solicitation and sales that supports customers' stable asset
building while expanding investment trust assets under management is likely to help securities companies, etc. build
a stable profit structure that is not vulnerable to market fluctuations.
Therefore, supervisors shall, regarding solicitation of investment trust products, conduct supervision by
paying particular attention to the following points, for example.
(i)Whether the following points are explained in an easy-to-understand manner at the time of solicitation of145

investment trust products in relation to costs incurred by customers (excluding specified investors; ;hereinafter the same shall apply in (ii)-(iii) ), such as commission on sales of investment trusts.
A. The rates of commission on sales, and the amounts of commission on sales that varies in accordance withthe amount being purchased, of the investment trusts to be solicited (a rough estimate shall be provided
if the exact figure is not available at the time of solicitation.).
B. Costs incurred by customers after purchasing the investment trusts under solicitation (including, forinstance, trust fees (real contribution rates including the asset management costs of the destination fundsof investment in cases of investment trusts using a fund-of-funds strategy), the value of assets retained in
the trust, etc.)(ii)

With respect to dividends on investment trusts, whether it is explained to customers in an easily

understandable manner, that all or part of the dividends may correspond to a partial repayment of principal.
(iii) Given that multi-currency funds involve not only a risk that the price of the invested asset will fluctuate
but also the complex risk of currency fluctuation, when entering a contract with a customer that has noexperience in investing in multi-currency funds, whether the securities company, etc. takes measures, such asreceiving a written confirmation from the customer to the effect that he/she has understood the productcharacteristics and risk profile, and keeping it.
(5) Points of Attention Regarding Explanation of Important Items Related to Investment Trust Switching
Solicitation of frequent switches to other investment trusts may not necessarily lead to the customer's stableand effective asset building due to such factors as increased costs arising from additional commissions on sales and,in terms of asset management, and potential declines in investment results arising from an increase in cancellations
shortly after establishing a new fund that lead to failure to efficiently manage the assets. In light of this, it isnecessary to provide detailed explanations to customers on the characteristics of investment trusts related toswitching between them and the advantages and disadvantages associated with the relevant switching even when
there is rationale for switching in light of customers’ investment goals, market trends, etc., to enable customers tojudge whether there is the need to make such switching after they have fully understood these points.
Reflecting these considerations, in cases where a securities company, etc. has failed to provide explanations
regarding the information necessary for customers to make a judgment as to whether there is a rationale for theswitching of investment trusts or investment corporations (hereinafter referred to as "investment trusts, etc."),including the consistency of the switching and customers' investment purposes, in accordance with each customer's
depth of understanding, and when it is found that it has failed to establish an internal control system for conducting
effective verification, the situation shall be deemed to fall under the category of "situations in which explanations
regarding important items related to switching have not been provided to customers in the solicitation for switchingof investment trust beneficiary certificates, etc.," as specified under Article 123(1)(ix) of the FIB Cabinet Office
Ordinance. The information necessary for customers to make a judgment as to whether there is a rationale forswitching may include roughly calculated profit and loss of the investment trust, etc. to be cancelled and comparisonsof merchantability and expenses between the investment trust, etc. to be cancelled and that to be newly acquired, in
addition to general items to be explained in relation to sale of investment trusts, etc., but it shall be noted that146

explanations may vary by case depending on each customer's knowledge, experience, status of assets, investment
purposes, and the characteristics of relevant investment trusts, etc.
(6) Points of Attention Regarding Secondary Offering of Bonds(i)

Cases in which a securities company, etc., has failed to provide explanations regarding the following

situations when soliciting individual customers (excluding specified investors) to acquire bonds (securities as
specified under Article 123(1)(xi) of the FIB Cabinet Office Ordinance; hereinafter the same shall apply in(6)) or selling bonds to them in a secondary offering, under Article 2(8)(viii) or (ix) (excluding the provision
regarding private placement of securities) shall be deemed to fall under the category of “cases in which
explanations regarding important incidents that have occurred during the application period for the acquisitionor purchase of the relevant securities and could affect investment decisions have not been individual customers(excluding specified investors),” as specified under Article 123(1)(xi) of the FIB Cabinet Office Ordinance.
A. When the yield on the relevant bond has become markedly disadvantageous to the customer comparedwith the yield on a similar bond already issued by the same issuer, the situation must be explained.
B. When the redemption terms of the relevant bond are determined by the market condition and otherbenchmarks (hereinafter referred to as “benchmarks, etc.”), and the condition of benchmarks, etc.,
regarding the bond at the time when the securities company, etc., is soliciting customers to buy the bondor selling the bond to them is disadvantageous to the customer compared with the condition of thebenchmarks, etc., that were used as a reference when the issuance terms or sales terms were determined,
the situation must be explained.
(ii)

Regarding (i) A. above, the following points shall be taken into consideration:
A. The “relevant bond” is a bond that falls under the category of corporate bonds, etc., intended forindividuals (referring to corporate bonds, etc. intended for individuals as specified under Article 2(1) of
the self-regulatory regulations of the Japan Securities Dealers Association, entitled “Rules on
Publication of Over-the-Counter Quotations Regarding Corporate Bonds, etc. Intended for Individuals”;
the same shall apply hereinafter).
B. The “similar bond” is a corporate bond intended for individuals which matures in less than six months
after the maturity date of the relevant bond (newly issued bond) and whose maturity date is the closest
to that of the relevant bond (when there are two or more such bonds, the one that was issued mostrecently).
C. Whether or not a certain situation should be deemed as a “situation markedly disadvantageous to thecustomer” shall be judged with due consideration of the interest rate level at the time of the offer(secondary offer) and other circumstances. For example, the value α obtained through the following
formula may be used as a basis for the judgment.
α = X (credit spread equivalent of a similar bond) – Y (credit spread equivalent of the relevant bond(newly issued bond))
X = (average (refer to Note) of reported values, as specified under the “System for Publication ofOver-the-Counter Quotations Regarding Corporate Bonds, etc., Intended for Individuals” (values
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published on the day before the offer date) regarding the similar bond) – (average simple yield(the value published on the same day as the offer date), calculated on the basis of reference bondtrading statistics published by the Japan Securities Dealers Association, of the government bondwhose maturity date is closest to that of the similar bond)Y = (subscribers’ yield (average simple yield) of the relevant bond (newly issued bond)) – (average
simple yield (the value published one day after the terms-setting date), calculated on the basis ofreference bond trading statistics published by the Japan Securities Dealers Association, of thegovernment bond whose maturity date is closest to that of the relevant bond (newly issued bond))(Note) The “average of reported values as specified under the ‘System for Publication of Over-theCounter Quotations Regarding Corporate Bonds, etc. Intended for Individuals’ regarding thesimilar bond” shall be a simple average of values (simple yields) that are reported by reporting
members to and published by the Japan Securities Dealers Association under this system.
(iii) Regarding (i) B. above, the following points shall be taken into consideration:
A. A “situation disadvantageous to the customer” refers to a case in which the theoretical price of therelevant bond at the time of the solicitation (or the theoretical price based on the closing price of therelevant bond on the previous day) has fallen below the bottom of the range set in advance by the
securities companies, etc., in relation to the offer price (secondary offer price).
B. The theoretical price in A. above shall be calculated through the calculation formula which was used asa basis for determining the issuance (secondary offer) terms of the bond, and the price range shall be
determined in light of the levels prescribed under internal rules regarding sales after the offer andsecondary offer periods. In addition, records on the calculation formula for the theoretical price shall beorganized and recorded, and appropriate arrangements and procedures, including the establishment ofinternal rules, regarding the handling of such records shall be established.
C. Regarding bonds whose redemption terms depend on the stock market condition, such as bonds
exchangeable with stocks of other companies and Nikkei Average-linked bonds with a special
redemption provision (hereinafter referred to “EBs, etc.”), the definition of a “situation disadvantageous
to the customer” may be changed from A. above to “a case in which the price of the relevant stock at
the time when the securities companies, etc., solicit customers to acquire or sell EBs, etc., in a secondaryoffer to them (or the closing price of the stock on the previous day) has fallen more than 7% below theinitial price (the price of the relevant stock used as a basis for determining the issuance terms or the
price regarded by individual companies as equivalent thereto).(Limited to cases where the use of thisdefinition was decided before the offer (secondary offer) period.)
D. Regardless of which of the above definitions in (A) and (C) is used during the offer/ secondary offer
periods, cases in which, after the offer/secondary offer periods, appropriate prices calculated based oninternal rules are not offered in the sale of EBs, etc., may be deemed to constitute a violation of Article
117(1)(ii) of the FIB Cabinet Office Ordinance.
(iv) In cases where securities companies, etc., are to conduct solicitation for acquisition under brokeragecontracts, they shall provide explanations specified under Article 123(1)(xi) of the FIB Cabinet Office148

Ordinance.
(7) Points of Attention Regarding Sale of Securitization Products (Assurance of Traceability of Securitization
Products)
Some securitization products have a complex structure and involve several parties in the origination to sales
processes. Therefore, if the originator of the underlying assets fails to properly provide information regarding thecontents of the underlying assets and the risks involved therein to the parties involved in the processes, such as theoriginator of securitization products, the seller and investors, it may become difficult for investors to identify risks
precisely.
As transactions involving securitization products are basically made between professional investors (e.g.,securities companies, etc., and qualified institutional investors), they are unlikely to be subject to the legal regulation
on disclosure and the legal obligation for explanations. However, regarding the sale of securitization products,
supervisors shall pay attention to the following with due consideration of the viewpoint described above as well as
the self-regulatory regulations of the Japan Securities Dealers Association, entitled “Regulations Concerning theDistribution, etc. of Securitized Products.”
Even if securities companies, etc., play only a limited role in transactions, such as acting as a sales agent, it isdesirable that they provide support where possible, as long as they deal with investors.
(i)Whether before selling securitization products, the securities company, etc., collects information

regarding the contents of the underlying assets, the status of the originators’ continuous retention of the risks
and the risks involved therein and conducts sufficient analysis to provide appropriate explanations.
(ii)

Whether the securities companies, etc., has established the internal procedures and rules necessary to

avoid relying exclusively on credit ratings, and provides information regarding the risks involved in theunderlying assets and liquidity risks not reflected in credit ratings when they sell securitization products.
(iii) Whether the securities company, etc., has established the internal procedures and rules necessary forproviding information, in ways that enable customers investing in securitization products to trace information
regarding the contents of the underlying assets and the risks involved therein, if requested to do so by theinvestors.
(iv)

Whether the securities company, etc., has developed a control environment for evaluating and calculating

theoretical prices and quickly informs customers of them, even when it is difficult to determine market prices.
Whether the securities company, etc., avoids evaluating and calculating theoretical prices in an arbitrary
manner so as to refrain from giving priority to promoting arbitrary use of the information for specific purposes.
(8) Points of Attention Regarding Solicitation of Transactions That Use Tax Exemption for Small-Amount
Investments
Tax exempt small-amount investment scheme “Nippon Individual Savings Account” which was introduced in
January 2014 (hereinafter referred to as the "NISA Program"), was fundamentally expanded and was renewed asa permanent program in January 2024 from the perspective of accelerating a shift of household financial assets fromsavings to investment and developing an environment that enables households, particularly the middle class, to149

enjoy the benefits of growth through broad participation in the capital market. More specifically, the period of taxexempt holding was made indefinite and the account valid period was made permanent to enable people to build
assets continuously from early in life to later in life through long-term, installment and diversified investment. In
addition, the annual investment quota was expanded to respond to individuals' needs for making investments
intensively during a short term when they have surplus funds in accordance with their life stages. Furthermore, fromthe perspective of further strongly backing up a fund flow from households to the capital market, which will lead tocompanies' growth investment, the growth investment quota to enable investment in listed stocks was newly
introduced and it was made possible to use this quota concurrently with the quota for long-term, installment anddiversified investment in certain investment trusts (the "installment investment quota").
Supervisors, mindful of the above considerations, shall especially take note of the following points, while taking
into consideration the “Points of Attention upon the Opening of Account, Solicitation or Sale, etc. of the NISA
Program (Guideline)” (NISA Promotion and Liaison Association), (hereinafter referred to as the “Guideline” in thisparagraph (8)), in conducting their supervision work on solicitation, etc. for transactions that use the NISA Program,so that the NISA Program can be used appropriately in accordance with the design and purpose of the system.
(i) Development of Control Environment for Customer Explanations
A. Efforts to Improve Financial Literacy among Customers
Considering that the NISA Program is expected to be used by customers who lack ample knowledge
or experience of investment, such as novice investors and young people, whether the operator embraces
the view that helping improve such customers' financial (and investment) literacy and encouraging themto build their assets, instead of only complying with the Principle of Suitability dictated by law, arebeneficial to both customers and securities companies, etc., and is committed to providing basic
knowledge of investment, such as the benefits of medium- to long-term investment and diversified
investment, in an appropriate manner, in conjunction with the initiatives for financial and economic
education being implemented by the national government and other entities.
B. Explanation of the NISA Program
Whether the operator, when soliciting, or receiving application, etc.

for, opening tax-exempt

accounts related to the NISA Program(hereinafter referred to as “NISA accounts”), provides explanation
based on the Principle of Suitability, for example, simple and accurate explanation of matters requiredby the Guideline

as necessary, so that the customer may not have wrong understanding.

(ii) Provision of Financial Instruments in Ways That Take into Consideration the Design and Purpose, etc. of
the System
Whether the operator takes into account the purpose of the NISA Program, which is to encourage steadyasset building by households, and the customers’ purpose for using the NISA Program, and provides financial
instruments, etc. that can truly contribute to stable asset building of customers based on the Principle ofSuitability, etc.
When determining the effectiveness of contribution to stable asset building, it is necessary to pay attention
to not only the characteristics of the investment products but also the balance of customers’ overall investment
150

portfolios. In light of the purpose, etc. of the NISA Program, solicitation of unreasonable short-term rollovers
using the growth investment quota does not lead to the stable asset building of customers. Therefore,
supervisors shall also conduct supervision while paying attention to such solicitation activities.
(iii) Points of Attention regarding the Junior NISA
Regarding the tax exempt small-amount investment scheme for minors, which was introduced in April
2016 (hereinafter referred to as the "Junior NISA"), opening of new accounts and new purchases were
terminated in December 2023. However, minors' accounts for the Junior NISA (hereinafter referred to as"Junior NISA accounts") remain eligible for tax exemptions until account holders become 18 years old. It
should be noted that those accounts are not used as accounts under fictitious names by people with parental
authority, etc.
From this point of view, it is necessary to check whether Financial Instruments Business Operators, etc.
manage Junior NISA accounts properly by, for example, sending account activity statements, etc. addressed tothe account holders themselves based on their age, etc. and confirming that the funds belong to account holders
and are intended to be used for the benefit of the accountholders themselves upon withdrawals from Junior
NISA accounts.

(9) Points of Attention Regarding Sale of Investment Trusts, etc. Whose Investment Targets Include Assets Other
Than Specified Assets

Under the Act on Investment Trusts and Investment Corporations, investment trusts and investment
corporations are used for the purpose of investing mainly in specified assets, and are given special institutional
positions as the people's long-term and stable asset formation means. As it is inappropriate to sell the following
products in light of such purpose of the investment trust and investment corporation systems, supervisors shallconduct supervision by paying attention to whether those products are being sold:(i) Products whose investment targets include assets other than specified assets (hereinafter referred to as“non-specified assets” in this paragraph (9)) and specified assets that practically have the same nature as
non-specified assets, such as equity in investment in a fund for which non-specified assets are investment
targets, (hereinafter referred to as “non-specified assets, etc.” in this paragraph (9)) (however, this shallnot apply if the non-specified assets, etc. have a public nature, such as the “public facility, etc.”
prescribed in the Act on Promotion of Private Finance Initiative)(ii) Products which, when investing in assets other than the fund’s investment targets, invest in nonspecified assets, etc. with higher risk of price fluctuation, liquidity, etc. compared to the specified assetsthat are the original investment targets
Even for products which, when investing in assets other than the fund’s investment targets, invest in
non-specified assets, etc. with low risk of price fluctuation, liquidity, etc., particular attention shall be
paid to whether the following acts of sale are conducted, in light of the purpose of the investment trust andinvestment corporation systems:
A. Act of selling a product that is given a name that evokes non-specified assets
151

B. Act of soliciting for and selling a product by emphasizing investment in non-specified assets
C. Act of selling a product to a customer having insufficient understanding, without providing sufficient
explanation on the risks involved and confirming the customer’s understanding despite the fact thatthe investor bears risks in holding non-specified assets, etc.
(10) Points of Attention Regarding Development of the Operational Control System Provided in Article 70-2(7) of
the FIB Cabinet Office OrdinanceIn the case where a securities company, etc. provides the brokerage service prescribed in Article 70-2(7) of the
FIB Cabinet Office Ordinance by using an internal trading system (meaning the internal trading system prescribedin the same paragraph; the same applies in IV-3-1-2), attention shall be paid to whether the securities company, etc.
explains the following points to the customer in an easy-to-understand manner from the viewpoint of investor
protection:(i) Information on the person operating the internal trading system (including an outline of the company
and the presence or absence of proprietary trading using the internal trading system) and an outline ofother trading participants(ii) In the case of providing the brokerage service prescribed in Article 70-2(7) of the FIB Cabinet Office
Ordinance by using the internal trading system at a price equivalent to or more favorable than the price(including the matter equivalent to the price) on a financial instruments exchange market, etc. (meaning
a financial instruments exchange market or the Proprietary Trading System prescribed in Article 26-22(7) of the FIEA Enforcement Order), details of the structure thereof(iii) The trading rules (including the standards for trading participation, grounds for refusal, and themethod for the customer to exclude the method of forwarding the order to the internal trading systemfrom order execution options)(iv) The fact that the matching price at the time of forwarding the order does not necessarily guarantee afavorable price at the time of contract and that an order will not be intentionally executed undertransaction conditions disadvantageous to the customer(v) In the case of conducting transactions using the internal trading system mainly for the purpose of
enabling the customer to conduct transactions at more favorable prices, the situation of the priceimprovement effects in individual transactions generated by using the internal trading system (if theprices did not improve, including the reasons why)(vi) The method by which the customer requests disclosure of the items to be specified under Article 158(5)of the FIB Cabinet Office Ordinance concerning the customer’s own orders agreed by using the internaltransaction system(11) Points of Attention Regarding Evaluation of Sales Staff
In light of the purpose of developing a system for solicitation and sales that support customers' asset building
over the medium- to long-term, supervisor shall perform supervision by paying attention to whether the operationallevel evaluation of sales staff is not focused too much on revenues, such as commission on sales of investment trusts,
152

but appropriately assesses aspects of customer base expansion, as reflected, for example, in increases in assets undermanagement.
(12) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the control environment forcustomer solicitation and explanations of a securities company, etc., through daily supervisory administration andthe reporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the securities company, etc., by requiring the submission of reports based on Article 56-2(1) of the FIEA. Whenthe securities company, etc., is deemed to have a serious problem from the viewpoint of protecting public interestsand investors, the supervisors shall take actions, including issuing an order for business improvement based on
Article 51 of the FIEA. When the securities company, etc., is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider necessary actions, including the issuance of an order for businesssuspension based on Article 52 (1) of the FIEA.
IV-3-1-3 Discretionary Trading Contracts(1) Points of Attention Regarding Discretionary Trading Contracts with Foreign Securities Companies
When supervisors have received a notification regarding the signing of a contract based on Article 16(1)(viii)(b)of the Cabinet Office Ordinance Regarding the Definitions Specified under Article 2 of the Financial Instruments
and Exchange Act (hereinafter referred to as “Cabinet Office Ordinance Regarding Definitions”), they shall pay
attention to the following points:(i)

Whether the division that executes transactions regarding the said agreement is clearly separated from thedivisions that receive and execute orders for other brokerage transactions.
(ii)

Whether it is ensured that account books are compiled in ways to enable the identification of transactions

related to the said agreement.
(2) Scope of Specified Agreements by Securities Companies, etc.
Specified agreements as prescribed under Article 123(1)(xiii)(b) and (c) of the FIB Cabinet Office Ordinanceinclude the following agreements:(i)

Agreements regarding prices higher (in the case of sell orders) or lower (in the case of buy orders) than

the specified prices (including prices determined with a prescribed method)(ii)

An appropriate range determined with a specified price as a base point(iii)

Agreements regarding the determination of prices at the discretion of securities companies, etc., on thecondition that they follow the best execution practice (so-called CD order) in daily trading.
(iv)

Targeting of prices determined through a prescribed method such as volume weighted averaging (so-called VWAP target order)(3) Supervisory Method and Actions
153

When supervisors have recognized an issue of supervisory concern regarding the transactions specified under
Article 123(1)(xiii)(a) to (e) of the FIB Cabinet Office Ordinance through daily supervisory administration and thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the securities company, etc., by holding in-depth hearings and, when necessary, requiring the submission ofreports based on Article 56-2(1) of the FIEA. When the securities company, etc., is deemed to have a serious problem
from the viewpoint of protecting public interests and investors, the supervisors shall take actions, including issuingan order for business improvement based on Article 51 of the FIEA. When the securities company, etc., is deemed
to have committed a serious and malicious violation of law, the supervisors shall consider taking necessary actions,
including issuing an order for business suspension based on Article 52(1) of the FIEA.
IV-3-1-4 Exchange of Non-Disclosure Information with Parent/Subsidiary Corporations, etc.
(1) Providing Corporate Customers with the Opportunity to Opt Out
Under Article 153(1)(vii) and (viii) and (2) of the FIB Cabinet Office Ordinance, if securities companies, etc.
provide the corporate customers with the opportunity to opt out (meaning that the customer who has been notifiedof the sharing of non-disclosure information can request the securities company, etc. to stop providing the nondisclosure information to its parent/subsidiary corporations, etc. if the customer does not consent to such sharing;
the same shall apply hereinafter) , the corporate customers are deemed to have given consent to the exchange of
their non-disclosure information between the securities companies, etc. and their parent/subsidiary corporations, etc.
until the corporate customers undertake procedures for opting out.

Whether a securities company, etc.

appropriately provides corporate customers with the opportunity to opt out shall be examined, focusing on thefollowing points.
(i)

Whether the securities company, etc. has, in advance, notified corporate customers of the scope of non-disclosure information to be exchanged with its parent/subsidiary corporations, etc., the scope of theparent/subsidiary corporations, etc. with which it will exchange non-disclosure information, the method of
exchange of non-disclosure information, the method of management of non-disclosure information employedby the recipients of the information, the purpose of use of non-disclosure information by the recipients, and themethod of management of non-disclosure information in the event of suspension of exchange of theinformation. If the securities company, etc. has made arrangements to provide corporate customers with easy
access to necessary information, such as clearly stating, in the notification made to corporate customers, thefact that detailed information on the matters mentioned above are posted or provided for inspection at its
branches or presented on its website, together with the contact point on this issue, the securities company, etc.
may be deemed to have made an appropriate notification even when the said notification does not contain suchdetailed information.
(ii)

It is not necessary to make a notification to corporate customers each time there is a minor change to thematters of which the customers have previously been notified; whether the securities company, etc. has taken
measures to enable corporate customers to acquire necessary information, such as presenting the latest
information on its website at all times and giving an appropriate explanation of this arrangement to corporate154

customers.
(iii)

Whether the securities company, etc. notifies corporate customers of the opportunity to opt out by suchmeans that enable them to clearly understand the opportunity to opt out, e.g. making a notification in writing
upon concluding a contract.
In addition, whether the securities company, etc. has clearly announced that the opportunity to opt out isalways available to corporate customers, by taking measures such as, posting or providing for inspection theinformation on the opportunity to opt out at its branches or presenting the same on its website, as well as
making arrangements so that corporate customers can opt out via the website at any time, or establishing apermanent contact point for corporate customers’ opt-out within the internal control division.
(iv)

Whether the securities company, etc. secures a necessary period of time, after notifying a corporate

customer of the opportunity to opt out and before commencing the exchange with its parent/subsidiarycorporation, etc. of non-disclosure information on the corporate customer, so that the corporate customer canmake a decision within such period regarding whether or not to opt out.
(v)

In cases where the securities company, etc. applies, to some corporate customers, a scheme wherein it

exchanges non-disclosure information with its parent/subsidiary corporations, etc. only when the corporate
customers opt in (meaning that the customer voluntarily gives consent to the sharing of non-disclosure
information; the same shall apply hereinafter), without providing the opportunity to opt out, whether the
securities company, etc. posts or provides for inspection at its branches the information regarding the types ofcorporate customers to which it provides (or does not provide) the opportunity to opt out, so that each corporate
customer can easily find if it is eligible to receive the opportunity to opt out.
(vi) Whether the securities company, etc. has prepared procedures for opting out in consideration of theconvenience of corporate customers, by measures such as adopting procedures utilizing email and input ofintentions in a format on the website using tablet terminals, etc., in addition to procedures in writing.
(vii) Whether the securities company, etc. has developed an environment for responding to corporate customers’
requests to opt out promptly and appropriately to the extent possible.
(2) Disseminating Information on the Opportunity to Opt Out among Listed Companies, etc.
Under Article 153(1)(vii) and (viii) of the FIB Cabinet Office Ordinance, if listed companies, etc.(Note) areplaced in a situation where they can easily know the fact that the provision of non-disclosure information is to bediscontinued in response to their request to opt out, securities companies, etc. are not required to obtain consent
from said listed companies, etc. and are permitted to exchange non-disclosure information pertaining to said listedcompanies with their parent/subsidiary corporations, etc. until the listed companies, etc. undertake procedures for
opting out. The appropriateness of such responses should be examined, focusing on the following points.
(Note) Listed companies, etc. are those falling under any of 1. to 4. of Article 123(1)(xviii)g. of the FIB Cabinet
Office Ordinance. Whether a company falls under a stock company intending to list its shares as set forth in 2.
of the same subitem, out of all listed companies, etc., cannot be necessarily judged based only on disclosed
information. Therefore, when exchanging non-disclosure information pertaining to a stock company intending
to list its shares, it should be noted that the securities company, etc. is required to appropriately confirm theconformity of said company (including the confirmation whether the company that fell under a stock company
155

intending to list its shares still continues to fall under as such), and in cases where the securities company, etc.
recognizes changes in the conformity of listed companies, etc. including those other than the above, it is totake appropriate responses as promptly as possible.
(i) Whether the securities company, etc. has place listed companies, etc. in advance in a situation where they caneasily know the scope of non-disclosure information that the securities company, etc. will exchange with its
parent/subsidiary corporations, etc., the scope of its parent/subsidiary corporations, etc. with which it will
exchange non-disclosure information, methods of exchanging non-disclosure information, methods ofmanaging non-disclosure information at the corporations, etc. to which the information is provided, the purposeof use of non-disclosure information by the corporations, etc. to which the information is provided, required
procedures and contact information for opting out, and methods of managing non-disclosure information when
it discontinued exchange of non-disclosure information with its parent/subsidiary corporations, etc. The
situation where listed companies, etc. can easily know the information refers to the situation where listedcompanies, etc. can know the information based on their own volition with ease in terms of both required timeand procedures. For example, when the securities company, etc. displays at its branches or posts on its website
the information on the aforementioned matters on a steady basis, it is considered to fall under the relevant
situation.
(ii) Whether the procedures for opting out are easy-to-understand for listed companies, etc.
(iii) Whether the securities company, etc. secures time for a listed company, etc. to decide whether or not to opt
out during the period from the time when the listed company, etc. is placed in advance in a situation where it
can easily know the fact that the provision of non-disclosure information is to be discontinued in response to
its request to opt out until the time when exchange of non-disclosure information between the securities
company, etc. and its parent/subsidiary corporations, etc. commences.
(iv) Whether the securities company, etc. updates the details of the information it displays at its branches or posts
on its website on a steady basis whenever there is any change in the matters set forth in (i) above.
(v) Whether the securities company, etc. has prepared procedures for opting out in consideration of theconvenience of listed companies, etc., by measures such as adopting procedures utilizing email and input ofintentions in a format on the website using tablet terminals, etc., in addition to procedures in writing. In cases
where a company at a top position of listed companies, etc. represents all companies belonging to the relevantgroup and requests to opt out, whether the securities company, etc. takes appropriate responses from theperspective of giving due consideration to the intentions and burdens of individual listed companies, etc.,
through measures such as handling procedures for opting out collectively.
(vi) Whether the securities company, etc. has developed an environment for responding to requests to opt out
filed by listed companies, etc. promptly and appropriately to the extent possible.
(3) Obtaining Opt-in Consents (Consents to the Sharing of Non-Disclosure Information)
Under Article 153(1)(vii)a. of the FIB Cabinet Office Ordinance, securities companies, etc. that have obtained
opt-in consents from issuers, etc. are permitted to exchange non-disclosure information pertaining to said issuers,
etc. who have given opt-in consents with its parent/subsidiary corporations, etc. The appropriateness of the methodof obtaining opt-in consents should be examined, focusing on the following points. The same shall apply in cases
156where a securities company, etc. intends to obtain opt-in consents anew from issuers, etc. who have opted out as
explained in (1) or (2) of IV-3-1-4 (Exchange of Non-Disclosure Information with Parent/Subsidiary Corporations,etc.) for the purpose of exchanging non-disclosure information pertaining to said issuers, etc. with its
parent/subsidiary corporations, etc.
(i) Whether the securities company, etc. has prepared procedures for withdrawing opt-in consents in considerationof the convenience of issuers, etc., by measures such as adopting procedures utilizing email and input ofintentions in a format on the website using tablet terminals, etc., in addition to procedures in writing.
(ii) Whether the securities company, etc. has developed an environment for responding to withdrawals of opt-in
consents promptly and appropriately to the extent possible.
(4) Points of Attention Regarding Exchange of Non-Disclosure Information with Parent/Subsidiary Corporations,etc.
When a securities company, etc. exchanges with its parent/subsidiary corporations, etc. non-disclosure
information on its customers under Article 153(1)(vii) and (viii) and (2) of the FIEA, it should pay attention to thefollowing matters, in addition to the matters mentioned in III-2-4.
(i)Whether the scope of non-disclosure information to be exchanged with the parent/subsidiary corporations,etc. has been defined in advance.
(ii)

Whether sufficient measures for information control are implemented regarding the non-disclosure

information to be exchanged with the parent/subsidiary corporations, etc., such as thorough access control,
measures to prevent the misappropriation by the parties concerned, and prevention of illegal access fromoutside.
(iii)

Whether the securities company, etc. and its parent/subsidiary corporations, etc., with which the former

exchanges non-disclosure information, have developed centralized systems for management of non-disclosure
information, including appointing a person responsible for management of non-disclosure information within
their internal control divisions; whether they manage non-disclosure information regarding customers who
have opted out or who have not opted in (hereinafter referred to as “non-shared information”) separately fromother non-disclosure information; whether they have developed a control environment for examining the statusof management of non-disclosure information and non-shared information periodically.
(iv)

Whether the securities company, etc. has taken measures, such as the following, so that the person

responsible for the management of non-disclosure information, assigned within the internal control division,
can fully check the sales division, etc.
A.

Employees of the internal control division are prohibited from concurrently holding office at the sales
division or other divisions using non-disclosure information for their operations, and vice versa.

B.

The internal control division is vested with proper authority to check the sales division, in such mannerthat the former’s decision should always prevail over the latter’s decision with regard to the mattersconcerning the management of non-disclosure information.

C.

The internal control division is free from the command and control of the sales division, etc. (excluding
executive officers).

(v)

Whether the authority of the person responsible for the management of non-disclosure information and157

the procedure for handling non-disclosure information are clarified in writing, and in particular, whether theprocedure for handling non-shared information within the sales division is specified; whether these procedures
are communicated to officers and employees of the securities company, etc. and its parent/subsidiary financial
institutions, etc., through training programs.
(vi)

Whether the securities company, etc. has taken measures to ensure that the officers and employees of thesales divisions and other divisions who use non-disclosure information for their operations of the securities
company, etc. or its parent/subsidiary corporations, etc. with which the former exchanges non-disclosure
information would not conduct solicitation, etc. to customers, while using non-shared information that can beaccessed only by any single corporation, etc. (limited to information regarding which corporations, etc. otherthan the single corporation, etc. do not have similar information), as officers or employees of a corporation,etc. other than said single corporation.
Incidentally, when an employee who concurrently holds positions at the securities company, etc. and its
parent/subsidiary corporations, etc. provides non-shared information held by any of the corporations where
he/she concurrently holds positions (limited to information regarding which other corporations, etc. where
he/she concurrently holds positions do not have similar information) to a customer, officer, or employee, etc.
(excluding officers and employees, etc. who concurrently hold positions at multiple corporations, etc. in thesame manner as the employee) in relation to business operations at other corporations where he/she
concurrently holds positions, such act of the employee concurrently holding positions falls under an exchange
of non-shared information among these corporations. In addition, it is also necessary to note whether the
securities company, etc. has developed an environment for ensuring that: based on the Need-to-Know Principle(see III-2-4(1)(i)), employees concurrently holding positions do not access information unnecessary for the
execution of business operations and do not use such information between them in the first place.
Furthermore, when an employee concurrently holding positions has newly obtained non-disclosure
information, the securities company, etc. should make a determination properly as to at which corporation, etc.
the employee obtained the relevant non-disclosure information and handle the information as such, in lightof the developments leading to the acquisition of said information and customers’ recognition.
The securities company, etc. should also provide training to employees concurrently holding positions regardingthese procedures to ensure that all such employees are aware of and comply with the relevant procedures.
(vii) Whether measures have been taken to prevent non-disclosure information from leaking between thedivisions dealing with non-disclosure information and the divisions dealing with no such information; whether
the same measures have been taken by the sales division dealing with non-shared information and otherdivisions using non-disclosure information for their operations within the securities company, etc., and by thesales divisions and other divisions using non-disclosure information for their operations within theparent/subsidiary corporations, etc. Additionally, whether the securities company, etc. has developed anenvironment for appropriately examining any incidents wherein leakage of non-disclosure information or an
illegal act utilizing non-disclosure information is suspected.
(viii) In cases where the securities company, etc. outsources its operations, whether the following measures
have been taken in addition to those mentioned in III-2-7(2), so that non-shared information will not be158

provided for its parent/subsidiary corporations, etc. via the outsourcing contractor.
A.

The outsourcing contractor has taken measures to prevent non-shared information from being provided
for the parent/subsidiary corporations, etc., such as managing non-shared information separately fromother customer information.

B.

In cases where the securities company, etc. provides customers with its services via the outsourcing
contractor, it has taken measures to prevent customers from mistakenly believing that the services areprovided by the parent or subsidiary corporation, etc. of the securities company, etc.

C.

The securities company, etc. appropriately supervises the outsourcing contractor so that the measures
mentioned in A and B above are taken as appropriate.

(5) Points of Attention Regarding Exchange of Non-Disclosure Information Necessary for Conducting Internal
Control Operations
In cases where a securities company, etc. and its parent/subsidiary corporations, etc. have properly taken
measures to prevent the leakage of non-disclosure information from the divisions engaged in conducting operations
concerning the maintenance and management of electronic data processing systems or internal control and operation(such operations shall hereinafter be referred to as “internal control operations, etc.” in (5) and such divisions shallhereinafter be referred to as “internal control divisions, etc.” in (5)), they may exchange non-disclosure information(including non-shared information) necessary for conducting internal control operations, etc. under Article
153(1)(vii)(g) or (i) of the FIB Cabinet Office Ordinance (with regard to operations concerning internal control andoperations, excluding cases where the securities company, etc. provides non-disclosure information to its
parent/subsidiary corporations, etc. other than parties in specified relationships; with regard to business management
concerning subsidiary corporations, etc., limited to reception from subsidiary corporations of the securities company,
etc., or provision to the parent corporations). In such case, they should pay attention to the following points.
(i)

The following operations conducted by the securities company, etc. may fall under the category of“operations concerning legal compliance” prescribed in Article 153(3)(i) of the FIB Cabinet Office Ordinance.
A.

Study of legal issues relating to the products and services handled

B.

Response to complaints, inquiries, etc. from customers, etc. and settlement of disputes with customers,
etc.

C.

Conflict of interest management and management of non-disclosure information

D.

Response to the supervisory authorities

E.

Control of violation of laws and regulations committed by the sales division in carrying out transactions(including decisions on internal actions)

F.

Management and monitoring of corporate-related information for the purpose of preventing insider
trading and other illegal acts

(ii)

G.

Review of operations from the perspective of reputation risk and corporate ethics

H.

Other operations necessary for fulfilling legal obligations
The following operations conducted by the securities company, etc. may fall under the category of“operations concerning management of risk of loss” prescribed in Article 153(3)(ii) of the FIB Cabinet Office159

Ordinance.
A.

Management of market risk (possible risk of loss arising from the fluctuation of prices of the securities
held)

B.

Management of credit risk (possible risk of loss arising from the business partner’s default or otherreasons)

C.

Management of operational risk (possible risk of loss arising during the process of daily operations,such as errors in clerical work)

D.

Management of liquidity risk

E.

Business Continuity Management (BCM) and implementation thereof in the event of disasters(iii)

Whether the internal control division, etc. has properly taken the following measures so as to prevent theleakage of non-disclosure information.
A.

Employees of the internal control division, etc. are prohibited from concurrently holding office at thesales division or other divisions using non-disclosure information for their operations, and vice versa.
(Note)(Note) Operations concerning measures for anti-money laundering and countering the financing ofterrorism and other operations concerning compliance with laws and regulations related to theprevention of financial crimes fall under the “affairs related to compliance management” (Article
153(3)(i), etc. of the FIB Cabinet Office Ordinance). In cases where employees in charge of those
operations are appointed at the sales division, such employees are deemed to belong to the internal
control division, etc. as long as they deal with non-disclosure information for those operations, andconcurrent holding of office between the internal control division, etc. and the sales division is notprohibited.
However, it should be noted that the securities company, etc. needs to take measures to ensure thatthose employees will not leak any non-disclosure information that they are not originally permitted toaccess for operations other than those falling under the affairs related to compliance management toother officers or employees of divisions other than the internal control division, etc. (e.g. front-line
personnel of the sales division) and will not use such non-disclosure information for any purpose otherthan the relevant operations (e.g. sales purpose) (see IV-3-1-4(4)(vi) and (vii)).

B.

The internal control division, etc. has taken measures to prevent non-disclosure information(development of confidential regulations and information management, etc.) from leaking at the timeof personnel reshuffles between the internal control division, etc. and other divisions.

C.

In cases where there are employees of the internal control division, etc. who also work for anotherdivision that does not handle non-disclosure information, the latter division has taken measuresequivalent to those mentioned in A and B above.

(iv)

If an officer, etc. (referring to an officer or person who has sufficient knowledge and experience in legal

compliance control and holds the position to instruct or supervise other employees; hereinafter the same shallapply in (iv)) receives non-shared information, other than the non-shared information that is under managementby any one corporation, etc. where he/she works, for the purpose of conducting operations concerning160

governance or internal control and operation, such case does not constitute the leakage of non-shared
information; in this case, however, whether the following measures have been taken.
A.

The officer, etc. is restricted from leaking the non-shared information.

B.

The officer, etc. is restricted from using the non-shared information for purposes other than conducting
operations concerning governance or internal control and operation (e.g. sales purpose)(v)

Whether in-house regulations have been developed regarding the measures mentioned in (iii) and (iv)above, and a control environment has also been developed for ensuring the examination of compliance of such
regulations.
(6) Prevention of Abuse of Superior Position of Employees Belonging to Two or More Divisions
In cases where a securities company, etc. has a parent bank, etc. or subsidiary bank, etc. (hereinafter referred toas “parent/subsidiary bank, etc.” in (6)), Article 153(1)(x) of the FIB Cabinet Office Ordinance prohibits abuse of
the superior bargaining position of the parent/subsidiary bank, etc. In 2022, deregulation (see IV-3-1-4(2)) was
conducted and it was made possible for a securities company, etc. and its parent/subsidiary corporations, etc. toshare non-disclosure information of listed companies, etc. until relevant listed companies, etc. undertake proceduresfor opting out. Accordingly, securities companies, etc. are required to properly and strictly take measures in orderto prevent abuse of the superior bargaining position of their parent/subsidiary banks, etc.(Note)
In light of this, supervision is to be performed, focusing on the following points.
(Note) “Abuse of the superior bargaining position of the parent/subsidiary bank, etc.” refers to the following, forexample, but is not limited thereto. It should be noted that forms of abuse may vary depending on business models
of individual securities companies, etc. and business types of other financial institutions within financial groups towhich individual securities companies, etc. belong.
・Cases where an officer or employee of a securities company, etc. solicits transactions with the company while
implying orally, in writing, or by any other means, or explicitly or implicitly, a possibility of giving unfavorable
treatment to customers, for example, by saying that if customers do not use the company or increase thecompany’s market share in underwriting of securities or other financial transactions, they may be subject to someinfluence regarding loan activity by its parent/subsidiary bank, etc. in the future.
(i)

Whether the management team recognizes the importance of preventing abuse of the superior bargaining
position of the parent/subsidiary bank, etc. and sincerely takes the lead in carrying out preventive measures bysuch means as cooperating with other financial institutions within the financial group (including holding
companies). Additionally, regarding operationally important cases such as those posing the possibility ofexerting a material impact on customers, out of cases wherein abuse of superior position is suspected, whether
an environment has been developed so that such cases are reported to the management team appropriately ona timely basis and the management team appropriately gets involved in the development of the environment
for preventing abuse of superior position.

(ii)

Whether or not an officer or employee of the sales division of the securities company, etc., in effect, forces

customers to sign contracts under which they make financial instruments transactions (hereinafter referred to
as “financial instruments transaction contracts”) by implying that he/she will suspend transactions relating to161loans or give unfavorable treatment to them unless they sign the contracts.
(iii)

In cases where customers intend to sign contracts with competitors (other financial instruments business

operators, etc.), whether or not an officer or employee tries to prevent the conclusion of said contracts withcompetitors by implying that he/she will suspend transactions that are available only at the parent/subsidiarybank, etc. where he/she works, or give unfavorable treatment to the customers in connection with suchtransactions.
(iv) Whether or not the evaluation of operational performance of officers and employees works to provide an
incentive to them to resort to abuse of superior position. Whether or not a parent/subsidiary bank, etc. has theearnings structure that may induce abuse of superior position, such as that loans are often provided with interest
rates that are supposed to be possible on the premise that the securities company, etc. concludes financial
instruments transaction contracts with the same customers, or profit management in the operations of aparent/subsidiary bank, etc. extremely lacks reasonableness.
(v)

Whether the securities company, etc. has established a division responsible for the implementation of

measures to prevent abuse of superior position or appointed a person responsible therefor, and developed aninternal control environment for examining whether said division or person is properly implementing thepreventive measures.
Additionally, when developing said internal control environment, whether the securities company, etc.
evaluates risks of abuse of superior position for each counterparty and transaction form depending on thecontents of business and status of transactions with customers of the securities company, etc. and other financial
institutions within the financial group, and takes preventive measures as follows, for example, in accordancewith the evaluated risks.
・A measure to provide customers with clear explanations that even if they do not accept a solicitation fortransactions with the company, this will not exert any influence on their transactions with its
parent/subsidiary bank, etc.
・A measure to appropriately create and store records of dialogues with customers to enable examinations ex
post facto as to whether there was any abuse of the superior position of the parent/subsidiary bank, etc.

(vi) Whether the securities company, etc. provides training periodically and as necessary, using persons withknowledge and practical experience in banking business as trainers, in order to prevent abuse of a superior
position.
(vii) Whether the securities company, etc. has established arrangements and procedures for responding tocomplaints, such as specifying the contact point for customer complaints regarding abuse of a superior position,
establishing a division in charge of processing complaints and prescribing procedures for processing
complaints.
(viii) Whether the securities company, etc. has established a sufficient system of checks and balances for theprevention of abuse of superior position by, for example, ensuring independence of the division or the person
mentioned in (v) above. Additionally, whether said division appropriately gets involved in or manages
examinations as to whether the effectiveness of the preventive measures mentioned in (v) above is being
secured, depending on the significance of individual cases.
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(ix) Whether the internal audit division is adequately staffed and equipped with regard to the aforementioned
points of attention. Whether integrated management on a group-wide basis is conducted, in such a manner as
conducting audits cooperatively among the group.
(7) Interpretation of Article 32 of the FIB Cabinet Office Ordinance“Operations for the execution of financial instruments business, etc., financial instruments intermediary(i)services, or securities, etc. intermediary business” as prescribed in Article 32(i) of the FIB Cabinet Office
Ordinance refers to the operations that do not entail governance decisions in relation to financial instruments
business, etc., financial instruments intermediary services, or securities, etc. intermediary business, and thefollowing operations fall under that category, for example:
A.

Acquisition, possession, lease, maintenance, security and management operations of real estate andfacilities, such as sales offices, etc.

B.

Management operations of maintenance/operation of automatic teller machines (ATMs).

C.

Formulation, organization, storing, issuing and delivery operations of accounts, statements, and slips,
etc.

D.

Computer-related operations (system development, electronic processing, maintenance/management,etc.).

E.

Calculation operations (including accounting work such as salary calculation and calculation ofmonthly settlements, etc.).

F.

Operations related to the management and organization of securities.

G.

Brokerage for name transfer.

H.

Requests for the payment of principal and interest of bonds and investment trusts.

I.

Delivery and settlement of securities among financial instruments exchanges/Financial Instruments
Business Operators, etc.

J.

Welfare packages for officers and employees, such as employee counseling and bulk purchase andmanagement of goods and services contributing to clerical work.

K.

Supplementary clerical work, such as formulation of personnel-related documents (including
operations related to the dispatch of workers to Financial Instruments Business Operators or financial
instruments intermediary service providers).

L.

Operations related to the education/training of officers and employees.

M. PR and advertisement.

(ii)

N.

Management operations such as use, maintenance and inspection, etc., of vehicles.

O.

Formulation of documents for statistical purposes.

P.

Providing public information, such as publications.

Q.

Printing, binding, issuing and delivery of documents.
"Operations for the purpose of conducting the business of any of the following persons exclusively"

prescribed in Article 32(ii) of the FIB Cabinet Office Ordinance refers to the operations listed in (i) above(excluding C.) that do not entail governance decisions.
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In this case, (i) above shall be applied by replacing D. with "Computer-related operations (management of
hardware and software and computerized processing, etc. for system development, electronic processing, anddata maintenance/management)," F. with "Operations related to the management and organization of securities(limited to those possessed as the own assets of a parent/subsidiary corporation, etc.)," G. with "Brokerage forname transfer (limited to those possessed as the own assets of a parent/subsidiary corporation, etc.)," and K.
with "Supplementary clerical work, such as the formulation of personnel-related documents (including
operations related to the dispatch of workers to Financial Instruments Business Operators, etc., financial
instruments intermediary service providers, etc., or a parent/subsidiary corporation, etc.)."(iii)

The operations listed in (i) C. above (excluding issuing and delivery services), data storage andmanagement in (i) D., and those from (i) F. to (i) I. are closely related for the purpose of implementing theoperations of said financial instruments business, etc., financial instruments intermediary services, securities,
etc. intermediary business operations, and the banking business, etc. Therefore, it should be noted that said
operations shall not, in principle, be outsourced to any enterprise other than a parent/subsidiary corporation,etc. of said Financial Instruments Business Operator, etc. or financial instruments intermediary service provider,etc., or any company prescribed in Article 32(i) and (ii) of the FIB Cabinet Office Ordinance, and that theprocess of implementation of said operations is to be monitored in a timely manner.
In the cases where a Financial Instruments Business Operator (limited to those engaged in Type I Financial
Instruments Business or Investment Management Business) is entrusted with the operations listed in (ii) above,
it should be noted that the operations listed in (i) A., B., E., and J. through Q. above need to be approved as theother operations prescribed in Article 35(4) of the FIEA.
(iv)

It should be noted that the Financial Instruments Business Operator, etc. or financial business intermediaryservice provider, etc. is not exempt from the responsibility to clients for the operations listed in (i) and (ii)above nor the administrative responsibilities even if they outsource said operations.
(8) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the exchange of non-disclosure
information between securities companies, etc. and their parent/subsidiary corporations, etc. or abuse of the superiorbargaining position of the parent/subsidiary banks, etc. by securities companies, etc., through daily supervisoryadministration and the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the securities companies, etc. by requiring the submission of reports based on Article 56-2(1)of the FIEA. When the securities company, etc. is deemed to have a serious problem from the viewpoint of protecting
public interests and investors, the supervisors shall take actions, including issuing an order for business
improvement based on Article 51 of the FIEA. When the securities company, etc. is deemed to have committed aserious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52 (1) of the FIEA.
With regard to abuse of the superior bargaining position of the parent/subsidiary banks, etc. by securities
companies, etc., supervisors shall analyze external information, including financial services users’ opinions gathered
through various channels, such as information collected at the information gathering contact for prevention to abuse
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of advantageous position and results of the hearings of borrowers’ opinions conducted by supervisory departmentsof the parent/subsidiary banks, etc., as well as media reports and external inquiries, and shall intensively conduct
monitoring. Parent/subsidiary banks, etc. are also prohibited from imposing disadvantages on customers in deciding
terms of transactions or conducting transactions by abusing their superior bargaining position under Article 14-113(iii) of the Regulation for Enforcement of the Banking Act and this has the same effect as Article 153(1)(x) of the
FIB Cabinet Office Ordinance. Accordingly, it is necessary to conduct inspections and supervision from the same
viewpoint and it should be noted that the supervisors need to sufficiently cooperate with supervisory departmentsof the parent/subsidiary banks, etc. and the Securities and Exchange Surveillance Commission. Furthermore, in lightof the prohibition of the abuse of superior position prescribed in the Antimonopoly Act, the supervisors shallexchange opinions regarding viewpoints and means for inspections and supervision periodically with the Fair Trade
Commission.
IV-3-1-5 Measures to Prevent Misrecognition(1) Points of Attention Regarding Measures to Prevent Securities Companies, etc., from Being Misrecognized as
Other Financial Institutions
Supervisors shall pay attention to the following points from the viewpoint of preventing customers frommisrecognizing securities company, etc., as other financial institution.
(i)

In cases where the securities company, etc. conducts business operations, with its headquarters or sales

branches located in a building also occupied by another financial institution, whether the securities company,
etc. provides sufficient explanations regarding the following matters to customers:
A. The securities company, etc. and the financial institution sharing the building or its parent/subsidiarycorporations, etc. are different corporations.
B. Products and services provided by the securities company, etc. are different from those provided by thesaid financial institution or its parent/subsidiary corporations, etc.
(ii)

In cases where an employee of the sales division of the securities company, etc. concurrently holds officeat the sales division of its parent/subsidiary corporation, etc., whether the following measures have been taken
appropriately.
A.

The contents of the products or services handled by the employee at each branch where he/she works,
and the name of the corporation that is the provider of such products or services, should be posted at
the said branches, so that customers visiting the branches can easily understand these matters.

B.

The employee should clearly show the customers the scope of the parent/subsidiary corporations, etc.
where he/she concurrently holds office. In particular, if the employee is engaged in receiving anunspecified number of customers, such as in counter operations, it is recommended that informationsuch as the scope of the major products or services that the employee deals with and the status of his/herholding of multiple offices should always be clearly shown to customers, by posting it at the counter at
all times.

C.

In particular, when the employee solicits new customers or solicits existing customers for new products
165

or services, he/she should give sufficient explanations on the status of his/her holding of multiple offices
and the scope of the products and services that he/she deals with.
D.

When concluding contracts with customers, the employee should secure the opportunity for thecustomers to properly recognize the name of the corporation with which they are to conclude thecontracts, for example by making confirmation in writing.

(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding misrecognition prevention
measures taken by a securities company, etc., through daily supervisory administration and the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by the
securities company, etc., by holding in-depth hearings and, when necessary, requiring the submission of reports
based on Article 56-2 (1) of the FIEA. When the securities company, etc., is deemed to have a serious problem fromthe viewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing anorder for business improvement based on Article 51 of the FIEA. When the securities company, etc., is deemed tohave committed a serious and malicious violation of law, the supervisors shall consider necessary actions, including
issuing an order for business suspension based on Article 52 (1) of the FIEA.
IV-3-1-6 Business Continuity Management (BCM)(1) Significance and Response
As securities companies, etc., play an important role as intermediaries in the financial instruments market, it isextremely important for the people’s lives and the economy that they act in an appropriate manner in the event ofan emergency, by, for example, taking recovery measures quickly and ensuring that the minimum necessary
operations and services are maintained. Therefore, securities companies, etc., need to make appropriate preparations
in normal times, such as establishing business continuity management (BCM) systems and creating crisis
management manuals. From this viewpoint, supervisors shall examine the appropriateness of the BCMs of securities
companies, etc., in light of the characteristics of their business, by paying attention to the following points, forexample.
(2) Major Supervisory Viewpoints
Whether the business continuity plan (BCP) ensures quick recovery from damage caused by acts of terrorism,
large-scale disasters, etc., as well as continuance of the minimum necessary business operations and services forthe maintenance of the functions of the financial system. Whether arrangements and procedures are in place for
ensuring response coordinated with Financial Instruments Firms’ Associations, other securities companies, etc.,
and relevant organizations based on the results of deliberations conducted at the Securities Market BCP Forumand other forums. Whether the BCP enables the securities company, etc, to deal with international disruptions ofbusiness operations in a manner suited to the actual state of its own business operations.
For example, attention shall be paid to:
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(i)

Whether measures to secure the safety of customer data in the event of disasters, etc., have been taken(storing information printed on paper in electronic media, creating back-ups of electronic data files andprograms, etc.).
(ii)

Whether measures to secure the safety of computer system centers, etc., have been taken (allocating

suitable back-up centers, securing staff and communication lines, etc.).
(iii) Whether the above back-up measures have been taken in ways to avoid geographic concentration.
(iv) Whether a specific target period has been set for the recovery of operations vital for the maintenance ofthe lives of customers, economic activities and the functions of the financial instruments markets (e.g., cash
withdrawals by customers, cancellation of MRFs and MMFs, sell orders for stocks in custody, orders for thesettlement of margin transactions and futures and options transactions and the settlement of executedtransactions for which delivery has not been made) through provisional measures such as manual operations
and processing by back-up centers.
(v)

Whether the securities company, etc., obtains the approval of the board of directors when it adopts the

BCM and makes important revisions. Whether the BCM is subjected to examination by independent entities,
such as internal and external audits.
(Reference)“Development of BCM at Financial Institutions” (BOJ, July 2003)“Basic Principles on Business Continuity” (Joint Forum, August 2006)
In addition, examination of the BCM and BCP shall basically be conducted in reference to III-2-9.
(3) Points of Attention Regarding BCPs Utilizing Overseas Offices
In cases where securities companies, etc. plan to develop their BCPs embedding a program that they operate
financial business operations from overseas when it becomes difficult to maintain business continuity in Japandue to such reasons as a large scale disaster, attention shall be paid to the following points, in addition to the points
set forth in (2) above.
(i) Whether the following points are specified in a BCP: a description /nature of crises for which business
operations from overseas are supposed, the scope and scale of supposed business operations, and its place andperiod.
In particular, in cases where front line of business (e.g. sales business, trading business) will operate fromoverseas, whether compliance with Article 58-2 and Article 64, etc. of the FIEA is ensured.
(ii) Whether the scope and scale of business operations to be conducted from overseas and the period therefor
are limited to the extent necessary in accordance with each crisis, and are specified taking into account theseriousness of each crisis and their impact on business operations.
Additionally, in cases where a part of the internal control and back office business operations are entrusted
to the overseas offices of the company's group in normal times, whether the impact on the Japanese business
operations is examined.
(iii) In cases where the accessibility to customer information stored in Japan from overseas is described in a
BCP, whether the control governance in the securities companies is ensured robust enough to comply with the167Personal Information Protection Act and other laws and regulations, in such ways as limiting the officers
granted access rights and the scope of accessible customer information to the minimum necessary.
(iv) Whether a control environment is ensured for verification/monitoring governance/procedures by the internal
control division to examine whether financial institution violates any Japanese law or regulation or cause aproblem from the perspective of public interest or investor protections during the period of executing BCP plan.
In addition, whether the locus of responsibility is clarified in the event that any such act/behaviors wascommitted from overseas.
(v) Whether reporting/communication systems/governance to the FSA and relevant bodies are developed
appropriately for all business operations to be conducted from overseas.
(Note) In cases where securities companies, etc. conduct business operations of their group's overseas officesin accordance with their BCPs, it shall be noted that it is necessary to comply with local and Japanese laws
and regulations.
IV-3-1-7 Measures Regarding Financial Services Support in Event of Disasters(1) Financial Services Support Measures for Disaster-Stricken Areas
The FSA disaster prevention/mitigation plan based on Article 36(1) of the Disaster Countermeasures Basic Act
and the FSA plan for the protection of the people based on Article 33(1) and Article 182(2) of the Act on theProtection of the People in Event of Armed Attacks (hereinafter referred to as the “People Protection Act”) provides
for measures regarding financial services support in the event of disasters and other emergencies. In light of this,when a disaster (including a disaster as specified under Article 2(i) of the Disaster Countermeasures Basic Act, anarmed attack specified under Article 2(4) of the People Protection Act and an emergency as specified under Article
183 of the People Protection Act) has occurred or may occur, supervisors shall, while maintaining close contact with
relevant organizations, ensure that securities companies, etc., quickly implement the following measures in an
appropriate manner within limits deemed necessary, in light of the extent of damage and other circumstances of theaffected areas and the demand for funds in such areas.
(i)

To provide as much convenience as possible for customers who have lost registered seals.

(ii)

To support the re-issuance of lost securities.

(iii) To provide as much convenience as possible for disaster victims who have requested the immediatepayment against the sale and cancellation of securities in custody.
(iv) In cases where a securities company, etc., has suspended over-the-counter services, to ensure that all
customers know at which branches the said operations have been suspended through means such as notices
indicated at branches, newspaper advertisement and notices posted on the Internet.
(v)

To take due care in dealing with customers regarding other matters.

(2) Various Financial Services Support Measures in Areas subject to prior evacuation for Nankai Trough Earthquake
Based on the Basic Plan for Promotion of Disaster Prevention Measures for the Nankai Trough Earthquake,the Government Guidance Policy, etc. shall be established for measures about Refund of deposits and savings and168

Actions to be taken by Normal closed hours sales, etc. financial institutions when Contents of Nankai TroughEarthquake Temporary Information (Major Earthquake Warning) and other related information (hereinafterreferred to as "Major Earthquake Warning") being published.
However, it is difficult to manage administrative processes related to financial instruments business on an
area-by-area basis, given the advanced automation and the expansion of networks of unmanned services
operations, therefore, regarding the possible Nankai Trough Earthquake, supervisors shall ensure that securities
companies, etc., take the following measures in an appropriate manner in light of the fund demand in the affectedareas, while maintaining close contact with relevant organizations.
(i)

Response to Nankai Trough Earthquake by Securities Companies, etc., with Sales Branches and Business

Offices in Areas subject to prior evacuation Prevention/Mitigation Measures Regarding Nankai TroughEarthquake
A. In cases where Major Earthquake Warning being published during business hours, supervisors shallrequest the securities companies, etc., to suspend over-the-counter services and shall request to maketraders fully aware that it has taken measures to suspend business.
B. Supervisors shall request the securities companies, etc., to ensure that all customers know at whichbranches services have been suspended, through means such as notices indicated at branches, newspaper
advertisements and notices posted on the Internet.
C. In cases where Major Earthquake Warning being published on a holiday or before or after the businesshours of sales branches, supervisors shall request the securities companies, etc., to refrain from resuming
over-the-counter services so as to enable the smooth implementation of anti-disaster measures, in casethe earthquake actually occurs.
D. Othersa. In cases where Measures for Evacuation Orders in Preparation for a Major Earthquake is removed,
supervisors shall request securities companies, etc., to resume normal operations and services assoon as possible.
b. Supervisors shall request the securities companies, etc., to take appropriate emergency measures
based on IV-3-1-7 if the earthquake actually occurs.
(ii)

Response to Major Earthquake Warning by Securities Companies, etc., with Sales Branches and Business

Offices Outside of Areas subject to prior evacuation
Even if securities companies, etc., have suspended business operations and services at sales branches andbusiness offices in Areas subject to prior evacuation, supervisors shall request them to conduct business andprovide services as usual at sales branches and offices in other areas.
(3) Administrative Report
In cases where the above measures have been taken, supervisors shall immediately report them to the DirectorGeneral of the Supervisory Bureau.

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IV-3-2 Appropriate Exercise of Market Intermediary Function of Securities Companies, etc.
The central role of securities companies, etc., in the financial instruments market is to exercise their market
intermediary function, which has a highly public nature. In addition, securities companies, etc., participate in thefinancial instruments market as market players.
While institutional reforms implemented since the financial “Big Bang” have brought about benefits, a series ofincidents involving problematic conduct occurred, including placement of large-scale erroneous orders in thefinancial instruments market, system troubles at securities companies, etc., insider trading cases, illegal transactions
by investors, such as those aimed at market manipulation, and inappropriate practices by issuer companies, such as
including false representations in financial statements. In light of this situation, a study group on securities
companies’ market intermediary function was established under the FSA’s Supervisory Bureau in March 2006, andthis group adopted and announced a summary of issues in June of the same year.
The summary included recommendations regarding four issues, namely (1) improvement in the reliability of theoperations of securities companies as market intermediaries, (2) securities companies’ exercise of the function ofacting as a check against issuers, (3) securities companies’ exercise of the function of acting as a check against
investors and (4) maintenance of the self-discipline of securities companies as market players. Basically, theserecommendations should be used as a basis for voluntary rules formulated by self-regulatory organizations, such as
the Japan Securities Dealers Association. However, it is also important from the viewpoint of improving thereliability of the financial instruments market through an appropriate exercise of the market intermediary functionof securities companies, etc., that the supervisory authorities take necessary actions based on the following
viewpoints and with the following supervisory methods, while giving consideration to voluntary rules.
IV-3-2-1 Improvement of Reliability of Operations of Securities Companies, etc., as Market Intermediaries(1) Points of Attention Regarding Order Management(i)Whether the securities company, etc., has developed appropriate internal rules based on the self-regulatory

regulations of the Japan Securities Dealers Association, entitled “Rules Regarding Development of OrderManagement Systems at Members," and strives to ensure that all officers and employees are aware of andcomply with them.
(ii)

Whether the securities company, etc., has implemented sufficient measures regarding computer systems

to prevent the placement of erroneous orders, such as incorporating the settings of order limits regarding
trading orders, including both hard limits and soft limits, into its systems.
(iii) Whether the securities company, etc., has enhanced the order management system and maintained its
functions, for example through periodic inspections, and through an appropriate allocation of personnel,
including the appointment of a chief information officer (CIO), who is in charge of supervising the trading
system.
(iv) Whether the securities company, etc., has arrangements and procedures for ensuring an appropriate
involvement of the relevant manager in the limitation of orders and the removal of alerts against inappropriate
orders. In particular, whether appropriate handling of the said matters is ensured in the wholesale division.
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(v)

Whether the securities company, etc., has developed an emergency response policy for dealing with large-

scale erroneous orders and strives to ensure that all officers and employees are aware of and comply withthem.
(vi) Whether the securities company, etc., has developed a control environment that ensures theimplementation of appropriate measures to prevent failure to meet the settlement deadlines in the event of anerroneous order.
(2) Points of Attention Regarding Assessment Rates for Substitute Securities Used in Margin Trading
Whether the securities company, etc., in accordance with the self-regulatory regulations of the Japan Securities
Dealers Association, entitled “Rules Regarding Treatment of Changes in Assessment Rates for Cash Margin Deposit
Substitute Securities Related to Margin Trading,” implements appropriate measures such as the provision of priorexplanations regarding incidents which may lead to changes in the assessment rates, so as to ensure that all
customers are aware of the changes, the notification of changes, the setting of the notification periods and theestablishment of relevant internal rules.
(3) Points of Attention Regarding Computer System Management by Securities Companies, etc.
Cases where the facts that fit the following descriptions are recognized with regard to computer systemmanagement by securities companies, etc., shall be deemed to fall under the category of “situations in which
computer system management is not adequate” as specified under Article 123(1)(xiv) of the FIB Cabinet Office
Ordinance. Supervisors shall also refer to supervisory viewpoints under Section III-2-1-2 of the “Guidelines forSupervision of High Speed Traders” for securities companies, etc. engaged in high-frequency trading as part of theirfinancial instruments business.
(i)

Cases in which the securities company, etc., does not periodically conduct appropriate checks on its

computer systems, such as system audits by computer system experts.
(ii)

Cases in which the securities company, etc., has failed to take sufficient measures regarding computer

systems to prevent the placement of erroneous orders, such as incorporating the settings of order limits
regarding trading orders, including both hard limits and soft limits, into their systems.
(iii) Cases in which the securities company, etc., is deemed to have failed to develop an appropriate control
environment in light of the viewpoints specified in III-2-8.
IV-3-2-2 Exercise of Checking Function against Issuers(1) Points of Attention Regarding Screening Related to Underwriting(i)

Whether the securities company, etc., has established appropriate rules regarding the screening of mattersused for judgment as to the appropriateness of underwriting, such as the financial condition and businessperformance of issuers based on the self-regulatory regulations of the Japan Securities Dealers Association,
entitled “Regulations Concerning Underwriting, etc. of Securities,” and whether it conducts effective
screening in an appropriate manner. Whether it has established arrangements and procedures for ensuring the171verification of the screening results.
(ii)

Whether the securities company, etc., relies on the screening conducted by other securities companies,

etc., that act as joint lead underwriters and neglects to conduct its own screening.
(iii) Whether the securities company, etc., has established arrangements and procedures for appropriately
conducting screening, such as ensuring the independence of the screening division from the sales divisions,in terms of both function and effect.
(iv) Whether the securities company, etc., has the function of examining and evaluating possible conflicts ofinterest between the underwriting division and other divisions. Whether it has developed a control
environment for properly preventing conflicts of interest through the exercise of the said function.
(v)

Whether the securities company, etc., has established appropriate rules, regarding the calculation of prices

based on laws and regulations as well as the self-regulatory regulations, in order to prevent underwriting underterms, such as volume and price, deemed to be markedly inappropriate. Furthermore, whether it has developed
a control environment that ensures an appropriate determination of underwriting terms.
(2) Points of Attention Regarding Underwriting of Share Certificates, etc. Issued by Parent/Subsidiary Corporations,etc.
In cases where a securities company, etc. acts as a lead underwriter of share certificates, etc. issued by its
parent/subsidiary corporations, etc. under Article 153(1)(iv)(c) of the FIB Cabinet Office Ordinance, whether thefollowing measures have been taken to ensure that other securities companies, etc. can appropriately participate in
the process of determining the issue price for such underwriting.
(i)

The following points are clearly prescribed in the written contract of screening for underwriting to beexchanged between the securities company, etc. (the lead underwriter) and the issuer:
A.

Other securities companies, etc. participating in the determination of the issue price (hereinafterreferred to as “independent underwriters” in (2)) have an authority equal to that of the lead underwriter.

B.

Independent underwriters can express their opinions on the validity of the content of the screening forunderwriting to the issuer or external parties.

(ii)

Independent underwriters are selected from among the securities companies, etc. that have sufficientexperience in underwriting services and satisfy the following requirements:
A.

Having engaged in underwriting services for five years or more.

B.

Having acted as lead underwriters within the past two years. In the case of share certificates, warrants
or bonds with share options, it is recommended that the securities companies, etc. have experience inacting as lead underwriters for share certificates, warrants or bonds with share options issued bybusiness operators in the same line of business as the issuer of the relevant share certificates, warrants
or bonds with share options. Furthermore, in the case of corporate bonds it is recommended that the
securities companies, etc. have experience in acting as lead underwriters for corporate bonds issued bybusiness operators in the same line of business as the issuer of the relevant corporate bonds.
(Note) The line of business of issuers may be classified based on, for example, the Major Categorization
created and publicized by the Securities Identification Code Committee.
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(3) Points of Attention Regarding Underwriting and Purchases of Privately Placed CBs
While capital increases through third-party allotment and private placement of convertible bonds (CBs)(including moving-strike CBs (MSCBs)) are seen as effective fund-raising means for corporate rehabilitation andother measures, they involve the risk that the interests of existing shareholders may be undermined through thedilution of the value of their shareholdings, depending on the issuance terms and the usage method. In light of thisrisk, supervisors shall pay attention to whether securities companies, etc., handling such deals (i) properly design
products with due consideration of possible effects on existing shareholders, (ii) provide issuers (senior managers
of issuers) with sufficient product explanations suited to their level of understanding and (iii) ensure that issuers
make appropriate information disclosure.
(4) Points of Attention Regarding Issuers Affiliated with Anti-Social Forces
From the viewpoint of preventing the listing of stocks issued by antisocial forces or by companies affiliatedtherewith, it is desirable that securities companies, etc., make sure to properly identify attempts to list such stocks
in their screening for underwriting, through cooperation with relevant authorities, the Japan Securities Dealers
Association and other organizations. and that they refuse to underwrite such stocks in some cases.
IV-3-2-3 Exercise of Checking Function against Investors(1) Points of Attention Regarding Trading Management System for Prevention of Illegal Trading
Securities companies, etc., need to exercise the function of acting as a check against investors by preventing the
trading of securities on behalf of customers, while understanding that such trading could constitute an illegal activity,
such as market manipulation and insider trading. Therefore, in examining the management of trading by securities
companies, etc., conducted to prevent illegal trading by customers, supervisors shall pay attention to the following
points with due consideration of the self-regulatory regulations of the Japan Securities Dealers Association, entitled“Rules Regarding Development of Trading Management System for Prevention of Illegal Trading.” (Carefulattention shall be paid to Internet transactions, in particular, in light of the absence of face-to-face contact therein.)(i) Precise Identification of Customers’ Trading Patterns and Thorough Management
A. Whether the securities company, etc., has established specific procedures for identifying customers’
trading patterns as represented by features such as the types of products they trade and the method andcharacteristics of their trading, and precisely identifies their trading motives by monitoring its trading
activity as necessary in accordance with the procedures.
B. Whether the internal control division makes sure that all officers and employees are aware of and follow
the above procedures, and ensures the effectiveness thereof by revising them as necessary, for example.
C. From the viewpoint of ensuring the preciseness of insider registration, whether the securities company,
etc., based on the “Rules Concerning Solicitation for Investments and Management of Customers, Etc.
by Association Members,” the self-regulatory rules of the Japan Securities Dealers Association, strives
to improve the contents of insider registration cards by requesting customers who conduct buy and sell173

transaction, etc. related to specified securities, etc. of listed companies, etc. stipulated in Article 166 of
the Financial Instruments and Exchange Act for the first time to notify whether or not they fall under
officers, etc. of listed companies, etc. and prepare an insider registration card for those who do before
they carry out the buy and sell transaction, etc. related to specified securities, etc. of listed companies,
etc., as well as updating the contents of the insider registration card without delay when a customer
notifies change, checking the name, date of birth and address of customers on a regular basis against JIRISS (Insider Registration & Identification Support System of the Japan Securities Dealers
Association) and checking against other information concerning officers, etc. of listed companies, etc.
as necessary.
D. From the viewpoint of preventing illegal practices such as market manipulation and insider trading,whether the securities company, etc., strives to identify the original customers and the end-investors,
with regard to transactions with investment business associations and orders placed from abroad.
E. In cases where the securities company, etc., has recognized the possibility of customers using accounts
opened under fictitious names, whether they investigate the true identity of the customers and monitor
transactions involving the said accounts with special care.
(ii)

Establishment of Trading Screening Criteria and Efficient Utilization Thereof
A. Whether the securities company, etc., has established the criteria for selecting individual issues forscreening, in light of factors such as the advancers-to-losers ratio, the own market involvement ratio andthe trading status of specified customers, in order to ensure the fairness of customers’ transactions andmake appropriate selection based on the said criteria.
B. Whether the securities company, etc., conducts appropriate trading management regarding selectedissues by, for example, establishing specific screening criteria and taking measures necessary (e.g.,inquiries with customers, issuing alerts and suspending trading) for preventing illegal trading practices,such as market manipulation.
C. Whether the internal control division has developed a control environment for examining the consistencyof the selection and screening criteria and the implemented measures with the actual status in a timely
manner, and is ensuring the effectiveness of the measures and criteria by making revisions as necessary,for example.

(iii) Others
A. Whether the securities company, etc., ensures that all customers are aware of the purpose of restrictions
on short-selling by, for example, reminding them that new sell orders for margin trading deemed to havebeen repeatedly placed by a customer in a short period of time for the purpose of exceeding price limits
do not fall under the category of transactions specified by Article 15 (1)(ii) of the cabinet officeordinance regarding regulations on securities transactions.
B. Whether the securities company, etc., conducts appropriate trading management by taking appropriate
measures, such as checking the contents of orders in a timely manner, making inquiries to customers,
issuing alerts and suspending trading as necessary, in order to avoid taking orders intended to exceed
price limits.
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C. Whether the securities company, etc., makes sure to immediately report suspected cases of insider
trading to the supervisory authorities based on Article 9 of the Anti-Criminal Proceeds Act.
(2) Points of Attention Regarding Pre-Hearing
In cases where a securities company, etc., holds pre-hearings or entrusts third-party entities to do so, whether itmakes sure to either implement or entrust third-party entities with the implementation of (i) approval by the legal
compliance division, (ii) signing of an agreement with the surveyed entity to not provide information regardingtransactions related to the relevant securities and the relevant corporation and (iii) compilation and storage of written
records based on the FIB Cabinet Office Ordinance and the self-regulatory regulations of the Japan Securities
Dealers Association, entitled “Rules Regarding Appropriate Treatment of Pre-Hearings by Members.”(3) Points of Attention Regarding Investors Affiliated with Anti-Social Forces
It is desirable that securities companies, etc., conduct sufficient trading management and screening with regard
to investors who may be affiliated with antisocial forces, in cooperation with relevant authorities, the Japan
Securities Dealers Association and other organizations.
(4) Points of Attention regarding High Speed Traders
When examining as to Article 38(viii) of the FIEA and Article 116-4 of the FIB Cabinet Office Ordinance,
supervisors shall check whether securities companies, etc. perform the following.
(i)Whether securities companies, etc., prior to starting business with and receive trade orders from investors

who intend to execute trades considered High Speed Trading (HST), confirm with the investors that they are
not non-authorized High Speed Traders under Article 38(viii) of the FIEA, nor High Speed Traders specified
under Article 116-4(i)and (ii) of the FIB Cabinet Office Ordinance (hereinafter referred to as “non-registeredentities, etc.” in this paragraph (4)); noting that the cases described below are deemed equivalent to the status
defined under Article 116-4(ii) “High Speed Traders who are not confirmed to have taken appropriate measures
to adequately manage electronic information processing systems or other systems for HST.”
A. When starting to transact with a High Speed Trader, it cannot be verified via documents, etc. that thetrader has taken measures to adequately manage trading systems as required for properly managing HST
business operations.
B. After starting to transact with a High Speed Trader, the trader cannot provide appropriate report andexplanation via documents, etc. upon failure/error of trading system.
(ii)

Whether measures are in place by securities companies, etc. to stop taking orders from any High Speed

Traders in the case where they become non-registered entities, etc. after starting to take HST-related orders,etc. (e.g., insertion of a clause in contracts that requires notification by High Speed Traders immediately when
they become non-registered entities, etc.)
IV-3-2-4 Maintenance of Self-Discipline of Securities Companies, etc., as Market Players
Against the background of the increasing diversity and complexity of the business operations of securities
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companies, etc., as market players, such as principal investments, M&A advisory services, proposals for fundraising through complex schemes and trading of securitization products, the number of incidents involving potential
conflicts of interest and ethical problems related to their business operations is increasing.
In light of this situation, supervisors shall pay attention to the following points when examining the maintenanceof the self-discipline of securities companies, etc., as market players.
(i)

Whether the securities company, etc., has formulated internal policies and rules and established an

appropriate internal control environment (including a control environment for internal audits) from theviewpoint of preventing conflicts of interest and ensuring compliance with a code of ethics. Whether they
have developed an appropriate control environment for legal compliance by ensuring all officers andemployees are aware of and comply with those policies and rules through the provision of training, forexample.
(ii)

Whether the securities company, etc., has identified transactions with a high risk of conflicts of interest.

(iii) Whether the securities company, etc., has established an appropriate control environment for priorscreening (for judging whether or not to allow the screened transactions to be made) by a division independent
from the sales division, as necessary, from the viewpoint of preventing conflicts of interest.
(iv) Whether the securities company, etc., provides appropriate explanations and makes appropriate disclosure
to customers and investors, as necessary, with regard to the status of conflicts of interest.
(Reference) Examples of (Potential) Cases of Conflicts of Interest- Cases where a securities company, etc., purchases stocks offered for sale through erroneous orders
while knowing the orders are erroneous.
- Cases where a securities company, etc., (or companies belonging to the same groups therewith) acts as
the lead manager of initial public offerings of stocks in unlisted companies in which it has madeinvestment and where it sell the stocks after the IPO.
- Cases where a securities company, etc., (or companies belonging to the same groups therewith)originates securitization products based on assets it has acquired as a result of principal investments
and sells the products to investors without providing sufficient explanations (transfer of risk).
- Cases in which a securities company, etc., proposes or considers securitization schemes aimed at
accounting manipulation and tax evasion, through the use of special-purpose companies, for example.
IV-3-2-5 Supervisory Method and Actions
With due consideration of the above viewpoints, supervisors shall encourage an appropriate exercise of themarket intermediary function of securities companies, etc., in cooperation with relevant organizations, including
Financial Instruments Firms’ Associations. In addition, they shall identify and keep track of the status of voluntary
improvement made by securities companies, etc., when it is deemed necessary to do so from the viewpoint ofprotecting public interests and investors, by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2 (1) of the FIEA. When a securities company, etc., is deemed to have aserious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When a securities company
176

is deemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary
actions, including issuing an order for business suspension based on Article 52 (1) of the FIEA.
IV-3-3 Appropriateness of Business Operations Related to Over-the-Counter Derivatives Transactions
IV-3-3-1 Control Environment for Legal ComplianceIf over-the-counter derivatives business operators (Type 1 Financial Instruments Business Operators engaging
in the business specified under Article 2(8)(iv) of the FIEA; the same shall apply hereinafter) are to gain the trust ofinvestors, it is important that they strive to manage their business operations in an appropriate manner, while strictly
complying with laws, regulations and various business rules, and fully recognizing their roles as undertakers ofover-the-counter derivatives business.
Basically, supervisors shall examine an over-the-counter derivative business operator’s control environment for
legal compliance, based on the viewpoints and the supervisory method specified in III-2-1. However, they shall also
examine it in relation to a broad range of matters, including the status of compliance with voluntary rules set by
self-regulatory organizations.
(1) Points of Attention Regarding Segregated Management of Currency-Related Over-The-Counter Derivatives
Business Operators
In cases where the over-the-counter derivatives business operator manages cash margins or other deposits
pertaining to currency-related over-the-counter derivative transactions and so forth (activities specified in Article
143(3)(ii) of the FIB Cabinet Office Ordinance; the same shall apply hereafter), it shall perform supervision,
focusing on the following points:(i)

Whether the over-the-counter derivatives business operator has clearly separated the management of trusts

prescribed in Article 143(1)(i) of the FIB Cabinet Office Ordinance (trust for the segregated management ofcash margin and other deposits) with the management of trusts prescribed in Article 141(1) of the FIB Cabinet
Office Ordinance (trusts for the separate management of money and securities);(ii)

Whether the over-the-counter derivatives business operator has properly calculated the individual

amounts for separate management (amounts of the money or security deposits deposited by each customer)
and the required amount for separate management (total of the individual amounts for separate management)prescribed in Article 143-2(1)(vi) of the FIB Cabinet Office Ordinance; and whether, in calculating therequired amount for separate management, the over-the-counter derivatives business operator has added or
subtracted the amounts listed in the following items A through C to or from the money or security deposits
deposited by the customer:
A. Realized gains and losses
B. Valuation gains and losses
C. Swap gains and losses;(iii) Whether the decision in Article 143-2(1)(vi) of the FIB Cabinet Office Ordinance, on whether theappraised value of the principal of the trust assets will be less than the required amount for separate
177management, has been made using as a reference day the day, in Japanese time, on which the point in timethat serves as the basis for calculating the required amount for separate management falls. For instance, fortransactions from seven o’clock in the morning, Japanese time, on a specified date to seven o’clock in themorning on the following day (hereinafter referred to as the “date of calculation” in IV-3-3-1), in cases where
the over-the-counter derivatives business operator calculates the required amount for separate management
using seven o’clock in the morning on the date of calculation as the base point in time, whether it adds theshortfall within two business days from the day following the date of calculation;(iv) In cases where a letter of guarantee or the like (hereinafter referred to as “LG”) is provided to a
counterparty to a cover transaction by a financial institution, etc., which is the trustee of a trust for the
segregated management of cash margin and other deposits, whether the trust assets always exceed the required
amount for separate management, even in cases where payment based on the LG has been made. Furthermore,in cases where a trust for the segregated management of cash margin and other deposits is terminated such as
by way of a petition for commencement of bankruptcy proceedings, rehabilitation proceedings orreorganization proceedings, whether the terms of the contract give preference to the repayment of money or
security deposits to the customer over the payment to the counterparties to the cover transaction; and(v) Whether the over-the-counter derivatives business operator properly manages segregated management suchas, for instance, by periodically undergoing an external audit or an internal audit by an independent division.
(2) Points of Attention Regarding the Segregated Management by Securities-Related Over-The-Counter Derivatives
Business Operators
IV-3-3-1 shall be applied mutatis mutandis to the points of attention for when an over-the-counter derivatives
business operator manages cash margin and other deposits pertaining to securities-related over-the-counter
derivative transactions (refers to transactions specified in Article 117(1)(xxix) of the FIB Cabinet Office Ordinance;
the same shall apply hereinafter). In addition, it should be kept in mind that, when calculating the required amountin IV-3-3-1(1)(ii), the interest adjustment and dividend adjustment should be added or subtracted.
(3) Points of Attention Regarding Segregated Management by Business Operators Handling Crypto-Assets, etc.Related Over-The-Counter Derivatives Transactions, etc.
IV-3-3-1(1) shall be applied mutatis mutandis to the points of attention for when an over-the-counter
derivatives business operator manages cash margin and other deposits pertaining to crypto-assets, etc.-related overthe-counter derivative transactions, etc. (refers to acts specified in Article 143(4)(ii) of the FIB Cabinet Office
Ordinance; the same shall apply hereinafter). In addition, it should be kept in mind that, when crypto-and otherassets are used as substitute (hereinafter referred to as "substitute crypto-and other assets") for the whole or partof a customer margin or any other security deposit, the crypto-and other assets should be valued at market prices
and their collateral value should be appropriately calculated on a daily basis in accordance with the rules of a
Financial Instruments Firms Association.
(Note 1) Even a person that conducts crypto-assets, etc.-related over-the-counter derivatives transactions
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(meaning the transactions prescribed in Article 123 (1)(xxxv) of the FIB Cabinet Office Ordinance) on aregular basis with a person that conducts such transactions on a regular basis as the counterparty isrequired to obtain registration for engaging in Type I Financial Instruments Business, in principle. Indeed,
it should be kept in mind that the registration is not required in the case where a person that engages incrypto-and other assets-related over-the-counter derivatives business in a foreign country in accordancewith laws and regulations of the foreign country conducts crypto-and other assets-related over-the-counter
derivatives transactions from the foreign country and where that person engages in cover transactions witha Financial Instruments Business Operator that conducts crypto-and other assets-related over-the-counter
derivatives transactions on a regular basis.
(Note 2) It should be kept in mind that, in the case where crypto-assets are used as a substitute for the wholeor part of a customer margin or any other security deposit, an act of receiving deposit of the crypto-assets
from the customer could constitute the "management of crypto-assets on behalf of others" prescribed in
Article 2(15)(iv) of the Payment Services Act and could require the registration to provide crypto-assets
exchange service.
(4) Supervisory Method and Actions(i)

In order to check the appropriateness of the management of cash margin and other deposits pertaining tocurrency-related over-the-counter derivatives transactions, etc., securities-related over-the-counter derivatives
transactions, and crypto-assets, etc.-related over-the-counter derivatives transactions, etc. that are intended forindividuals, supervisors shall require over-the-counter derivatives business operators to submit, in principle,
once a week, prima facie evidence of the balance of trusts, such as certificates of deposit balance issued bytrust banks, as well as a written document in which the required amount for management has been calculated
for the corresponding date of calculation, and other materials with which the status of management of security
deposits can be confirmed.
(ii)

In order to check the appropriateness of the management of cash margin and other deposits pertaining tocurrency-related over-the-counter derivatives transactions, etc., securities-related over-the-counter derivatives
transactions, and crypto-assets, etc.-related over-the-counter derivatives transactions, etc. that are intended forindividuals, supervisors shall require over-the-counter derivatives business operators to submit, periodicallyor as necessary, reports on external audits or internal audits.
(iii) When supervisors have, through daily supervisory processes, recognized an issue regarding an over-thecounter derivatives business operator’s control environment for legal compliance, they shall identify and keep
track of the status of voluntary improvement made by the over-the-counter derivatives business operator byholding in-depth hearings, and, when necessary, requiring the submission of reports based on Article 56-2(1)of the FIEA. When the over-the-counter derivatives business operator is deemed to have a serious problem
from the viewpoint of protecting public interests and investors, the supervisors shall take actions such as
issuing an order for business improvement based on Article 51 of the FIEA. When the business operator isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary
actions, including issuing an order for business suspension based on Article 52(1) of the FIEA.
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IV-3-3-2 Control Environment for Customer Solicitation and Explanations(1) Points of Attention Regarding Advertisements, etc.
(i)

In cases where losses exceeding the amount of cash margin and other deposits may arise due to rapid

market movements, despite a contract provision for making automatic settlements through reversing trades inthe event of the loss exceeding a prescribed ratio (hereinafter referred to as the “Loss-Cutting Rule”), whether
the over-the-counter derivative business operator properly indicates this risk in the advertisement.
(ii)

Whether the over-the-counter derivative business operator has forced customers to continue attending

seminars and similar events despite their expression of unwillingness to do so (including cases where it has
effectively forced them to do so). It should be kept in mind that this kind of practice shall be deemed to meetthe provision of Article 38(vi) of the FIEA (known as “prohibition of re-solicitation”).
(2) Points of Attention Regarding Over-the-Counter Derivative Business Operators’ Responsibility for Explanation“The Key Points of the Status of Internal Control” in the Explanation Documents, as specified under Article 464 of the FIEA, shall describe specific arrangements and procedures for handling complaints and inquiries from
customers and for conducting internal audits.
(3) Points of Attention Regarding the Distribution of Notices of Warning Concerning the Solicitation Methods, etc.
for Over-the-Counter Derivative Transactions
When conducting over-the-counter derivative transactions, whether, based on the self-regulatory regulations of
the Japan Securities Dealers Association, entitled “Regulations Concerning Solicitation for Investments andManagement of Customers, etc., by Association Members” and on the Financial Futures Association of Japan’s“Regulations on Financial Futures Trading,” and other rules of Financial Instruments Firms Associations, the overthe-counter derivatives business operator alerts customers appropriately by distributing clear and concise documents(Notice of Warning) which specify in large print and in an easily understandable manner: (i) the relationship withthe application of the regulations on uninvited solicitations; (ii) an alert to the associated risks; and (iii) the contact
details of the designated ADR body in the event of a problem arising, etc. and by giving explanations suited to thecustomer attributes. Whether there is a control environment in place in which the implementation status of this canbe appropriately identified.
(Note) Even in cases where a Financial Instruments Business Operator sells complex structured bonds andinvestment trusts that are similar to market derivatives transactions or over-the-counter derivativetransactions, it should be kept in mind whether the business operator is treating them correspondingly.
(4) Points of Attention Regarding Over-the-Counter Financial Futures Business Operators’ Responsibility for
Explanation(i) Offer of Prices Indicated at Time of Transaction
A. Regarding Article 123(1)(xxi) of the FIB Cabinet Office Ordinance, in cases where an over-the-counter
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financial futures business operator offers the price of a financial instruments, a financial index or an
option concerning over-the-counter financial futures trading to a customer requesting the offer of theprice indicated at the time of the transaction, the price offered by the business operator may be either
the opening price, the intraday high, the intraday low or the closing price of the relevant transaction date.
B. Over-the-counter financial futures business operators shall record the prices of financial instruments,
financial indexes and options indicated at the time of the transaction and store them for at least three
years.
(ii)

Hedging
A. Whether the over-the-counter financial futures business operator solicits customers to do transactions
intended to offset possible losses involved in the transactions made by them (so-called hedging) or
engage in similar practices with regard to over-the-counter financial futures business (limited totransactions involving cash margin and other deposits)
B. Cases where an over-the-counter financial futures business operator confirms the possibility of acustomer making hedging transactions, when the customer has expressed willingness to make suchtransactions or when the customer inquired about the possibility of making such transactions shall not
automatically be deemed to fit the provision of Article 117(1)(xxvi) of the FIB Cabinet Office Ordinance.
However, if the business operator indicates that possibility without explaining that hedging may lackeconomic rationality in some cases, as the customer must pay double fees and may incur losses
depending on the interest rate differential between currencies (hereinafter referred to as the “Swap
Point”) and must bear an additional burden regarding the price difference (what is known as “the spread
received by over-the-counter financial futures business operators) between the sale and purchase prices
with the median price as a base point, the business operator’s act shall be deemed to fall under the
category of “other similar practices” specified under Article 117(1)(xxvi) of the FIB Cabinet Office
Ordinance.

(iii) Transactions with Customers and Counterparties to Cover Transactions
Whether the over-the-counter financial futures business operator provides appropriate explanations
regarding the following points when requested to do so by customers:
A. Order placement method of cover transactions
B. Criteria for the execution of cover transactions
C. Response to the occurrence of system troubles in relation to the counterparties to cover transactions(iv) Response to Rapid Market Movements
Whether the over-the-counter financial futures business operator provides appropriate explanations
regarding how it responds to rapid market movements, when requested to do so by customers.
(v)

Internal Control Environment for Proprietary Trading
Whether the over-the-counter financial futures business operator provides appropriate explanations

regarding whether it engages in proprietary trading and, if it does so, regarding its control environment forrisk management, when requested by customers to provide such explanations.
(vi) Status of Segregated Management181

Whether the over-the-counter financial futures business operator provides customers with appropriate
explanations, when requested by them to do so, regarding the status of trusts for the segregated managementof cash margin and other deposits prescribed in Article 143(1)(i) of the FIB Cabinet Office Ordinance.
(vii) Loss-Cut Transactions
In cases where the over-the-counter financial futures business operator conducts currency-related overthe-counter derivative transactions, whether it provides appropriate explanations regarding the fact that anagreement regarding loss-cut transactions (referring to the transactions prescribed in Article 123(1)(xxi-2) ofthe FIB Cabinet Office Ordinance; the same shall apply hereafter) is in place and the details therein. Also,
whether it provides appropriate explanations regarding the risk of losses in cases where a loss-cut transaction
cannot be conducted as intended.
(viii) Low-Spread Transactions
In cases where the currency-related over-the-counter derivatives business operator, who provides
transactions with particularly low spreads or fees (hereinafter referred to as “low-spread transactions”), makes
indications in advertisements and so forth which emphasize that its spreads or fees are low, whether any of
the following risks, for instance, have arisen:
A. The risk that customers could be led to erroneously believe that, even though fees, commissions, otherrewards and expenses that they must also pay do exist, the rewards and expenses to be paid by thecustomer are substantially lower than the actual levels.
B. The risk that a difference between the price indicated to the customer at order or designated by thecustomer at order and the actual contracted price (hereinafter, "slippage") could occur, resulting in atransaction being conducted at a spread higher than indicated in advertisements and so forth.
(5) Points of Attention Regarding the Accountability of Securities-Related Over-The-Counter Derivatives Business
Operators
The provisions of (4) above shall be applied mutatis mutandis to points of attention regarding matters to be
explained to customers by business operators engaged in securities-related over-the-counter derivatives intended
for individuals.
(6) Points of Attention Regarding the Accountability of Over-The-Counter Derivatives Business Operators that
Trade in Currency Options, Interest Rate Swaps, etc.
Even in cases where (4) and (5) above do not apply, whether the over-the-counter derivatives business operator
pays attention to the following points when conducting over-the-counter derivative transactions of currency options
or interest rate swaps, for example.
(Note) Even in cases where a Financial Instruments Business Operator sells complex structured bonds andinvestment trusts that are similar to over-the-counter derivative transactions, it should be kept in mind
whether the business operator is treating them correspondingly.
(i) Whether the over-the-counter derivatives business operator provides full and appropriate explanations about
the descriptions and risks of the said over-the-counter derivative transactions, including on the following
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issues for example, using such methods as issuing a document which gives specific and easy-to-understandexplanations.
A. Whether the over-the-counter derivatives business operator provides explanations to customers, in a waythat they can understand, about the maximum anticipated loss assuming the worst-case scenario (basedon reasonable assumptions such as data from previous times of stress; the same shall apply hereinafter)
regarding, inter alia, the levels of financial indices that cover the said over-the-counter derivativetransactions (including, as necessary, levels of volatility; the same shall apply hereinafter), including thefact that circumstances different to those assumed may result in any loss becoming even greater.
B. Whether the over-the-counter derivatives business operator confirms the amount of losses that are
acceptable to a customer as far as the said over-the-counter derivative transactions are concerned, andconfirms that the said amount of loss would not have a material effect on the management and financial
condition of the customer’s business. Furthermore, in cases that do not amount to the abovementioned
worst-case scenario, but where there is a possibility that the customer may suffer a loss greater than that
acceptable, whether the over-the-counter derivatives business operator provides explanations tocustomers, in a way that they can understand, about how the financial indices or other circumstances
would have to be for such a situation to occur.
C. In cases where the over-the-counter derivatives business operator uses illustrations and so forth which
are unavoidably different to the actual over-the-counter derivative transactions for the sake of
explanation, whether the business operator explains that the said illustrations and so forth are different
to the actual transactions.
(ii)

Whether the over-the-counter derivatives business operator provides full and appropriate explanations

about the premature cancellation of the said over-the-counter derivative transactions and the resultant
settlement money, including on the following issues for example, using such methods as issuing a document
which gives specific and easy-to-understand explanations.
(Note) In the case of the sale of structured bonds, for instance, the term “premature cancellation” shall be
replaced with “premature sale,” and the term “settlement money on cancellation” shall be replaced with“estimated amount of losses resulting from the premature sale.” With regard to B. below, in cases where
tentatively calculating the estimated amount of losses resulting from the premature sale is difficult, it isdesirable that, wherever possible, explanations assuming the worst-case scenario be given.
A. In cases where the said over-the-counter derivative transactions are, in principle, unable to be cancelled
prematurely, whether the over-the-counter derivatives business operator explains this to customers, in a
way that they can understand.
B. In cases where settlement monies arise if the said over-the-counter derivative transactions are prematurely
cancelled, whether the over-the-counter derivatives business operator provides explanations tocustomers, in a way that they can understand, about this fact and about the details of the settlementmoney on cancellation (including the tentatively calculated amount of the settlement money oncancellation assuming the worst-case scenario regarding the levels of financial indices and so forth, andif there is a possibility that the amount could be greater than the said tentatively calculated amount, an
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explanation to this effect).
C. Whether the over-the-counter derivatives business operator confirms the amount of settlement money oncancellation that is acceptable to a customer as far as the said over-the-counter derivative transactions
are concerned. Furthermore, in cases that do not amount to the abovementioned worst-case scenario, butwhere there is a possibility that the customer may suffer a loss greater than that acceptable, whether theover-the-counter derivatives business operator provides explanations to customers about this, in a waythat they can understand.
(iii) In cases where over-the-counter derivative transactions are provided for the purpose of hedging, whether
the over-the-counter derivatives business operator confirms that the customer understands that the following
is necessary regarding the said transactions, and based on the results of this confirmation, whether the business
operator provides full and appropriate explanations.
A. The over-the-counter derivative transactions shall function as a hedging instrument that is effective in
conducting ongoing business operations even when taking into account the customer’s business situationand its competitive relationship in the market (Note 1).
B. The situation described above of the over-the-counter derivative transactions functioning effectively as ahedging instrument is expected to continue until the end of the contract period (Note 2).
C. Forecasting future business management will not instead be made more difficult for the customer (Note3).
(Note 1) It should be kept in mind that, for example, even if exchange rates or interest rates fluctuate, it
should be comprehensively determined whether or not the customer has the price-bargaining poweror price-setting power likely to reduce the effects of these fluctuations.
(Note 2) It should be kept in mind that, for example, even in cases where losses have not arisen due tothe hedging instrument itself, due to changes in the customer’s business situation, such as theassumed scale of operations contracting, the customer’s hedging needs might be swayed or theeffects of the hedge might stop functioning effectively for those needs before the end of the contract
period.
(Note 3) It should be kept in mind that using hedges to fix a purchase price or the like could affect thecustomer’s price competitiveness.
(iv) Whether measures have been taken in order to confirm from customers that they have received an
explanation based on the matters listed in (i) through (iii) above, for example, receiving a written confirmationor the like from customers and keeping it.
(v)

With regard to the solicitation of persons believed to be excluded from the ban on uninvited solicitationfor over-the-counter derivative transactions, whether, based on the law (Note), the customer’s hedging needs
have been confirmed such as by using past customer transaction histories, and whether soliciting is forcontracts that are within the scope of those needs.
(Note) It should be kept in mind that “corporations engaging in foreign trade and foreign currency transactions”(Article 116(1)(ii) of the FIB Cabinet Office Ordinance) that are excluded from the ban on uninvited
solicitation includes cases where, for example, a domestic building contractor, who imports lumber from184

overseas, in reality, imports and exports through a domestic trading firm rather than transacting directlywith overseas exporters, but does not include cases where it simply purchases imported lumber from adomestic trader.
(vi) Whether, if requested to do so by the customer, the over-the-counter derivatives business operator provides,
in a timely and appropriate manner, information which is needed for the customer to settle its accounts or
make decisions on canceling transactions, such as by providing customers with market price information on
their position or notifying them of the amount of settlement money on cancellation at a particular time on aperiodic or as-needed basis.
(vii) With regard to confirming the customer’s intention to enter into a contract for the said over-the-counter
derivative transactions, whether the over-the-counter derivatives business operator has developed a control
environment wherein it can confirm customers’ intentions in a way which is mindful of the decision-making
process that corresponds, inter alia, to the content and scale of the contract as well as to the nature of thecustomer’s business operations and to their size and control environment for governance.
For example, in cases where the contemplated over-the-counter derivative transaction could have asignificant impact on the customer’s future business management, it should be kept in mind that it is important
to confirm whether the contract would be entered into with the decision being made by the said customer’sboard of directors or other such body.
(7) Points of Attention Regarding the Accountability of Crypto-and Other Assets-Related Over-The-Counter
Derivatives Business Operators
The provisions of III-2-14(3)(i) and IV-3-3-2(4) shall be applied mutatis mutandis to points of attention
regarding matters to be explained to customers by crypto-and other assets-related over-the-counter derivatives
business operators. In addition, supervisors shall pay attention to the following points:(i) As provided in Article 146-4(2)(i) of the FIB Cabinet Office Ordinance, when handling crypto-and otherassets-related over-the-counter derivatives transactions, the Financial Instruments Business Operator, etc. isrequired to explain to customers that crypto-and other assets are not a legal currency. In particular, in the casewhere a crypto-and other assets-related over-the-counter derivatives business operator concurrently engages
in currency-related over-the-counter derivative transactions, the business operator shall make deliberations
on matters including the methods of transactions so that its crypto-and other assets-related over-the-counter
derivatives transactions and currency-related over-the-counter derivatives transactions are recognized bycustomers as types of transactions that can be clearly distinguished from each other.
(ii) The "act of making an indication concerning the matters set forth in Article 78(v) through (vii) or (xiii)(a)through (e) without showing reasonable grounds to support it" as prescribed in Article 117(1)(xli) of the FIB
Cabinet Office Ordinance could include, for example, the following:
A. An act of predicting the price transition of the crypto-and other assets by using biased analysis results.
B. An act of indicating that the crypto-and other assets are safe and low-risk on the basis that they are subject
to transactions by a Financial Instruments Business Operator.
C. An act of indicating that the Financial Instruments Business Operator's financial conditions, etc. are sound185

on the basis that it has obtained registration for engaging in crypto-and other assets-related over-the-counter
derivatives business.
(iii) With regard to "the outline and specific characteristics of the crypto-and other assets" prescribed in Article
146-4(2)(iv) of the FIB Cabinet Office Ordinance and "matters which should be noted by the customer in
relation to the nature of crypto-and other assets" prescribed in item (v) of that paragraph, the Financial
Instruments Business Operator, etc. shall explain matters including those prescribed in III-2-14(3)(i), while
also making reference to information such as the contents of the document on the outline of crypto-and otherassets published by a Financial Instruments Firms Association.
(8) Points of Attention Regarding Provision of Pre-Contract Documents(i)

The “reasons for the possibility of a loss exceeding the principal amount,” as specified under Article

82(iv)(b) of the FIB Cabinet Office Ordinance shall include a rapid market movement that could cause a loss
exceeding the principal amount despite the Loss-Cutting Rule.
(ii)

The “reasons for the termination of the relevant financial instruments transaction contract,” as specified

under Article 82 (viii) of the FIB Cabinet Office Ordinance shall include items related to the Loss-CuttingRule.
(iii) The “types and calculation methods of cash margin and other deposits to be made by customers withregard to the relevant derivatives transactions, etc.,” as specified under Article 93(1)(iv) of the FIB Cabinet
Office Ordinance shall include items related to the minimum margin deposits and additional margin deposits
that must be made when the existing deposits have fallen short of the required level due to market movements,
etc. (hereinafter referred to as “margin calls”).
(iv)

Regarding currency-related transactions, the “major terms and other basic items regarding derivatives

trading,” as specified under Article 93(1)(vii) of the FIB Cabinet Office Ordinance shall include items related
to the method of determining prices of financial instruments, etc., and the Swap Point. In cases where theSwap Point may be either received or paid by customers and where a loss may arise, these possibilities shallbe properly indicated.
(v)

Regarding the “counterparty to a cover transaction,” as specified under Article 94(1)(i) of the FIB Cabinet

Office Ordinance, all such counterparties shall be indicated when two or more counterparties exist. However,in cases where a participant in the interbank foreign currency market engaging in a cover transaction finds it
impossible to identify the counterparty thereto, it shall suffice that an indication to that effect be contained in
the Explanation Document.
(vi)

Regarding the “trustee,” as specified under Article 94(1)(iv) of the FIB Cabinet Office Ordinance, thespecific name of the trustee of a trust for the segregated management of cash margin and other deposits in thecase of securities-related over-the-counter derivative transactions, and the specific name of the trustee of cash
margin and other deposits, as specified under each item of Article 143(1)(i) or (ii)(a) to (d), in the case of overthe-counter derivative transactions other than securities-related over-the-counter derivative transactions, shallbe indicated.

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(9) Points of Attention Regarding Provision of Documents Related to Receipt of Cash Margin and Other Deposits
The “date of the receipt of deposits by the relevant Financial Instruments Business Operators, etc.,” as specified
under Article 114(1)(iv) of the FIB Cabinet Office Ordinance may be either the date on which the deposit is madeor a date after that date, depending on the agreement between the business operator and the customer.
(10) Points of Attention Regarding Ban on Uninvited Solicitation
Regarding customer solicitation for over-the-counter financial futures transactions, in the past, there were somecases in which solicitation by means of telephone calls and door-to-door visits led customers to engage in suchtransactions without sufficient understanding of the risks and schemes involved and caused disputes, a situation thateventually developed into a social issue. In light of this, a ban has been imposed, under Article 38(iv) of the FIEA,
on over-the-counter derivatives business operators and their officers and employees visiting or placing phone calls
to customers who have not requested solicitation in order to solicit them to sign contracts for over-the-counter
derivative transactions (in the case of derivatives transacions other than for over-the-counter financial futurestransactions and crypto-and other assets-related over-the-counter derivatives transactions, limited to over-thecounter derivatives transactions made with individual customers; hereinafter the same shall apply in (10)) (a practiceknown as “uninvited solicitation”).
Meanwhile, Article 116 of the FIB Cabinet Office Ordinance allows over-the-counter derivatives business
operators to solicit the customers with whom they have on-going transactions to sign contracts for over-the-counter
derivatives transactions, and to solicit corporations engaging in foreign trade and foreign currency transactions tosign such contracts, in order to offset the possibility of losses that may be incurred by the corporations as a result of
exchange rate movements related to their assets and liabilities.
In order to ensure compliance with the above provisions, it is important for over-the-counter derivatives business
operators to develop a control environment for customer management so as to precisely identify the status ofcustomers’ solicitation requests. Therefore, supervisors shall conduct supervision by paying attention to thefollowing points, for example:(i)

Eligibility for Uninvited Solicitation
A. The “solicitation for signing contracts for financial futures transactions through visits or phone calls,”
as specified under Article 38(iv) of the FIEA, shall include inquiring with customers as to whether they
are willing to accept visits for solicitation.
B. The “persons who have outstanding unsettled over-the-counter financial futures transactions in theiraccounts” as specified under Article 116(1)(i) of the FIB Cabinet Office Ordinance, the “persons who
have outstanding unsettled crypto-and other assets-related over-the-counter derivatives transactions intheir accounts” as specified under Article 116(1)(ii)-2 of the FIB Cabinet Office Ordinance, the “persons
who have outstanding unsettled securities-related over-the-counter derivative transactions in theiraccounts” as specified under Article 116(1)(iv) of the FIB Cabinet Office Ordinance, and the “persons
who have outstanding over-the-counter derivative transactions in their accounts,” as specified under
Article 116(1)(v) of the FIB Cabinet Office Ordinance shall include persons who hold options contracts
for which the exercise period has not expired.
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C. An inquiry regarding general items submitted via the telephone or through other means to an over-thecounter derivatives business operators over-the-counter financial futures business operator from acustomer who has seen an advertisement, or a request therefrom for documents regarding the outline oftransactions shall not in itself be deemed to constitute a “request for the solicitation for signing contracts
for financial futures transactions.”(ii)

Identification of Status of Customers’ Solicitation Requests
A. Whether the over-the-counter financial futures business operator strives to identify the status ofcustomers’ solicitation requests and past transactions in a timely manner, by developing a system ofcustomer cards, for example, and whether it ensures that all officers and employees strive to solicit
customers in an appropriate manner in light of the status of their solicitation requests and pasttransactions.
B. Whether the over-the-counter financial futures business operator has prescribed specific procedures forthe management of customer information, such as the status of their solicitation requests and pasttransactions, and ensures that all officers and employees are aware of and comply therewith. In particular,
whether the business operator has prescribed the procedures for managing customer information basedon sufficient deliberations made from the viewpoint of the confidentiality obligation.
C. Whether the internal control division strives to grasp how the over-the-counter financial futures business
operator identify the status of customers’ solicitation requests and past transactions and manage
customer information. Furthermore, whether the said division examines, as necessary, if solicitation isconducted in an appropriate manner, and strives to develop a control environment that ensures theeffectiveness of the procedures for managing customer information by reviewing and revising them, forexample.

(11) Points of Attention Regarding the Solicitation of Complex Structured Bonds and Investment Trusts that are
Similar to Over-The-Counter Derivative Transactions (Reasonable-Basis Suitability and Solicitation
Commencement Standards)
Regarding the sale of complex structured bonds and investment trusts that are similar to over-the-counter
derivative transactions, there has been an increase in problems, especially between Financial Instruments Business
Operators and individual customers, due to such problems as the difficulty for customers to understand the risks. Inview of these circumstances, from the perspective of improving investor protection, it is important for Financial
Instruments Business Operators that solicit individual customers for these structured bonds and investment trusts toensure appropriate solicitation based on the principle of suitability. As such, supervisors shall examine this by paying
attention to the following points, for example:(i)Whether the Financial Instruments Business Operator verifies in advance the suitability of financial

products to be sold to investors (reasonable-basis suitability), based on the self-regulatory regulations of theJapan Securities Dealers Association, entitled “Regulations Concerning Solicitation for Investments andManagement of Customers, etc., by Association Members.”(ii)

Whether the Financial Instruments Business Operator appropriately formulates solicitation
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commencement standards according to the risk profile of the financial products and the nature of the customers
based on the self-regulatory regulations of the Japan Securities Dealers Association, entitled “Regulations
Concerning Solicitation for Investments and Management of Customers, etc., by Association Members,” andconducts proper solicitation in accordance with those standards.
(12) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding an over-the-counter derivatives
business operator’s control environment for customer solicitation and explanations, through daily supervisoryadministration or the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the over-the-counter derivatives business operator by holding in-depth hearings and, whennecessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When the over-the-counter
derivatives business operator is deemed to have a serious problem from the viewpoint of protecting public interestsand investors, the supervisors shall take actions, including issuing an order for business improvement based on
Article 51 of the FIEA. When the over-the-counter derivatives business operator is deemed to have committed aserious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52(1) of the FIEA.
IV-3-3-3 Discretional Trading Contracts, etc.
(1) Points of Attention Regarding Discretionary Trading Contracts with Foreign Financial Futures Companies
When supervisors receive a notification from an over-the-counter derivatives business operator for the signingof a contract based on Article 16(1)(viii)(b) of the Cabinet Office Ordinance Regarding Definitions, they shall pay
attention to the following points:(i)

Whether the division that executes transactions regarding the said contract is clearly separated from thedivisions that receive and execute orders for other brokerage transactions.
(ii)

Whether it is ensured that account books are compiled in ways to enable the identification of transactions

related to the said contract.
(2) Scope of Specified Agreements by Over-the-Counter Derivatives Business Operators
Specified agreements under Article 123(1)(xiii)(b) and (c) of the FIB Cabinet Office Ordinance include thefollowing agreements:(i)

Agreements regarding rewards and contracted values higher or lower than the specified rewards andcontracted values (including rewards and contracted values determined with a prescribed method)(ii)

Agreements regarding an appropriate range determined with a specified reward or a contracted value as abase point.
(iii)

Agreements regarding the determination of rewards and contracted values at the discretion of over-the-counter derivatives business operators on condition that they follow the best execution practice in daily trading.

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(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding an over-the-counter derivatives
business operator’s practices specified under Article 123(1)(xiii)(a) to (e) of the FIB Cabinet Office Ordinancethrough daily supervisory administration and the reporting of problematic conduct, they shall identify and keep
track of the status of voluntary improvement made by the over-the-counter derivatives business operator by holding
in-depth hearings and, when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA,
while paying consideration to the above viewpoints. When the over-the-counter derivatives business operator isdeemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When theover-the-counter derivatives business operator is deemed to have committed a serious and malicious violation oflaw, the supervisors shall consider necessary actions, including the issuance of an order for business suspension
based on Article 52(1) of the FIEA.
IV-3-3-4 Control Environment for Business Execution(1) Points of Attention Regarding Treatment of Slippage in Currency-Related Over-the-Counter Derivative
Transactions, etc.
Slippages unavoidably occur due to such factors as the passage of time for communicating orders. In supervising
the treatment of slippage, for the purpose of establishing a system in which currency-related over-the-counter
derivatives business operators are encouraged to execute business operations honestly and fairly, the following
points shall be noted.
(i) Whether the over-the-counter derivatives business operator, as regards to slippages that arise in dealings
with customers, are treating them asymmetrically in a way that work advantageously toward the customer,
such as in the cases below.
A. The over-the-counter derivatives business operator executes a transaction at a price disadvantageous tothe customer when there is a slippage disadvantageous to the customer (when the execution price ismore disadvantageous to the customer than the price at order), while it also executes a transaction at a
price disadvantageous to the customer even when there is a slippage advantageous to the customer (whenthe execution price is more advantageous to the customer than the price at order).
B. The over-the-counter derivatives business operator sets a wider slippage range in which it executes
transactions at prices disadvantageous to the customer than the slippage range in which it executes
transactions at prices advantageous to the customer (including cases in which the customer is allowed
to designate the slippage and the operator makes an arrangement by means of which the slippage range
in which transactions are executed at prices disadvantageous to the customer is set wider than that inwhich transactions are executed at prices advantageous to the customer).
C. The upper limit of the value of transactions executed when the slippage is disadvantageous to thecustomer is set higher than the upper limit of the value of transactions executed when the slippage isadvantageous to the customer.
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(ii) Even when the over-the-counter derivatives business operator does not engage in asymmetric treatment
disadvantageous to the customer, as provided in (i) above, but slippage does occur, whether the operator
provides appropriate and sufficient explanation of the occurrence of slippages and their causes, the possibility
that slippages can be either advantageous or disadvantageous toward the customer, its policy on the treatmentof advantages and disadvantages due to slippage that have occurred, and so forth.
(2) Points of Attention Regarding Specified Over-the-Counter Derivatives Transactions
Specified over-the-counter option transactions for individual customers such as so-called binary option
transactions, etc. (meaning the specified over-the-counter option transactions provided in Article 123(vii) of the FIB
Cabinet Office Ordinance; the same shall apply hereinafter) include those of which profit/loss results become known
in short time, leading to customers engaging in excessively speculative transactions, and those that are products
based on complex theoretical principles but are likely to give the false impression that they are simple products,
making it difficult for the customer to precisely judge their risks.
In consideration of the above, when an over-the-counter derivatives business operator handles specified overthe-counter option transactions for individuals, supervisors shall be mindful of the purpose of securing andestablishing a system in which product design and business operations necessary and appropriate for protecting
public interests and investors are executed, and conduct verification on whether such operators comply with theprovisions in the self-regulatory rules established by self-regulatory organizations.
(i) Points of Attention Regarding Product Characteristics
Whether an over-the-counter derivative business operator pays attention to the following points in order
to secure, for the specified over-the-counter option transactions for individual customers it provides,
appropriateness and soundness as financial instrument transactions.
A. Transaction Period and Transaction Maturity
a. Whether transaction periods (i.e., the period between the time the transaction starts and the judgmenttime) are set so short that it may encourage excessively speculative transactions.
b. Whether intervals between transaction maturities on the same issue are set so short that they may
encourage excessively speculative transactions. In addition, regarding transaction maturities
overlapping different issues (such as currency pairs), whether short time lags are set between themwithout reasonable grounds in ways in which they encourage excessively speculative transactions
overlapping different issues, repeatedly and continuously.
c. Whether the operator responds to customers' buy transaction orders or sell transaction orders(including fresh transaction orders) as far as possible until the transaction maturity during thetransaction period.
B. Exercise Pricea. Whether the exercise prices (or the calculating method if such prices are decided according to a certain
method of calculation) are decided and indicated in ways in which customers can precisely grasp therisks associated with the transaction so that they can make appropriate investment decisions.
b. Whether exercise prices are set at levels that significantly differ from the prices of underlying assets
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at the beginning of the transaction, which may lead to excessively speculative transactions.
C. Fairness of Transactions
Regarding products that have the same underlying assets, transaction period and exercise price, whether
transaction conditions advantageous to the over-the-counter derivatives business operator are eliminatedby the adoption of measures such as simultaneously providing opportunities for fresh buy transactions
and fresh sell transactions, or eliminating settings in which all customers can sustain loss on exercise
prices.
D. Transaction Prices (Value)
Whether Transaction Prices (Value) are calculated by fair methods considering the exercise period,
exercise price, prices of underlying assets and so forth.
(ii) Points of Attention Regarding Customer Management and Transaction Management
Whether the over-the-counter derivatives business operator is exercising appropriate handling ofspecified over-the-counter option transactions for individuals in accordance with the characteristics of thecustomer by giving consideration to the following points.
A. Whether it has standards for initiating transactions in accordance with the customer's knowledge,
experience and financial resources.
B. Whether it has an upper limit on transaction values depending on characteristics of the customer, andconducts monitoring.
(iii) Points of Attention Regarding Provision of Information to Customers
Whether an over-the-counter derivatives business operator provides necessary and sufficient explanationand information on the risk, content of the product, past profit/loss performance, and so forth on specified
over-the-counter option transactions for individuals so that customers can precisely grasp the risks associatedwith the transaction and make an appropriate investment judgment. In addition, whether the over-the-counter
derivatives business operator adjusts its advertising and publicity and has an appropriate system to screen
advertising so that its advertising may not lead investors to have excessively optimistic expectations orerroneous understanding.
(iv) Points of Attention Regarding Appropriate Transaction Conditions
A. Disclosure of Grounds for Calculation of Transaction Conditions
Whether sufficient explanations are provided to customers on the grounds for setting transaction prices,
exercise prices and expiry prices so that they can make reasonable investment judgments.
B. Suspension of Transactions
In light of the fact that suspension of transactions stops services to customers and the provision ofliquidity, whether the operator is mindful of its impact on customers and takes the following measures.
a. Whether the operator explains to customers in advance its judgment criteria for deciding thesuspension of transactions.
b. Whether the operator publicizes, when a transaction suspension occurs, the fact of its occurrence andthe reason on its website, etc., as well as storing such information in the form of documents.
c. Whether the operator, when a transaction suspension occurs, has a third party, rather than its
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responsible sections, investigate the causes of the occurrence and conduct monitoring to prevent
recurrence.
C. Monitoring of Transaction Conditions
Whether the operator conducts verification of the appropriateness of transaction prices and expiry
prices by having a third party, rather than its responsible internal sections, monitor them and verify theirappropriateness.
(3) Points of Attention Regarding Crypto-and Other Assets-Related Over-the-Counter Derivatives Transactions
The provisions of III-2-14(1) shall be applied mutatis mutandis to points of attention regarding crypto-and otherassets-related over-the-counter derivatives transactions. In addition, supervisors shall also pay attention to thefollowing points:(i) Whether, according to the patterns or contents of a customer's orders relating to crypto-and other assetsrelated over-the-counter derivatives transactions or the status of such transactions or any other circumstances,the crypto-and other assets-related over-the-counter derivatives business operator screens whether there isany violation of Article 185-22(1), Article 185-23(1), or Article 185-24(1) or (2) of the FIEA, and if it findsthat there may be a violation, it takes measures such as suspending crypto-and other assets-related over-thecounter derivatives transactions with that customer and any other measures necessary for preventing unfair
acts relating to crypto-and other assets-related over-the-counter derivatives transactions such as the following
for example.
(Note) "Unfair acts relating to crypto-and other assets-related over-the-counter derivatives transactions "include an act of using crypto-and other assets handled or to be newly handled by the crypto-and otherassets-related over-the-counter derivatives business operator or the information stated in (ii) below
regarding the crypto-and other assets-related over-the-counter derivatives business operator to benefit
itself or a third party.
A. Establishment of Arrangements and Procedures for Transaction Screening
Whether the crypto-assets-related over-the-counter derivatives business operator has developed
necessary arrangements and procedures for preventing unfair acts by customers, such as specifying
necessary procedures for transaction screening in internal rules, etc. and setting up a division in charge oftransaction screening.
B. Precise Identification of Customers’ Trading Patterns and Thorough Management
a. Whether the over-the-counter derivatives business operator has established specific procedures for
identifying customers’ trading patterns as represented by features such as the types of crypto-and otherassets, etc. subject to transactions and the method and characteristics of their trading, and precisely
identifies their trading motives by monitoring its trading activity as necessary in accordance with theprocedures.
b. Whether the internal control division makes sure that all officers and employees are aware of and follow
the above procedures, and ensures the effectiveness thereof by revising them as necessary, for example.
c. In cases where the over-the-counter derivatives business operator has recognized the possibility of193

customers using accounts opened under fictitious names, whether it investigates the true identity of thecustomers and monitors transactions involving the said accounts with special care.
C. Establishment of Transaction Screening Criteria and Efficient Utilization Thereofa. Whether the over-the-counter derivatives business operator has established the criteria for selecting thecrypto-and other assets, etc. for screening, for each of their types, in light of factors such as theadvancers-to-losers ratio and the status of transactions, in order to ensure the fairness of customers’transactions, and makes appropriate selection based on said criteria.
b. Whether the over-the-counter derivatives business operator conducts appropriate trading management
regarding selected crypto-and other assets, etc. by, for example, establishing specific screening criteria
and taking measures necessary (e.g., making inquiries with customers, issuing alerts and suspending
trading) for preventing illegal trading practices, such as market manipulation.
c. Whether the internal control division has developed a control environment for examining theconsistency of the selection and screening criteria and the implemented measures with the actual status
in a timely manner, and is ensuring the effectiveness of the measures and criteria by making revisions
as necessary, for example.
(ii) Whether the following measures, for example, are taken with regard to important information on the cryptoand other assets, etc. subject to or to be newly made subject to crypto-and other assets-related over-thecounter derivatives transactions or on the crypto-and other assets-related over-the-counter derivatives
business operator, which is deemed to affect customers' decisions on those transactions (Note).
(Note) The following information, for example, could fall under the category of such information. However,this excludes the case where the information is made readily accessible to all customers of the financial
instruments business, etc. conducted by the crypto-and other assets-related over-the-counter derivatives
business operator.
- Important changes to functions, effects, or plans of the crypto-and other assets, etc., such as changes
in the forks of the blockchain used for the crypto-and other assets, etc. or other technicalspecifications used for the crypto-and other assets, etc.
- Material changes in the status of business operations or property of a person or body that is able todecide the specifications, etc. of the crypto-and other assets, such as commencement of bankruptcy
proceedings, special liquidation proceedings, civil rehabilitation proceedings, or corporate
rehabilitation proceedings, or other insolvency proceedings equivalent thereto of the issuer, etc. of
the crypto-and other assets, etc.
- Decision or occurrence of matters that have a serious impact on the price or liquidity of the cryptoand other assets, etc., such as a decision that the handling of the crypto-and other assets, etc. will becommenced or discontinued, or occurrence of a fact of receiving a number of orders large enough tohave a serious impact on the price of the crypto-and other assets.
- Decision or occurrence of matters that have a material impact on the status of business operations orproperty related to the crypto-and other assets-related over-the-counter derivatives business
operator's financial instruments business, such as occurrence of a security incident that seriously
194disturbs implementation of the financial instruments business or commencement of insolvency
proceedings.
A. Whether the crypto-assets-related over-the-counter derivatives business operator specifies the types or
the scope of information that could fall under the category of such information in internal rules, etc.
B. Whether the crypto-assets-related over-the-counter derivatives business operator has set up an
independent division for managing such information and has established arrangements and procedures
for appropriately managing such information.
C. Whether the crypto-assets-related over-the-counter derivatives business operator has establishedarrangements and procedures for preventing an officer or employee that has acquired such informationfrom communicating the information to a third party beyond the scope necessary for business.

(4) Points of Attention Regarding Services to Operate Electronic Transaction Platforms
In cases where Financial Instruments Business Operators provide services to operate platforms for electronictransactions prescribed in Article 1(4)(xvi) of the FIB Cabinet Office Ordinance, supervisors shall require them tothoroughly comply with laws, etc. as Type I Financial Instruments Business Operators and supervise such operations
by paying attention to the following points in view of ensuring fairness and transparency in over-the-counter
derivative transactions.
(i)Whether the electronic transaction platform operator (referring to a Type I Financial Instruments Business

Operator that provides the service of operating an electronic transaction platform; the same shall apply
hereinafter) is equipped with a control environment/system to disclose quotations of sales and purchasetransactions accurately on a page of its electronic transaction platform. Also, whether it is equipped with acontrol environment/system to accurately and swiftly communicate quotations of sales or purchase transactions
offered by the relevant party to the other party when deciding a transaction price based on negotiations between
customers.
(ii)

Whether the electronic transaction platform operator has a control environment/system to disclose general

information about over-the-counter derivative transactions settled on its electronic transaction platform
accurately and in a timely manner in accordance with laws, etc.
In particular, in cases in which the relevant disclosure service (service to disclose transactions that havebeen settled) is outsourced, whether the outsourced contractor makes it clear in disclosing such informationthat the information is disclosed for the electronic transaction platform operator (the consigner). Also, whether
the electronic transaction platform operator (the consigner) is appropriately conducting selection, monitoring,etc. of outsourced contractors in accordance with internal rules so that disclosures are carried out accurately
and in a timely manner in accordance with laws, etc.
(iii) Whether the electronic transaction platform operator provides in a contract, etc. that the customer is toobserve the rules established by the operator and submit information on transactions with the operator at therequest of the operator.
(5) Points of Attention Regarding Storage and Reporting of Transaction Data in Specified Currency-Related Over195

the-Counter Derivatives Transactions
Whether a control environment has been established for the appropriate storing and reporting of information
concerning specified currency-related over-the-counter derivatives transactions (meaning the specified currencyrelated over-the-counter derivatives transactions prescribed in Article 117(1)(xxviii)-2 of the FIB Cabinet Office
Ordinance) pursuant to the provisions of Article 123(1)(xxi)-7 and (xxi)-8 of the FIB Cabinet Office Ordinance andthe rules of the Financial Instruments Firms Association (the rules within the limits designated by the Commissionerof the Financial Services Agency; for currency-related over-the-counter derivatives business operators that are notaffiliated with a Financial Instruments Firms Association that has determined Rules Set by Associations, etc., theCommissioner of the Financial Services Agency shall determine the rule).
(6) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the control environment for the
execution of business operations of an over-the-counter derivatives business operator through daily supervisoryadministration and the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement in business operations made by the over-the-counter derivatives business operator through thoroughinterrogation or by requiring the submission of reports based on Article 56-2(1) of the FIEA. When the operator isdeemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When theoperator is deemed to have committed a serious and malicious violation of law, the supervisors shall consider
necessary actions, including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
IV-3-3-5 Control Environment for Managing Risk Related to Currency-Related Over-The-Counter Derivative
Transactions
Regarding currency-related over-the-counter derivative transactions (meaning the currency-related over-thecounter derivative transactions prescribed in Article 123(4) of the FIB Cabinet Office Ordinance; the same shallapply hereafter), it is important for currency-related over-the-counter derivatives business operators to manage theirown risks. Therefore, supervisors shall supervise currency-related over-the-counter derivatives business operators’
control environments for risk management and their execution of business by paying attention to the following
points.
(1) Points of Attention Regarding Transactions with Customers and Counterparties to Cover Transactions(i)

In cases where there is the possibility of a timing gap arising between the execution of a transaction witha customer and the execution of a cover transaction, whether the currency-related over-the-counter derivatives
business operator has developed a control environment for risk management that is well prepared for the riskof a rapid market movement occurring during the intervening period.
(ii)

In cases where a cover transaction is made at a specific interval of time or for a specific amount oftransactions, or made at the discretion of dealers, rather than being made for each transaction with a customer,
whether the currency-related over-the-counter derivatives business operator has developed a control
196

environment for risk management that is well prepared for the risk of a rapid market movement occurring
between the execution of a transaction with a customer and the execution of a cover transaction, with due
consideration of the timing gap.
(iii) In cases where the currency-related over-the-counter derivatives business operator makes covertransactions after executing customers’ limit orders or loss-cutting orders in light of quotations indicated byinformation vendors and other factors, whether the business operator has developed a control environment forrisk management that is well prepared for the risk of a rapid market movement occurring during theintervening period.
(iv) Basically, handling of information technology risk related to cover transactions made through a computer
system shall be examined from the viewpoints regarding the development of the relevant control environmentthat are specified in III-2-8. However, with due consideration of the possibility of computer system troubles
disrupting cover transactions, supervisors shall also examine whether the currency-related over-the-counter
derivatives business operator has developed a control environment for risk management that is well prepared
for the risk of a rapid market movement occurring during the intervening period.
(v)

Whether the currency-related over-the-counter derivatives business operator fully understands thecontents of a contract with the counterparty to cover transactions and has developed a control environmentthat ensures quick and appropriate response in the event of a dispute.
(2) Points of Attention Regarding Response to Rapid Market Movements
Whether the currency-related over-the-counter derivatives business operator has established a specific policy
for risk management in preparation for a possible rapid market movement, such as refraining from taking orders
from customers when it has suspended proprietary trading or when it is impossible to make transactions with thecounterparty to cover transactions, and whether it has developed a control environment that ensures compliancewith the policy.
(3) Points of Attention Regarding Proprietary Trading
In cases where a currency-related over-the-counter derivatives business operator engages in proprietary tradingin addition to cover transactions related to customers, supervisors shall pay attention to the following points:(i)

Whether the currency-related over-the-counter derivatives business operator has established internal rules

regarding position limits, stop-loss limits (on daily and monthly bases) and overnight position limits regarding
employees engaging in proprietary trading.
(ii)

Whether the currency-related over-the-counter derivatives business operator has set both soft limits andhard limits regarding order placement by employees engaging in proprietary trading in order to prevent
erroneous orders.
(iii) Whether the currency-related over-the-counter derivatives business operator has developed a control
environment that ensures that the compliance of transactions made by employees engaging in dealing withinternal rules is constantly monitored by back-office staff.

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(4) Points of Attention Regarding Loss-Cut Transactions Intended for Individuals(i)Whether the currency-related over-the-counter derivatives business operator has set a level for executing

loss-cut transactions in light of price volatility risk, liquidity risk and other factors, in order to prevent acustomer’s loss from exceeding the margin they deposit.
(ii)

Whether the currency-related over-the-counter derivatives business operator has formulated internal rules

and so forth in which agreements on loss-cut transactions are specified, and whether it reflects them incontracts with customers.
(iii) Whether the currency-related over-the-counter derivatives business operator properly identifies the
position of a customer at each point during the trade, and in cases where the position conflicts with the levelmentioned in (i) above, whether it executes the loss-cut transaction without exception.
(iv) Whether the currency-related over-the-counter derivatives business operator, periodically or as necessary,
reports to the board of directors, etc. on the execution of loss-cut transactions.
(5) Points of Attention Regarding Low-Spread Transactions
Unless a currency-related over-the-counter derivatives business operator, who provides low-spread transactions,can secure and maintain a considerable trade volume, there is the risk that its financial situation will worsen. On theother hand, the business operator needs to develop a control environment wherein it can appropriately manage a
trade volume of sufficient size to ensure management stability.
From this perspective, whether the currency-related over-the-counter derivatives business operator has
developed an adequate control environment for risk management, including the following issues for example.
(i)

When developing a company-wide control environment for risk management (for example, formulationof a basic policy on risk management), whether the currency-related over-the-counter derivatives business
operator fully recognizes the risks associated with low-spread transactions and has appropriately reflected
them.
(ii)

When beginning to provide low-spread transactions, whether the currency-related over-the-counter

derivatives business operator has decided on spreads and fees after considering whether it can secure adequate
profitability in light of its earnings structure and trade volume. Also, whether the business operator
periodically examines the said decision with due consideration of any changes in its earnings structure or tradevolume, and whether it makes revisions as necessary. Whether the business operator has clarified suchprocedures in its internal rules and so forth.
(iii) Whether the currency-related over-the-counter derivatives business operator, who provides low-spreadtransactions, has fully understood the trade volume and transaction details of the said transactions and theeffects on the company’s financial situation, and whether it has developed a control environment for reportingto the board of directors, etc. in an appropriate and timely manner.
(iv) Whether the currency-related over-the-counter derivatives business operator, who provides low-spreadtransactions, has fully developed systems and other necessary control environments for realizing the assumed
earnings structure. Also, whether the business operator examines its actual earnings situation as needed, andwhether it makes appropriate revisions to the said control environment.
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(6) Points of Attention Regarding the Assumed Ratio of Foreign Exchange Risk of Specific Currency-Related OverThe-Counter Derivative Transactions Intended for Corporations (meaning Specific Currency-Related Over-TheCounter Derivative Transactions Stipulated in Article 117(1)(xxxix) of the FIB Cabinet Office Ordinance)(i)

In the case where the currency-related over-the-counter derivatives business operator calculates theassumed ratio of foreign exchange risk stipulated in Article 117(31) and (32) of the FIB Cabinet Office
Ordinance
A. Whether the currency-related over-the-counter derivatives business operator has developed an accurate
and reasonable model (meaning the quantitative calculation model stipulated in the “Notice of theEstablishment of the Method of Calculating the Assumed Ratio of Foreign Exchange Risk Pertaining toSpecific Currency-Related Over-The-Counter Derivative Transactions;” the same shall apply hereinafterin (6)), and whether it has established a control environment for calculating the assumed ratio of foreignexchange risk based on data continuously calculated using a reasonable method.
B. Whether the currency-related over-the-counter derivatives business operator verifies the assumed ratio of
foreign exchange risk that was calculated using the model at every calculation and after calculation, andwhether it has developed a control environment for reviewing the model as needed.
(ii)

In the case where the currency-related over-the-counter derivatives business operator outsources thecalculation of the assumed ratio of foreign exchange risk stipulated in Article 117(31) and (32) of the FIB
Cabinet Office Ordinance
A. Whether the currency-related over-the-counter derivatives business operator monitors whether theoutsourcee has developed an accurate and reasonable model, and whether it has established a control
environment for calculating the assumed ratio of foreign exchange risk based on data continuously
calculated using a reasonable method.
B. Whether the currency-related over-the-counter derivatives business operator monitors whether theoutsourcee verifies the assumed ratio of foreign exchange risk that was calculated using the model at every
calculation and after calculation, and whether it has developed a control environment for reviewing themodel as needed.
C. In the case where all or part of the operations of A and B above are outsourced more than once, whether
the currency-related over-the-counter derivatives business operator checks if the outsourcee adequately
monitors the subcontractor. Also, whether the currency-related over-the-counter derivatives business
operator directly monitors the subcontractor as needed.
D. In the cases where a Financial Instruments Firms Association calculates and publishes the assumed ratioof foreign exchange risk (including cases where said Association outsources all or part of the calculationand publication of the ratio), whether the currency-related over-the-counter derivatives business operator
has developed a control environment for using the ratio precisely and continuously, when it uses the ratio.
(Note) In the case of D above, the supervisory authorities shall examine whether said Association is properly
operated.

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(7) Points of Attention Regarding Stress Testing
Whether a control environment has been established for the appropriate stress testing as prescribed in Article
123 (1)(xxi-4) of the FIB Cabinet Office Ordinance and the rules of the Financial Instruments Firms Association(the rules within the limits designated by the Commissioner of the Financial Services Agency. for currency-related
over-the-counter derivatives business operators that are not affiliated with a Financial Instruments Firms Associationthat has determined Rules Set by Associations, etc., the Commissioner of the Financial Services Agency shalldetermine the rule) in order to enhance settlement risk management.
(8) Supervisory Method and Actions(i)

In order to check the appropriateness of the currency-related over-the-counter derivatives business

operator’s control environment for risk management, supervisors shall identify the details (spreads, fees andso forth) of the products and transactions provided by the currency-related over-the-counter derivatives
business operator, through hearings and other means.
(ii)

When supervisors have, through daily supervisory administration or the reporting of problematic conduct,

recognized an issue regarding a currency-related over-the-counter derivatives business operator’s control
environment for risk management, they shall identify and keep track of the status of voluntary improvement
made by the currency-related over-the-counter derivatives business operator by holding in-depth hearings,
and, when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When thecurrency-related over-the-counter derivatives business operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions such as issuing anorder for business improvement based on Article 51 of the FIEA. When the business operator is deemed tohave committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including issuing an order for business suspension based on Article 52(1) of the FIEA. When supervisors haverecognized an issue of supervisory concern regarding a currency-related over-the-counter derivatives business
operator’s control environment for risk management, through daily supervisory administration, they shallidentify and keep track of the risk management status by conducting in-depth hearings and, when necessary,
requiring the submission of a report based on Article 56-2(1) of the FIEA. When the business operator’s risk
management status is deemed to have a serious problem from the viewpoint of protecting public interests andinvestors, the supervisors shall take actions, including issuing an order for business improvement based on
Article 51 of the FIEA. When the business operator is deemed to have the risk of defaulting in light of its
business condition or asset status, the FSA shall consider taking necessary actions, such as issuing an orderfor business suspension under Article 52(1) of the FIEA.
IV-3-3-6 Control Environment for Managing Risk Related to Securities-Related Over-The-Counter Derivative
Transactions
The provisions of IV-3-3-5(1) to (5) and (8) shall be applied mutatis mutandis to the establishment of control
environments for risk management and to the execution of business pertaining to securities-related over-the-counter
derivative transactions intended for individuals.
200IV-3-3-7 Control Environment for Managing Risk Related to Crypto-Assets, etc.-Related Over-the-Counter
Derivatives Transactions
The provisions of IV-3-3-5(1) through (5) and (8) shall be applied mutatis mutandis to the development of acontrol environment for managing risk and implementation of business operations related to crypto-assets, etc.related over-the-counter derivatives transactions. In addition, supervisors shall also pay attention to the following
points:(1) Points of Attention Regarding Transactions with Customers and Counterparties to Cover Transactions(i) When the crypto-and other assets-related over-the-counter derivatives business operator receives from acustomer a deposit of substitute crypto-and other assets as the whole or part of a customer margin or any
other security deposit, whether it requires the customer to deposit a volume of crypto-and other assets thatsufficiently exceeds the required amount, taking into account the price fluctuation risk of the substitutecrypto-and other assets.
(ii) When the crypto-and other assets-related over-the-counter derivatives business operator deposits cryptoand other assets to the counterparty to cover transactions, whether it screens the counterparty to covertransactions based on the control environment developed under IV-3-6-4(3), and confirms that thecounterparty to cover transactions appropriately manages the deposited crypto-and other assets to ensurethat they are not leaked outside.
(2) Points of Attention Regarding the Assumed Risk Ratio of Crypto-Assets, etc. of Specific Crypto-Assets, etc.Related Over-The-Counter Derivatives Transactions Intended for Corporations (meaning Specific Crypto-Assets,
etc.-Related Over-The-Counter Derivatives Transactions stipulated in Article 117(1)(xlix) of the FIB Cabinet Office
Ordinance)(i) In the case where the crypto-assets-, etc.-related over-the-counter derivatives business operator calculates
the assumed risk ratio of crypto-assets, etc. stipulated in Article 117(51) and (52) of the FIB Cabinet Office
Ordinance
A. Whether the crypto-assets-, etc.-related over-the-counter derivatives business operator has developed an
accurate and reasonable model (meaning the quantitative calculation model stipulated in the “Notice of
the Establishment of the Method of Calculating the Assumed Risk Ratio of Crypto-Assets, etc. Pertaining
to Specific Crypto-Assets, etc.-Related Over-The-Counter Derivatives Transactions”; the same shallapply hereinafter in (2)), and whether it has established a control environment for calculating the assumed
risk ratio of crypto-assets, etc. based on data continuously calculated using a reasonable method.
B. Whether the crypto-assets, etc.-related over-the-counter derivatives business operator verifies theassumed risk ratio of crypto-assets, etc. that was calculated using the model at every calculation and after
calculation, and whether it has developed a control environment for reviewing the model as needed.
(ii) In the case where the crypto-assets, etc.-related over-the-counter derivatives business operator outsources
the calculation of the assumed risk ratio of crypto-assets, etc. stipulated in Article 117(51) and (52) of the201

FIB Cabinet Office Ordinance
A. Whether the crypto-assets, etc.-related over-the-counter derivatives business operator monitors whether
the outsourcee has developed an accurate and reasonable model, and whether it has established a control
environment for calculating the assumed risk ratio of crypto-assets, etc. based on data continuously
calculated using a reasonable method.
B. Whether the crypto-assets-related, etc. over-the-counter derivatives business operator monitors whether
the outsourcee verifies the assumed risk ratio of crypto-assets, etc. that was calculated using the model at
every calculation and after calculation, and whether it has developed a control environment for reviewing
the model as needed.
C. In the case where all or part of the operations of A and B above are outsourced more than once, whether
the crypto-assets, etc.-related over-the-counter derivatives business operator checks if the outsourcee
adequately monitors the subcontractor. Also, whether the crypto-assets, etc.-related over-the-counter
derivatives business operator directly monitors the subcontractor as needed.
D. In the cases where a Financial Instruments Firms Association calculates and publishes the assumed risk
ratio of crypto-assets, etc. (including cases where said Association outsources all or part of the calculationand publication of the ratio), whether the crypto-assets, etc.-related over-the-counter derivatives business
operator has developed a control environment for using the ratio precisely and continuously, when it uses
the ratio.
(Note) In the case of D above, the supervisory authorities shall examine whether said Association is properly
operated.
IV-3-4 Appropriateness of Business Operations Related to Commodity-Related Market Derivatives BusinessIV-3-4-1 Control Environment for Legal Compliance
If commodity-related market derivatives business operators (meaning Type I Financial Instruments Business
Operators which engage in the activities prescribed under Article 28(1)(i)-2 of the FIEA on a regular basis; the same
shall apply hereinafter) are to gain the trust of investors, thereby building trust in the commodity-related market, it
is important that they strive to manage their business operations in a sound and appropriate manner while strictly
complying with laws, regulations and various business rules, and fully recognizing their roles as commodity-related
derivatives market players.
Commodity-related market derivatives business operators’ control environments for legal compliance shallbasically be examined based on the supervisory viewpoints and method specified in III-2-1. However, they shallalso be examined in relation to a broad range of matters, including the status of compliance with voluntary regulatory
rules established by self-regulatory organizations.
In cases where a commodity-related market derivatives business operator manages money or any other property
deposited by customers for subject commodity derivatives transaction-related transactions (referring to the subject
commodity derivatives transaction-related transactions specified in Article 43-2-2 of the FIEA; the same shall apply
hereafter), it is basically required to conduct management under the provisions of Articles 142-3 through 142-5 of202

the FIB Cabinet Office Ordinance. However, it should be kept in mind that, if the commodity-related market
derivatives business operator is a specified member (meaning the “specified member” prescribed in Article 4(1) of
the Supplementary Provisions of the Act Partially Amending the Financial Instruments and Exchange Act, etc. (ActNo. 86 of 2012); the same shall apply hereinafter), it has the possibility of selecting a method to manage money or
any other property deposited by customers for subject commodity derivatives transaction-related transactions bytaking property management measures (meaning the “property management measures” prescribed in Article 2(1) of
the Supplementary Provisions of the Act Partially Amending the Cabinet Office Ordinance on Financial Instruments
Business, etc. (Cabinet Office Ordinance No. 11 of 2014)), notwithstanding these provisions.
IV-3-4-2 Control Environment for Customer Solicitation and Explanations(1) Points of Attention Regarding Advertisements, etc.
(i) In cases where losses exceeding the amount of cash margin and other deposits may arise due to rapid market
movements despite the Loss-Cutting Rule, whether the commodity-related market derivatives business
operator properly indicates this risk in the advertisement.
(ii) Whether the commodity-related market derivatives business operator has forced customers to continue
attending seminars and similar events despite their expression of unwillingness to do so (including cases
where it has effectively forced them to do so). It should be kept in mind that this kind of practice shall bedeemed to meet the provision of Article 38(vi) of the FIEA (known as “prohibition of re-solicitation”).
(2) Points of Attention Regarding Confirmation of Willingness to be Solicited
While the soliciting of a customer to conclude a contract on entrustment of commodity-related market
derivatives transactions is prohibited without obtaining confirmation from the customer, prior to solicitation,
regarding whether or not the customer is willing to be solicited, whether the commodity-related market
derivatives business operator explains this restriction on solicitation to customers and appropriately confirms
whether they are willing to be solicited.
In addition, in the case where customers are individuals, whether the commodity-related market derivatives
business operator uses a method of making a visit or phone call or a method of assembling customers without
clearly indicating to them that the purpose of such assembly is solicitation (the methods set forth in Article
117(1)(viii)-2, A. and B. of the FIB Cabinet Office Ordinance) as the method for confirmation. For example,
when it intends to assemble customers to a seminar, etc. and confirm the customers’ willingness to be solicited,
whether the commodity-related market derivatives business operator clearly indicates to them in advance byan advertisement or notice, etc. on the seminar, etc. that the purpose of the seminar, etc. is solicitation for
conclusion of a contract on entrustment of commodity-related market derivatives transactions.
Meanwhile, there are differences in the regulation on solicitation between commodity-related market
derivatives transactions and commodity derivatives transactions under the Commodity Derivatives Transaction
Act (including transactions other than the commodity transaction contracts with prohibitions on uninvited
solicitation prescribed in Article 30 of the Order for Enforcement of the Commodity Derivatives Act).
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Therefore, attention should be paid to whether a business operator that handles both commodity-related market
derivatives transactions and commodity derivatives transactions has established an effective control
environment for managing sales staff, such as establishing internal procedures and rules based on suchdifferences and making sure that all officers and employees are aware of them, and developing a control
environment where the internal control division, etc. can conduct ex-post facto examination on the status of
implementation.
(3) Points of Attention Regarding Explanation Documents“The Key Points of the Status of Internal Control” in the Explanation Documents as specified under Article 464 of the FIEA shall describe specific arrangements and procedures for handling complaints and inquiries from
customers and for conducting internal audits.
(4) Points of Attention Regarding the Distribution of Notices of Warning Concerning the Solicitation Methods, etc.
for Commodity-Related Market Derivatives Transactions
When conducting commodity-related market derivatives transactions, whether, based on the self-regulatory
regulations of the Japan Securities Dealers Association, entitled “Regulations Concerning Solicitation for
Investments and Management of Customers, etc., by Association Members,” the commodity-related market
derivatives business operator alerts customers appropriately by distributing clear and concise documents (Notice ofWarning) which specify in large print and in an easily understandable manner: (i) an alert to the associated risks;and (ii) the contact details of the designated ADR body in the event of a problem arising, etc. and by giving
explanations suited to the customer attributes. Whether there is a control environment in place in which theimplementation status of this can be appropriately identified.
(5) Points of Attention Regarding Commodity-Related Market Derivatives Business Operator’ Responsibility for
Explanation(i) Hedging
A. Whether the commodity-related market derivatives business operator recommends customers to matchthe volume and maturity in the transactions made by them with those in corresponding transactions(meaning transactions intended to offset possible losses involved in the transactions made by them (socalled hedging)) with regard to entrustment, etc. of commodity-related market derivatives transactions.
B. Cases where a commodity-related market derivatives business operator confirms the possibility of anindividual customer making hedging transactions, when the customer has expressed willingness to makesuch transactions or when the customer inquired about the possibility of making such transactions shallnot automatically be deemed to fit the provision of Article 117(1)(xxxv) of the FIB Cabinet Office
Ordinance. However, whether the business operator confirms that the customer fully understands thetransactions, by explaining that hedging may lack economic rationality in some cases, as the customer
must pay double fees, the gains and losses will be fixed or limited, and negative spreads could occur.
C. In addition, even in cases where the volume and maturity in corresponding transactions do not match204

those in the transactions made by the customer, whether the commodity-related market derivatives
business operator accepts entrustment of the transactions after confirming that the customer fully
understands the transactions, by providing the explanation referred to in B. above or by other means.
(ii) Obligation to Explain Sagyoku-mukai
When a commodity-related market derivatives business operator which conducts “transactions tointentionally match the customer's transactions with transactions of its own account” (hereinafter referred toas "specified transactions") intends to accept entrustment of individual transactions from a customer, whether
it sufficiently explains the matters set forth in Article 117(1)(xxxviii) of the FIB Cabinet Office Ordinancein a manner that the customer can understand. For example, whether it explains matters such as that, whentransactions are settled while using specified transactions and if all customers’ total loss is higher than their
total gain, it produces profit for the commodity-related market derivatives business operator, and could
generate conflicts of interest between the commodity-related market derivatives business operator andcustomers.
In addition, even if a customer has entrusted transactions after receiving an explanation about specified
transactions conducted by the commodity-related market derivatives business operator, whether thecommodity-related market derivatives business operator, each time it places an order for its own transactions,notifies the customer that has placed an order for entrusted transactions corresponding to the business
operator’s own transactions of the fact that the entrusted transactions became the corresponding transactions
for the commodity-related market derivatives business operator’s own transactions, so as to enable thecustomer to confirm how often the customer’s entrusted transactions become the corresponding transactions
for the commodity-related market derivatives business operator’s own transactions, in an effort to make thecustomer’s understanding based on the explanation above more sufficient.
(Note) “Transactions to intentionally match the customer's transactions with transactions of its own account”
means placing an order for own transactions in a manner that the total number of open sell positions
and the total number of open buy positions become balanced between entrusted transactions(transactions conducted by a commodity-related market derivatives business operator based on
entrustment by a customer) and own transactions (transactions conducted by a commodity-related
market derivatives business operator on its own account), regardless of whether it is conductedmanually or automatically. The balance in the total number of open positions is not limited to thematching number of sell and buy positions.
If measures to prevent leakage of trading information on entrusted transactions are precisely taken
between the division that accepts entrustment of and executes entrusted transactions and the divisionthat executes own transactions, even if the total number of open sell positions and the total number ofopen buy positions become balanced between entrusted transactions and own transactions, it isconsidered unintentional.
(iii) Response to Rapid Market Movements
Whether the commodity-related market derivatives business operator provides appropriate explanations
regarding how it responds to rapid market movements, when requested to do so by customers.
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(iv) Internal Control Environment for Proprietary Trading
Whether the commodity-related market derivatives business operator provides appropriate explanations
regarding whether it engages in proprietary trading and, if it does so, regarding its control environment forrisk management, when requested by customers to provide such explanations.
(v) Status of Segregated Management
Whether the commodity-related market derivatives business operator provides customers withappropriate explanations, when requested by them to do so, regarding the status of the commodity customer
segregated fund trusts prescribed in Article 142-5 of the FIB Cabinet Office Ordinance.
(vi) Loss-Cut Transactions
In cases where the commodity-related market derivatives business operator has an agreement regarding loss-cut
transactions in place, whether it provides appropriate explanations regarding the details therein. Also, whether it
provides appropriate explanations regarding the risk of losses in cases where a loss-cut transaction cannot be
conducted as intended.
(6) Points of Attention Regarding Provision of Pre-Contract Documents(i) The “reasons for the possibility of a loss exceeding the principal amount,” as specified under Article
82(iv)(b) of the FIB Cabinet Office Ordinance shall include a rapid market movement that could cause aloss exceeding the principal amount despite the Loss-Cutting Rule.
(ii) The “reasons for the termination of the relevant financial instruments transaction contract,” as specified
under Article 82 (viii) of the FIB Cabinet Office Ordinance shall include items related to the Loss-Cutting
Rule.
(7) Points of Attention Regarding Provision of Documents Related to Receipt of Cash Margin and Other Deposits
The “date of the receipt of deposits by the relevant Financial Instruments Business Operators, etc.,” as specified
under Article 114(1)(iv) of the FIB Cabinet Office Ordinance may be either the date on which the deposit is madeor a date after that date, depending on the agreement between the business operator and the customer.
(8) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a commodity-related market
derivatives business operator’s control environment for customer solicitation and explanations, through daily
supervisory administration or the reporting of problematic conduct, they shall identify and keep track of the status
of voluntary improvement made by the commodity-related market derivatives business operator by holding in-depth
hearings and, when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA.
When the commodity-related market derivatives business operator is deemed to have a serious problem fromthe viewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing anorder for business improvement based on Article 51 of the FIEA. When the commodity-related market derivatives
business operator is deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including the issuance of an order for business suspension based on Article 52(1) of the206

FIEA.
IV-3-5 Appropriateness of Business Operations Related to Financial Instruments Business Operators Who Provide Service ofHandling Electronic Public Offerings
IV-3-5-1 Basic View on Financial Instruments Business Operators Who Provide Service of Handling Electronic
Public Offerings
Financial instruments business operators who provide services of handling electronic public offerings (referringto the service of handling electronic public offerings prescribed in Article 29-2(1)(6) of the FIEA; the same shallapply hereinafter) are required to provide appropriate information through the Internet in order to protect investors,
as information on the Internet is expected to influence the investment decisions of investors. Supervisors shalloversee such business operators by paying attention to the following points.
IV-3-5-2 Appropriateness of Service of Handling Electronic Public Offerings
When a Financial Instruments Business Operator handles public offering, secondary distribution or private
placement, or solicits sales transactions for specified investors, involving securities that are prescribed in each itemof Article 3 of the FIEA or those that are not listed on a financial instruments exchange (excluding those prescribedin Article 15-4-2 of the FIEA Enforcement Order; the same shall apply in IV-3-4 and V-2-4), by a method using anelectronic data processing system or that using communications technology, such an act constitutes a service ofhandling electronic public offerings. Verification of the appropriateness of business operations by Financial
Instruments Business Operators that provide services of handling electronic public offerings shall be conducted bypaying attention to the following points.
IV-3-5-2-1 Control Environment for Legal ComplianceControl environments for legal compliance by Financial Instruments Business Operators that provide servicesof handling electronic public offerings shall basically be examined based on the supervisory viewpoints and methods
specified in III-2-1. However, they shall also be examined in relation to a broad range of matters, including thestatus of compliance with voluntary regulatory rules established by self-regulatory organizations.
IV-3-5-2-2 Provision of Information Intended to Protect Investors
In providing services of handling electronic public offerings, Financial Instruments Business Operators thatprovide such services are required to disclose information that may have a material impact on investors' investment
decisions on their website, and ensure such information is accessible to investors during the period in whichelectronic public offerings are being made (including cases in which such operators outsource services; the same
shall apply in IV-3-4 and V-2-4). As such, the following points shall be taken into consideration regarding theservices of handling electronic public offerings.
(1) Posting of trade names, etc.
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In providing services of handling electronic public offerings, whether items required to be included in a sign as
specified in Article 36-2(1) of the FIEA are posted in a noticeable location on the website. In the case of a Type 1
Small-Amount Electronic Public Offering Services Operator (referring to the said operators as prescribed in Article
29-4-2(9) of the FIEA; the same shall apply hereinafter), whether such an operator posts items prescribed in Article
29-4-2(8) of the FIEA in a noticeable location on their website.
(2) Representation of Items That Can Have a Material Impact on Investors' Judgment
Providers of services handling electronic offerings are required to maintain information prescribed in Article
146-2(3) of the FIB Cabinet Office Ordinance in a state accessible to investors on their website. Posting of therelevant information shall be examined by paying attention to the following points.
(i)

Whether the relevant information is displayed clearly and accurately in a location that is easy to see on
the website. Also, whether appropriate and easy-to-understand descriptions are made, from the viewpoint ofprotecting investors.

(ii)

Whether the operator is making efforts not to impair the ability of investors to understand by, forexample, first displaying important information that has material impact on their judgment, in light of
purposes of posting relevant information on the website as well as the aims of provisions regarding methodof indicating relevant information(iii)

Whether relevant information is displayed on the website in ways in which investors can access its

location easily during the period in which the service of handling electronic public offerings is being
providedIV-3-5-3 Appropriateness of Electronic-Application-Style Services of Handling Electronic Public Offerings
Financial Instruments Business Operators providing services of handling electronic public offerings in theelectronic-application style (as prescribed in Article 70-2(3) of the FIB Cabinet Office Ordinance; the same shallapply hereinafter) are required to maintain a system to ensure appropriate screening of the issuer's business plan andappropriate provision of information, as well as to provide information regarding the Financial Instruments Business
Operators themselves. The appropriateness of services handling electronic public offerings in electronic applicationstyle shall be checked by paying attention to IV-3-4-2 and the following points.
IV-3-5-3-1 System to Control Operations(1) Appropriate Screening Regarding Business Plan, Etc., of Issuer
Whether appropriate rules are introduced regarding screening of items specified in Article 70-2(2)(iii) of the FIB
Cabinet Office Ordinance, and meaningful screening is accurately conducted.

Also, whether a system toaccurately verify the results of such screening is in place. In addition, whether a system is in place to ensure
appropriate screening can be conducted to ensure that the business plan is based on rational reasoning and that areasonable target amount is set for the offering in view of the said business plan and the issuer's financial status.

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(2) Points of Attention Regarding Level of Offer Target and Handling of Subscribed Amount(i) Whether representations are made to avoid misunderstanding by investors on the "method to handle
subscribed amount when the target of amount of offer is not reached or such a target is exceeded" prescribedin Article 70-2(2)(iv) of the FIB Cabinet Office Ordinance. Examination, for example, shall be conductedby paying attention to the following points.
A. When securities are issued even though the subscribed amount failed to reach the target, whether thereason that the issuance of the said securities is deemed rational in view of the issuer's business plan andthe purpose of the funds being raised so as to prevent misunderstanding on the part of investors is clearlypresented.
B. When the subscribed amount exceeds the target of offer and the securities are issued for the higher amount,whether the purpose of the funds being raised to the amount exceeding the amount of offering target andthe possible impact the amount exceeding the amount of offering target may have on the details of theissuer's business plan are clearly explained in ways that prevents misunderstanding on the part of investors.
(ii) In cases where the securities are issued only when subscription reaches the target subscription amount,whether "measures have been taken to ensure that the issuer will not receive the payment of subscription
price (including an amount similar thereto; the same applies in item (vii) and Article 83(1)(vi)(d)) before thetarget subscription amount is achieved" as prescribed in Article 70-2(2)(v) of the FIB Cabinet Office
Ordinance, for example, by ensuring that the account into which subscribed amounts are paid only after the
total subscribed amount reaches the target subscription amount.
(3) Points of Attention Regarding Cancellation of Application
Whether there are measures in place to ensure investors can retract their application or cancel the contract with
the issuer regarding the said application (hereinafter referred to as "application cancellation, etc.") within eight days
from the day the application was made to acquire the said securities(hereinafter referred to as "application
cancellation period"), with regard to public offering or private placement of securities handled in services handlingelectronic public offerings in an electronic application style, etc.
When judging whether the above-mentioned measures are employed to a satisfactory degree, the following
points, for example, shall be considered.
(i) Whether applicants can retract their application unconditionally during the application cancellation period.
For example, whether the Financial Instruments Business Operator providing a service of handlingelectronic public offerings in the electronic application style, in facing a retraction of application, may beable to claim payment of a penalty (regardless of what this is called, for example, damages, fees, etc.) for
the said retraction(ii) Whether clear representation is made that investors can retract their application during a specified period
as well as about necessary information for retracting an application (such as the method for retraction,
procedure, contact information and how to get refunded on the payment of subscription amount that havealready been paid, etc.)

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(4) Ensuring Provision of Information About Status of Business Operation
Whether measures are taken to ensure that the issuer periodically provide the customer with information about
the former's operational status (such a measure can be, for example, a scheme in which the Financial Instruments
Business Operator providing a service of handling electronic public offerings in the electronic application style
receives reports on the issuer's operational status, and disclose them to investors by posting them on the said
Financial Instruments Business Operator’s website or sending them by email.
IV-3-5-4 Appropriateness of Type 1 Small-Amount Electronic Public Offering Services
Part of the registration requirements for Type 1 Small-Amount Electronic Public Offering Services (prescribedunder Article 29-4-2(10) of the FIEA) has been relaxed for Type I Financial Instruments Business for Financial
Instruments Business Operators who handle Electronic Public Offering Services that meet certain requirements,
such as those in which the amount of the securities(referring to stocks or stock acquisition right certificates (limited
to those not listed on financial instruments exchanges and excluding securities specified under Article 15-4-2(4) and(5) of the FIEA Enforcement Order); the same shall apply in IV-3-4-4) issued is small. The appropriateness ofType 1 Small-Amount Electronic Public Offering Services shall be checked in accordance with IV-3-4-2 and IV-34-3, as well as by paying attention to the following points.
IV-3-5-4-1 Control Environment for Customer Solicitation and Explanations(1) Supervisory viewpoints
As services by Type 1 Small-Amount Electronic Public Offering Services Operators for public offerings or
private placement of securities are provided only through the method utilizing communications technology as
specified in each item of Article 6-2 of FIB Cabinet Office Ordinance, such operators are banned from soliciting
acquisition of securities using methods other than the specified one. (For example, they cannot use solicitation usingphone calls or visits customers individually.) It should be noted, therefore, that Type 1 Small-Amount Electronic
Public Offering Services Operators soliciting acquisition using methods other than the specified one do not qualify
for the special clause of Article 29-4-2 of the FIEA, resulting in such operators operating Type I Financial
Instruments Business without registration under the FIEA.
(2) Supervisory Method and Actions
If a Type 1 Small-Amount Electronic Public Offering Services Operator is found to be handling public offeringor private placement of securities using methods other than that utilizing the communications technology specifiedin each item in Article 6-2 of the FIB Cabinet Office Ordinance, supervisors shall conduct in-depth hearing and, if
necessary, instruct submission of a report in accordance with provisions of Article 56-2(1) of FIEA to look into
status of spontaneous efforts to improve the situation at such operator. When the operator is deemed to have a serious
problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the operator is deemed
to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,210

including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
IV-3-5-4-2 Points of Attention Regarding Total Issued Amount of Securities(1) Basic Points to Consider
Whether a Type 1 Small-Amount Electronic Public Offering Services Operator has taken necessary andappropriate measures to prevent the total issued amount of securities (Type 1 Small-Amount Electronic Public
Offering Services public offerings or private placement of securities the same(2)and(3)) of which it handles public
offering or private placement from exceeding 100 million yen and individual investors acquiring relevant securities
from paying in excess of 500,000 yen
When judging whether the above-mentioned measures are employed to a satisfactory degree, the following
points, for example, shall be considered.
(i) Whether the operator has checked to see if the issuer of securities for public offering or private placement,in relation to calculation method based on provisions of Article 16-3(1) of the FIB Cabinet Office Ordinance,
issued the same type of securities through a different Financial Instruments Business Operator in the past
one-year period before the day the said public offering or private placement is started or using a method
specified in Article 2(8)(vii) of FIEA (along with the specific amount of issuance if the issuer is found tohave done so) by means of an appropriate method before starting to solicit acquisition of the securities, suchas by examining documents showing calculations and, if necessary, questioning the issuer.
(ii) Whether the operator has checked to see if the investor in securities for public offering or private
placement, in relation to calculation methods based on the provisions of Article16-3(2) of the FIB Cabinet
Office Ordinance, has acquired the same type of securities issued by the same issuer in the past one-year
period before the day of the said public offering or private placement is started (and that the operator has
confirmed the specific acquisition value of such securities if it is possible to obtain the figure), using anappropriate method(2) Points of Attention When Service Becomes Disqualified for Type 1 Small-Amount Electronic Public Offering
Services Operators
It should be noted that if the total amount of issued securities for public offering or private placement that arehandled by a Type 1 Small-Amount Electronic Public Offering Services Operator exceeds 100 million yen or aperson acquiring the said securities pays more than 500,000 yen, such a service becomes disqualified from thespecial clause of Article 29-4-2 of the FIEA, resulting in the said Type 1 Small-Amount Electronic Public Offering
Services Operator providing services under the Type I Financial Instruments Business.
(3) Supervisory Method and Actions
If a Type 1 Small-Amount Electronic Public Offering Services Operator is found to be handling public offeringor private placement of securities whose issuance totals 100 million yen or more or the amount paid by the person
acquiring the said securities exceeds 500,000 yen, supervisors shall conduct in-depth hearing and, if necessary,211

request submission of reports based on provisions of Article 56-2(1) of FIEA to look into status of spontaneous
efforts to improve the situation at such an operator. When the operator is deemed to have a serious problem fromthe viewpoint of protecting the public interest and investors, the supervisors shall take actions, including issuing anorder for business improvement based on Article 51 of the FIEA. When the operator is deemed to have committed
a serious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52 (1) of the FIEA.

IV-3-6 Appropriateness of Business Operations Related to Financial Instruments Business Operators That Handle
Electronically Recorded Transferable Rights That Must Be Indicated on Securities, etc.
Financial instruments business operators that handle electronically recorded transferable rights that must be
indicated on securities, etc. (meaning the electronically recorded transferable rights that must be indicated on
securities, etc. prescribed in Article 1(4)(xvii) of the FIB Cabinet Office Ordinance; the same shall apply hereinafter)are required to appropriately develop a control environment from the viewpoint of investor protection in light of thehigh degree of freedom in the design of electronically recorded transferable rights that must be indicated on
securities, etc. and their transferability. Supervisors shall oversee such business operators by paying attention to thefollowing points in addition to the points indicated in IV-3-1.
Meanwhile, electronically recorded transferable rights (meaning the electronically recorded transferable rights
prescribed in Article 2(3) of the FIEA; the same shall apply hereinafter) do not fall under the category of cryptoassets, as prescribed in Article 2(14) of the Payment Services Act. However, in the case where electronicallyrecorded transferable rights also have a function to be used to pay the price for purchase of goods or provision ofservices, for example, supervisors shall examine the state of development of the control environment for distribution
and management, etc. of the electronically recorded transferable rights while referring to Guideline for
Administrative Processes (Vol. 3: 16 Crypto-Asset Exchange Service Providers) as needed.
(Note) In the case where the Financial Instruments Business Operator provides electronic public offering
services, supervisors shall also refer to IV-3-4.
IV-3-6-1 Control Environment for Legal Compliance
The control environment for legal compliance by Financial Instruments Business Operators that handle
electronically recorded transferable rights shall basically be examined based on the supervisory viewpoints andmethods specified in III-2-1. However, they shall also be examined in relation to a broad range of matters, including
the status of compliance with voluntary regulatory rules established by self-regulatory organizations.
IV-3-6-2 Control Environment for Customer Solicitation and Explanations(1) Principle of Suitability
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A characteristic of electronically recorded transferable rights that must be indicated on securities, etc. is that therights are transferred and electronically recorded by using an electronic data processing system without involving
the book-entry transfer institution specified by the Act on Book-Entry Transfer of Corporate Bonds and Shares. This
scheme gives transferability to unlisted securities, but it could involve risks that differ from those for ordinary
securities in respect to the holding, transfer, settlement, and so on of the rights, etc. Therefore, supervisors shall
examine whether the Financial Instruments Business Operator handles electronically recorded transferable rightsthat must be indicated on securities, etc. in consideration of the following points from the viewpoint of suitability:(i) Whether the Financial Instruments Business Operator continuously conducts appropriate examination
regarding the risks involved in the networks, such as the blockchain, used for the electronically recordedtransferable rights that must be indicated on securities, etc. it handles by, for example, undergoing an
examination by experts as necessary, in light of the importance of the risks.
(ii) In conducting purchase and sale or other transactions of electronically recorded transferable rights thatmust be indicated on securities, etc. with customers, whether the Financial Instruments Business Operator
has appropriately established standards for initiating transactions. In addition, whether the standards take
into consideration not only customers' investment experience and status of property, but also the degree ofunderstanding of the scheme of holding and transferring electronically recorded transferable rights that must
be indicated on securities, etc. and the risks involved therein, and the experience in transactions of products
using a similar scheme.
(2) Points of Attention Regarding Advertisements, etc.
In the case of making an advertisement, etc. with regard to an act that constitutes a financial instruments
transaction with regard to electronically recorded transferable rights that must be indicated on securities, etc., themaking of an inappropriate representation of the matters prescribed in Article 78(xii) of the FIB Cabinet Office
Ordinance is prohibited. Examples of "a representation that substantially differs from the truth" or "a representationthat substantially misleads others" could include the following:(i) A representation that could cause others to have a misconception regarding the fact that fluctuations in thetransaction volume or price of the electronically recorded transferable rights that must be indicated on
securities, etc. could generate a loss(ii) A representation that could cause others to have a misconception regarding the fact that transfer of theelectronically recorded transferable rights that must be indicated on securities, etc. will be restricted for a
specific period according to the scheme of the rights(iii) A representation that could cause investors to have a misconception regarding the financial conditions of
the issuer of the electronically recorded transferable rights that must be indicated on securities, etc. or the
status of progress of business conducted by the issuer(3) Points of Attention Regarding Explanation of Electronically Recorded Transferable Rights That Must Be
Indicated on Securities, etc.
In a pre-contract document for purchase and sale or other transactions of electronically recorded transferable
213

rights that must be indicated on securities, etc., the Financial Instruments Business Operator is required to state theoutline of the electronically recorded transferable rights that must be indicated on securities, etc. and the matterswhich should be noted by the customer, based on Article 83(1)(vii) of the FIB Cabinet Office Ordinance.
For example, the explanation of the outline of the electronically recorded transferable rights that must be
indicated on securities, etc. should be stated in a manner easy for investors to understand, by using figures or the
like if it includes technical explanation. In addition, it should be kept in mind that, if the scheme of the electronicallyrecorded transferable rights that must be indicated on securities, etc. involves risks, etc. that differ from those forordinary securities in respect to the method of holding or transferring the rights or the like (this includes but is not
limited to the reaching of an agreement, settlement, the method of satisfaction of the requirement for perfection, etc.
relating to transfer of the rights), the Financial Instruments Business Operator is required to explain thisappropriately.
IV-3-6-3 Points of Attention Regarding the System to Control Operations
In the case of handling electronically recorded transferable rights that must be indicated on securities, etc. in
the course of electronic-based application type electronic public offering services, etc., the Financial Instruments
Business Operator needs to develop the system to control operations prescribed in Article 70-2(2)(ii) through (vii)of the FIB Cabinet Office Ordinance as stated in IV-3-4-3-1 above. Of this system, regarding the examination on
the handling of electronically recorded transferable rights that must be indicated on securities, etc. (item (iii) of thatparagraph), supervisors shall examine whether the Financial Instruments Business Operator, etc. appropriately
examines the points in IV-3-4-3-1(1) above as well as, for example, whether the scheme of the electronicallyrecorded transferable rights that must be indicated on securities, etc. does not cause serious risks, etc. to investors
in respect to the method of holding or transferring the rights or the like (this includes but is not limited to the reachingof an agreement, settlement, the method of satisfaction of the requirement for perfection, etc. relating to transfer ofthe rights), as "matters to facilitate the decision of whether it is appropriate to handle the securities as part ofelectronic-based application type electronic public offering services, etc." In addition, supervisors will pay attention
to whether the Financial Instruments Business Operator continuously conducts appropriate examination regarding
the risks involved in the networks, such as the blockchain, used for the electronically recorded transferable rightsthat must be indicated on securities, etc. by, for example, undergoing an examination by experts as necessary, inlight of the importance of the risks.
IV-3-6-4 Measures such as Verification at the Time of Transaction
The characteristics of the purchase and sale or other transactions of electronically recorded transferable rightsthat must be indicated on securities, etc. are that the transactions are generally conducted without any face-to-facecontact and that the rights can be electronically transferred without involving a book-entry transfer institution. Givensuch characteristics, etc. of the transactions, special attention should be paid from the viewpoint of preventing
terrorism financing and money laundering. Therefore, supervisors shall examine the following points, for example,
in addition to the points stated in III-2-6 above and the Guidelines for Anti-Money Laundering and Combating the
Financing of Terrorism.
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(1) Identification, Assessment, and Reduction of Risks Based on the Specific Characteristics, etc. of Electronically
Recorded Transferable Rights That Must Be Indicated on Securities, etc.
Whether the Financial Instruments Business Operator identifies and assesses the risks involved in theelectronically recorded transferable rights that must be indicated on securities, etc. in light of the scheme of theelectronically recorded transferable rights that must be indicated on securities, etc. (including the issuer, manager,
and other persons concerned, and details of the invested business and underlying assets pertaining to theelectronically recorded transferable rights that must be indicated on securities, etc.), the status of distribution,technology used in the electronically recorded transferable rights that must be indicated on securities, etc., and othercharacteristics of the rights, and develops an internal control environment for appropriately reducing those risks,
including the implementation of the measures referred to in (2) below. In addition, whether these are periodicallyexamined and reviewed.
(2) Measures against Cases of Money Laundering and Terrorism Financing
Whether the Financial Instruments Business Operator, etc. carefully determines the scope of electronicallyrecorded transferable rights that must be indicated on securities, etc. to be handled in light of the risk that theelectronically recorded transferable rights that must be indicated on securities, etc. would be exploited in cases ofmoney laundering and terrorism financing, and other factors. For example, it should be kept in mind thatelectronically recorded transferable rights that must be indicated on securities, etc. of which transfer records are
extremely difficult to trace should not be made subject to purchase and sale or other transactions, as the risk of suchelectronically recorded transferable rights that must be indicated on securities, etc. becoming exploited in cases ofmoney laundering and terrorism financing is particularly high.
In addition, in the case of conducting purchase and sale or other transactions of electronically recordedtransferable rights that must be indicated on securities, etc., whether the Financial Instruments Business Operator,etc. has developed a control environment for effectively reducing the risk of money laundering and terrorism
financing associated with the handling of electronically recorded transferable rights that must be indicated on
securities, etc. based on III-2-6 and the Guidelines for Anti-Money Laundering and Combating the Financing ofTerrorism, and whether it appropriately confirms that the transactions are unlikely to fall under the category ofsuspicious transactions. In particular, whether it has determined the need for the suspicious transaction reporting by
appropriately considering whether there are any suspicious aspects about the counterparty to the transaction being
the true holder of the electronically recorded transferable rights that must be indicated on securities, etc. in respect
to attributes of the counterparty to the transaction and the management method of the electronically recordedtransferable rights that must be indicated on securities, etc.
(3) Points of Attention Regarding Transactions Between Financial Instruments Business Operators
In the case where the Financial Instruments Business Operator conducts purchase and sale or other transactionsof electronically recorded transferable rights that must be indicated on securities, etc. with another Financial
Instruments Business Operator or a foreign financial instruments business operator, or grants a license to use a215

system it has developed to another Financial Instruments Business Operator or a foreign financial instruments
business operator, whether it has developed the following control environment based on the Guidelines for AntiMoney Laundering and Combating the Financing of Terrorism:(i) The Financial Instruments Business Operator gathers information on the customer base and the nature ofbusiness operations of the counterparty to the transactions, the status of development by the counterparty ofarrangements and procedures for preventing terrorism financing and money laundering, and if thecounterparty is a foreign business operator, the local supervisory authorities' arrangements and proceduresfor supervising the business operator, and properly assesses the risk of the transaction being exploited incases of terrorism financing and money laundering. In addition, it periodically reviews this, and as necessary,
reviews the risk assessment when a new event that could have a serious impact on measures against terrorism
financing and money laundering occurs.
(ii)

The Financial Instruments Business Operator takes appropriate risk reduction measures, such as

appropriately examining and determining the conclusion or continuation of a contract for transactions withthe counterparty to the transactions, including requiring approval by the manager.
(iii) The Financial Instruments Business Operator clarifies, by way of documentation or the like, the sharingof responsibility and roles between the Financial Instruments Business Operator and the counterparty to thetransactions with regard to prevention of terrorism financing and money laundering.
(4) Points of Attention Regarding Business Partners, etc.
In the case where the Financial Instruments Business Operator forms a partnership with or outsources part ofoperations to another company with regard to the purchase and sale or other transactions of electronically recordedtransferable rights that must be indicated on securities, etc., whether it has developed the following control
environment based on the Guidelines for Anti-Money Laundering and Combating the Financing of Terrorism. If thepartner or outsourced contractor (hereinafter referred to as the "partner, etc.") is the specified business operator
provided for in Article 2(2) of the Anti-Criminal Proceeds Act, supervisors shall refer to the matters set forth in (3)above.
(i) The Financial Instruments Business Operator gathers information on the customer base and the nature ofbusiness operations of the partner, etc. and the status of development by the partner, etc. of arrangements
and procedures for preventing terrorism financing and money laundering, and properly assesses the risk ofthe partner, etc. of being exploited in cases of terrorism financing and money laundering. In addition, it
periodically reviews this, and as necessary, reviews the risk assessment when a new event that could have aserious impact on measures against terrorism financing and money laundering occurs.
(ii)

The Financial Instruments Business Operator takes appropriate risk reduction measures, such as

appropriately examining and determining the conclusion or continuation of the contract with the partner, etc.
(iii) The Financial Instruments Business Operator clarifies, by way of documentation or the like, the sharingof responsibility between the Financial Instruments Business Operator and the partner, etc. with regard to
the prevention of terrorism financing and money laundering.

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IV-3-6-5 Control Environment for Managing Information Technology Risk
In conducting purchase and sale or other transactions of electronically recorded transferable rights that must
be indicated on securities, etc., the Financial Instruments Business Operator often has an advanced and complicatedinformation system that assumes the use of the internet, due to the nature of the operations, and electronicallyrecorded transferable rights that must be indicated on securities, etc. are indicated on property value that can beelectronically recorded on a blockchain, etc. and transferred via a network. Therefore, there are growing risks ofunauthorized computer access or leakage of important information due to cyberattacks that are becoming morecunning day by day. Also, there can be cases where the Financial Instruments Business Operator outsources these
operations to a third party, or cases where multiple Financial Instruments Business Operators use a common network
which they jointly designed and developed. In such case, supervisors shall examine the following points, forexample, in addition to the points stated in III-2-8(1) above.
(1) Control Environment for Managing Information Technology Risk, Assessment of Information Technology Risk(i) Whether the Financial Instruments Business Operator has constantly reviewed the control environment for
managing information technology risk according to identification and analysis of system trouble, etc., risk
management implementation results, and technological progress, etc.
(Note) It is desirable to have the control environment for managing information technology risk periodicallyassessed by a third party (external organization).
(ii) Whether the computer system division assesses the residual risk that remains after taking measures against
the identified risks, and reports it to the board of audit.
Whether risks such as the following are included in the information technology risk:- Risk caused by using external services- Risk caused by API disclosure, provision, connection, etc.
(2) Management of Cybersecurity(i) Whether the Financial Instruments Business Operator has developed procedures in preparation for ex-post
facto investigation (forensic investigation), such as keeping logs and acquiring image copies for checking
the scope affected and investing the cause in case of receiving a cyberattack.
(ii) Whether the Financial Instruments Business Operator has clearly specified the procedures for periodic
information gathering and analysis of and response to information on vulnerabilities and threats andimplements these in an organizational manner. In addition, whether it properly conducts risk assessment in
the case where a cybersecurity incident occurs inside or outside Japan.
(3) System Planning/Development/Management(i) Whether the Financial Instruments Business Operator has formulated rules concerning the preparation of
documents and programs concerning design/development according to the system development process. In
the system design/development phase, security-related matters, such as the following, should be included in
the rules:
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- To clarify the specific security requirements.
- To take measures for preventing generation of vulnerable points, such as implementation of secure coding.
(ii) Whether the Financial Instruments Business Operator has formulated rules and procedure manuals
concerning quality management, including the following contents:- To conduct reviews and keep records.
- To formulate completion standards for each process and conduct assessment.
- To ensure sufficient performance design and manage the upper limits of the system capacity andperformance.
- To identify the limit values at the time of system development.
(iii) Whether the Financial Instruments Business Operator has established rules on system changes. In addition,
whether it prepares documents and requires the manager’s approval for system changes.
(iv) Whether the Financial Instruments Business Operator has formulated system operation and management
rules and procedure manuals in consideration of points including the following:- A scheme to efficiently isolate a problem at the time of detection in the monitoring settings.
- Unification of escalation rules concerning monitoring.
- Incorporation of recording, approval, and inspection in the work process.
- Recording and keeping the status of implementation of operations concerning the system operation
management.
(v) Whether the Financial Instruments Business Operator has specified the purpose and policy of managementof system configurations and the scope of application.
In addition, whether it identifies the configurations and checks the effectiveness of management regarding
points including the following:- Physical resources (hardware, networks, servers, PCs, etc.)- Logical resources (licenses, software, connection configuration, etc.)- Cloud services, operations outsourced to a third party, etc.
(vi) Whether the Financial Instruments Business Operator has secured human resources that are well versed in
the mechanism of the current system and have expertise in system planning, development, and operation
management.
(4) Management of Outsourcing of Business Operations(i) When using an external service, such as a cloud service, whether the Financial Instruments Business
Operator considers the risks involved in the service to be used, and take measures against them,For example, whether it implements measures such as the following:- Identification of the base where important data are processed and stored.
- Reflecting of the auditing authority, monitoring authority, etc. in the written contract.
- Acquisition and evaluation of the assurance report.
(ii) Whether the Financial Instruments Business Operator takes necessary measures in outsourced systemrelated work (including work further subcontracted) in order to prevent the work from being completely left218

to outsourced contractors, such as allocating its personnel to the outsourced contractors as the outsourcer.
(iii) Whether the Financial Instruments Business Operator has its internal control division or system auditor,
etc. conduct audit of important outsourced contractors and acquires and evaluates reports on internal controlsof the outsourced contractors.
"Reports on internal controls of the outsourced contractors" could include, for example, reports preparedaccording to IT Committee Practical Guideline No. 7 "Assurance Reports on Internal Control Concerning
Security, Availability, Processing Integrity, Confidentiality, and Privacy of Entrusted Business" and Auditing
and Assurance Practice Committee Practical Guideline No. 86 "Assurance Reports on Controls at a Service
Organization" published by the Japanese Institute of Certified Public Accountants (JICPA).
(5) Contingency Plan(i) With regard to a contingency plan, whether the Financial Instruments Business Operator has developed aprocedure manual based on the plan. In addition, whether it has established arrangements and proceduresfor dealing with emergencies, including those for important outsourced contractors.
(ii) In formulating a contingency plan, whether the Financial Instruments Business Operator adopts a sufficient
risk scenario that assumes risks including the following:- Cyberattacks- Disasters and pandemics- System troubles- Information leakage(iii) Whether the Financial Instruments Business Operator takes measures against a case where data become
damaged, such as periodically making backups of data.
IV-3-6-6 Points of Attention Regarding Segregated Management
When a Financial Instruments Business Operator receives deposits of electronically recorded transferable
rights that must be indicated on securities, etc. from customers, appropriate handling of segregated management of
those rights needs to be ensured based on the provisions of Article 43-2 of the FIEA and Article 136(1)(v) or (vi) of
the FIB Cabinet Office Ordinance.
In particular, given that measures are required to be taken against risk of leakage with regard to the scheme ofholding and transferring electronically recorded transferable rights that must be indicated on securities, etc. as
indicated in IV-3-5-7 below, supervisors need to pay attention to the following points:(1) Case where the Financial Instruments Business Operator manages the electronically recorded transferable rightsthat must be indicated on securities, etc. itself(i) Electronic equipment, etc. that has been connected to the internet even once does not fall under the categoryof "electronic equipment, etc. that is never connected to the internet" (Article 136(1)(v)(b) of the FIB Cabinet
Office Ordinance).
(ii) Whether or not certain measures can be regarded as "equivalent technical security control measures"
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(Article 136(1)(v)(b) of the FIB Cabinet Office Ordinance) needs to be substantially determined according
to the actual state in individual cases. However, a possible case could be, for example, where the private key
or any other information (hereinafter referred to as the "private key, etc.") required for transferring theproperty value on which electronically recorded transferable rights that must be indicated on securities, etc.
are indicated is recorded and managed in electronic equipment, etc. that only connects to the internet whenaffixing a signature, while the technical specifications make it possible to affix a signature within theelectronic equipment, etc., without having the private key, etc. recorded in the electronic equipment, etc. tobe transferred from the electronic equipment, etc. to outside, and the authenticity of the contents oftransactions is confirmed each time by manually affixing a signature with the private key, etc.
(iii) Whether or not electronically recorded transferable rights that must be indicated on securities, etc. can be
regarded as "the minimum required for ... in order to secure customer convenience and smoothly implement
financial instruments business" (Article 136(1)(v) and (vi) of the FIB Cabinet Office Ordinance) needs to beconsidered individually based on their contents and transferability. However, in the following cases, forexample, it is not permissible to record and manage a private key, etc. in electronic equipment, etc. connectedto the internet:
A. A case where the electronically recorded transferable rights that must be indicated on securities, etc.
include common benefit rights, such as a corporation's voting rights, and in the event of leakage, it isdifficult to recover the damage caused to investors by monetary compensation alone.
B. A case where the instantaneousness of transfer is not sought, such as where the settlement is not executed
simultaneously with the agreement on transfer of the right, etc., and there is little need to record andmanage the private key, etc. in an electronic equipment, etc. connected to the internet.
(2) Case were a Financial Instruments Business Operator outsources the management of electronically recordedtransferable rights that must be indicated on securities, etc. to a third party
Whether or not a method can be regarded as a "method that is reasonably found to secure equivalent customer
protection as the case of conducting management itself" needs to be substantially determined according to theactual state in individual cases. However, a possible case could be, for example, where all of the following
points are satisfied:(i) In light of the points prescribed in (1) above, the third party appropriately takes the measures referred to in
Article 136(1)(v)(b) of the FIB Cabinet Office Ordinance and appropriately takes necessary actions against
the risk of leakage based on IV-3-5-7.
(ii) The Financial Instruments Business Operator, which is the outsourcer, appropriately manages theoutsourced contractors as stated in III-2-8(1)(viii) and IV-3-5-5(2) above.
IV-3-6-7 Points of Attention Regarding Actions against Risk of Leakage of Electronically Recorded Transferable
Rights That Must Be Indicated on Securities, etc.
When a Financial Instruments Business Operator received deposits of electronically recorded transferable
rights that must be indicated on securities, etc. from customers, there is a risk that investor protection would not be220ensured due to leakage of the private key, etc. for the entrusted electronically recorded transferable rights that must
be indicated on securities, etc. as a result of unauthorized computer access, etc., such as where it becomes unable toreturn the electronically recorded transferable rights that must be indicated on securities, etc. to customers. Therefore,
it is required to take appropriate actions against such risk of leakage through establishment of an internal control
environment (including a control environment for internal audits according to the nature of the business), such as
segregated management and information technology risk management, etc., in normal times.
While recording and transfer, etc. of electronically recorded transferable rights that must be indicated on
securities, etc. are to be conducted via a network, such as a blockchain, there have been several cases where large
amounts of entrusted crypto-and other assets, which use a similar scheme, were leaked as a result of unauthorized
computer access, etc. Therefore, taking actions against the abovementioned risk of leakage is one of the top-priority
issues also in receiving entrustment of electronically recorded transferable rights that must be indicated on securities,etc.
In confirming whether a Financial Instruments Business Operator receiving deposits of electronically recordedtransferable rights that must be indicated on securities, etc. is taking appropriate actions against the abovementioned
risk of leakage, supervisors shall pay attention to the following points, for example:(1) Identification and Assessment of the Risk of Leakage(i) Whether the Financial Instruments Business Operator appropriately identifies and assesses the risk ofleakage of the electronically recorded transferable rights that must be indicated on securities, etc. it handles,for each type of those rights.
(ii) In identifying the risk of leakage, whether the Financial Instruments Business Operator determines
assumable situations of leakage (including but not limited to leakage, theft, unauthorized use, or loss of a
private key, etc.) and specifically identifies the risks that cause the leakage (including but not limited tocyberattacks as well as clerical error, internal fraud, and system failure) by taking into consideration
circumstances including the scheme of holding and transferring electronically recorded transferable rightsthat must be indicated on securities, etc., the technology used for the electronically recorded transferable
rights that must be indicated on securities, etc., the internal system and network environment, and operations
for using (signing with) the private key, etc. for the entrusted electronically recorded transferable rights thatmust be indicated on securities, etc. (affixing electronic signatures).
(iii) In assessing the identified risk of leakage, whether the Financial Instruments Business Operator
specifically analyzes and assesses the impact that the materialization of the risk could have on the entrusted
electronically recorded transferable rights that must be indicated on securities, etc. and on customers andbusiness management. In addition, whether the Financial Instruments Business Operator periodicallyreviews the risk assessment, and as necessary, reviews the risk assessment when a new event that could havea serious impact on the management of electronically recorded transferable rights that must be indicated on
securities, etc. occurs.
(iv) When newly commencing the handling of electronically recorded transferable rights that must be indicatedon securities, etc., whether the Financial Instruments Business Operator analyzes the electronically recorded221transferable rights that must be indicated on securities, etc. and examines them from the viewpoint of therisk of leakage in advance.
(2) Reduction of the Risk of Leakage
In reducing the risk of leakage, whether the Financial Instruments Business Operator takes effective measures
to reduce the risk of leakage identified and assessed in (1) above, while taking into account the changes in the modesof leakage and technological progress, and for example incorporating the following points:(i) Whether the Financial Instruments Business Operator has arrangements and procedures where multiple
persons in charge become involved in transfer of entrusted electronically recorded transferable rights thatmust be indicated on securities, etc., according to the procedure specified in internal rules, etc. in advance.
(ii) Whether the Financial Instruments Business Operator manages the private key, etc. in a manner ensuringthat no person other than authorized persons can use (sign with) it. In particular, when managing the private
key, etc. in a physical medium, such as hardware or paper, whether the Financial Instruments Business
Operator stores it in an environment that no person other than authorized persons can access, such as a locked
security room or a safe.
(iii) Whether the Financial Instruments Business Operator takes appropriate measures, such as requiring anelectronic signature that requires multiple private keys, etc., for transfer of entrusted electronically recordedtransferable rights that must be indicated on securities, etc. When using multiple private keys, etc., whether
it manages the private keys, etc. by storing each of them in different places.
(iv) In transfer of entrusted electronically recorded transferable rights that must be indicated on securities, etc.,
whether the Financial Instruments Business Operator confirms the authenticity of the contents oftransactions pertaining to transfer of the electronically recorded transferable rights that must be indicated on
securities, etc.
(v) Whether the Financial Instruments Business Operator creates a backup of a private key, etc. in case of
losing it. Whether it also manages the backup of the key safely based on (ii) above.
(vi) Whether the Financial Instruments Business Operator makes the procedure of transfer of entrusted
electronically recorded transferable rights that must be indicated on securities, etc. subject to internal audit.
(3) Response at the Time of Leakage(i) Whether the Financial Instruments Business Operator has developed a system monitoring arrangements andprocedures that can immediately detect leakage of entrusted electronically recorded transferable rights thatmust be indicated on securities, etc. or other internal control arrangements and procedures necessary for
immediately detecting leakage.
(ii) Whether the Financial Instruments Business Operator has developed internal communication arrangements
and procedures for securely and promptly conveying the detected contents when leakage of entrusted
electronically recorded transferable rights that must be indicated on securities, etc. has been detected.
(iii) With regard to response in the case of detecting leakage of entrusted electronically recorded transferable
rights that must be indicated on securities, etc., whether the Financial Instruments Business Operator has
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formulated a contingency plan assuming a time of leakage, and has established emergency arrangements
and procedures including the following measures, for example:
A. Measures necessary for preventing secondary damage(Note) It is necessary to consider the response according to the state of leakage and the specificcharacteristics of the electronically recorded transferable rights that must be indicated on securities,
etc. that are stored. For example, in the case where a private key, etc. is stored in an environment
connected to the internet, the private key, etc. should immediately be isolated from the internet, theelectronically recorded transferable rights that must be indicated on securities, etc. which aremanaged using that private key, etc. should immediately be transferred to an environment that is notconnected to the internet, and the Financial Instruments Business Operator should check whether the
leakage affects other electronically recorded transferable rights that must be indicated on securities,
etc.
B. Response to users that incurred damage (including opening a consultation service, etc.)(Note) It should be kept in mind that, in recovering the damage incurred by users, the Financial
Instruments Business Operator is required to make response in accordance with the policy on
performance of the obligations prescribed in Article 70-2(5) of the FIB Cabinet Office Ordinance.
C. Reporting to and cooperation with persons concerned, including the authorities and outsourced
contractors, etc.
D. Consideration and implementation of prompt causal analysis and new risk reduction measures(Note) It should be kept in mind that, in order to conduct causal analysis promptly, it is necessary toappropriately preserve evidence on the related server, etc. and to have recorded access logs or the like that
include sufficient information for tracking the event.
IV-3-6-8 Development of an Environment for Screening the Issuer of Electronically Recorded Transferable Rights(1) Points of Attention Regarding Screening of Underwriting, etc.
Electronically recorded transferable rights are able to represent various rights, and they may have hightransferability due to their scheme. On the other hand, however, when the transferability increases, asymmetry of
information is inclined to occur between the issuer and investors, so the issuer needs to appropriately perform its
obligations under disclosure regulations. In addition, in order to ensure the accuracy of the disclosed contents andto prevent fraudulent cases, it is necessary to appropriately develop a scheme for third-party screening of the issuer's
business and financial conditions, etc.
Therefore, supervisors shall examine, for example, the following points to check whether the Financial
Instruments Business Operator has appropriately developed a control environment for screening the issuer inunderwriting electronically recorded transferable rights, etc., based on laws and regulations and voluntary regulatory
rules established by self-regulatory organizations:(i) Whether the Financial Instruments Business Operator has developed appropriate rules for screening theissuer's business and financial conditions, the networks, such as the blockchain, used for purchase and sale223

or other transactions of electronically recorded transferable rights, and other matters to facilitate the decisionof whether the underwriting, etc. is appropriate, and precisely conducts substantive screening. In addition,
whether it has developed arrangements and procedures for securely examining the results of the screening.
(ii) Whether the Financial Instruments Business Operator depends solely on screening by other Financial
Instruments Business Operators, without conducting screening itself, even in the case where multiple
Financial Instruments Business Operators jointly conduct underwriting, etc.
(iii) Whether the Financial Instruments Business Operator has developed arrangements and procedures forappropriately conducting screening, such as properly securing the independence of the division conducting
the screening from the sales division in terms of functions and effects.
(iv) Whether the Financial Instruments Business Operator has a function to examine and assess conflicts ofinterest with other divisions in the company. In addition, whether it has developed a control environment for
appropriately preventing a state of conflicts of interest, based on such function.
(v) Whether the Financial Instruments Business Operator has developed appropriate rules concerning the pricecalculation method, etc. in order to prevent the conducting of underwriting, etc. for a volume, price, or otherconditions that are found to be extremely inappropriate, and whether it has developed a control environment
for appropriately deciding the conditions for underwriting, etc.
(2) Points of Attention Regarding Issuers Affiliated with Anti-Social Forces
From the viewpoint of preventing distribution of electronically recorded transferable rights by antisocial forces
or by entities closely affiliated therewith, it is desirable that Financial Instruments Business Operators handlingelectronically recorded transferable rights, make sure to properly identify such attempts, through cooperation with
relevant authorities, self-regulatory organizations, and other organizations, and that they refuse to underwrite suchrights in some cases.
IV-3-6-9 Segregated Management of Investments Through Crypto-and Other Assets
When a Financial Instruments Business Operator conducts purchase and sale, etc. of rights pertaining to equity
in a collective investment scheme (fund) that falls under the category of electronically recorded transferable rights,
the invested or contributed money needs to be managed separately from own property of the person conducting
business by using the invested or contributed money, based on Article 40-3 of the FIEA and Article 125 of the FIB
Cabinet Office Ordinance.
In addition, when crypto-and other assets are invested or contributed, the Financial Instruments Business
Operator needs to appropriately manage the crypto-assets by entrusting the management to a crypto-and other asset
exchange service provider or a trust company, etc. Therefore, supervisors shall oversee whether the Financial
Instruments Business Operator appropriately confirms the control environment, etc. for reducing the risk of leakage
developed by the outsourced crypto-asset exchange service providers or trust company, etc.
IV-3-7 Points of Attention Regarding Supervision of Non-Affiliated Business Operators

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(1) Major Supervisory Viewpoints(i)

In the case of a Financial Instruments Business Operator who does not have membership in any Financial
Instruments Firms’ Association (referred to as “Non-Affiliated Business Operators” in IV-3-7), whether it
has developed internal rules with due consideration of rules such as articles of incorporation set by Financial
Instruments Firms’ Associations (hereinafter referred to as the “Rules Set by Associations, etc.”).

(ii) Whether the Non-Affiliated Business Operatorshave developed a control environment that ensuresappropriate compliance with internal rules (e.g., information sharing among officers, information sessions
for employees and examination of status of compliance).
(iii) When Rules Set by Associations, etc. have been revised, whether the Non-Affiliated Business Operators
make sure to quickly review and revise internal rules accordingly.
(2) Supervisory Method and Actions
If a problem is found regarding the creation and revision of internal rules at a Non-Affiliated Business Operator
and status of compliance, supervisors shall conduct in-depth inquiry and, if necessary, have the operator submit areport based on the provisions of Article 56-2(1) of the FIEA to look into the status of spontaneous efforts to improve
the situation at the said Financial Instruments Business Operator. When the operator is deemed to have a serious
problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. Further, if, after requesting
for a report, an operator is not confirmed to have introduced internal rules that are in line with Rules Set by
Associations, etc., or that it has failed to introduce a system to ensure compliance with the relevant internal rules,
supervisors shall consider necessary responses, including issuance of a Business Improvement Order based on theprovisions of Article 52(1) of the FIEA.

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IV-4 Various Administrative Procedures (Type I Financial Instruments Business Operator)
IV-4-1 Registration(1) Trade Names
A Local Finance Bureau that has received an application from a business operator shall inquire with the FSA
and other Local Finance Bureaus, when necessary, to check whether the trade name of the applicant does not violate
Article 29-4(1)(vi)(b) of the FIEA.
(2) Items Regarding Examination of System’s Appropriateness
When examining whether or not a Financial Instruments Business Operator is sufficiently staffed to properly
conduct the financial instruments business as specified under Article 29-4(1)(i)(e) of the FIEA, supervisors shallcheck the following points based on its application and attachments thereto as well as hearings. Note that theexamination as to whether the operator has the structure/system necessary to operate financial instruments businessappropriately, thereby falling under Article 29-4(1)(i)(f) of the FIEA, shall also be based on the following points.
(i) Whether it can be deemed that officers and employees with sufficient knowledge and experience have been
secured and a sufficient organization has been established to conduct the relevant financial instruments
business in light of the following requirements.
A. Top managers must be sufficiently qualified to conduct financial instruments business in a fair andappropriate manner, in terms of their backgrounds and capabilities.
B. Managing directors must understand the viewpoints regarding governance indicated in the FIEA andvarious other laws and regulations, and have sufficient knowledge and experience to conduct governance,in addition to sufficient knowledge and experience regarding compliance and risk management to
conduct financial instruments business in a fair and appropriate manner.
C. The staff must include two or more permanent officers or employees with more than three years ofexperience regarding the relevant Type I Financial Instruments Business.
D. The Financial Instruments Business Operator must be staffed and organized so that managers in chargeof internal control are appropriately allocated, and personnel necessary for conducting business in an
appropriate manner are allocated to individual divisions. (Regarding the conduct of underwriting
business in particular, it is necessary to ensure a sufficient control environment and secure staff toconduct the business in a fair and appropriate manner.)
E. The compliance division (staff in charge of compliance) should be independent from the sales divisionand staffed with personnel who have necessary knowledge and experience.
F. Staff capable of conducting the following processes should be secured, with regard to the relevantbusiness.
a. Compilation and management of account books, reports and other documents.
b. Disclosurec. Segregated management of customer assets
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d. Risk Management
e. Computer system management
f. Trading management, customer management
g. Advertisement screening
h. Customer information managementi. Processing of complaints and disputes
j. Internal audits(ii)

When the qualifications of employees and officers are examined in a comprehensive manner in relation

to the following criteria regarding organized crime groups, their members and financial crimes, whether thereis the risk that public confidence in the Financial Instruments Business Operator could be damaged becauseof the inclusion among its staff of officers and employees with inappropriate qualifications.
A. Officers and employees should not be current or former members of organized crime groups.
B. Officers and employees should not have close relationships with organized crime groups.
C. Officers and employees should not have the experience of being sentenced to a fine for violation of the
FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
D. Officers and employees should not have the experience of being sentenced to a fine (including similar
punishments imposed under foreign laws and regulations equivalent thereto) for violation of the Act on
Prevention of Unjust Acts by Organized Crime Group Members (excluding the provisions of Article 322(7) of the same act) or other foreign laws and regulations equivalent thereto, or for committing a crimeprescribed under the Penal Code or under the Act on Punishment of Physical Violence and Others.
E. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion as well as attempts at these crimes).)(Note) It should be kept in mind that in cases where it is deemed, as a result of comprehensive
examination based on the criteria described in (ii) A to E, that a major shareholder in the Financial
Instruments Business Operator could exercise undue influence on it, thereby damaging publicconfidence in it, the business operator may be deemed to be “not adequately staffed to properly
conduct financial instruments business.”(3) Documents Specifying Contents and Methods of Business Operations(i) In cases where the business operator handles currency-related over-the-counter derivative transactions andsecurities-related over-the-counter derivative transactions that are intended for individuals, supervisors shallcheck whether a clear statement to this effect has been included in the section on the types of derivativetransactions the business operator conducts, in the documents specifying the contents and methods of thebusiness operator’s business operations.
(ii) In cases where an electronic transaction platform operator outsources disclosure of information in accordance227with Article 40-7(2) of the FIEA, supervisors shall check to see if this is mentioned along with the name ofthe outsourced contractor in “method of disclosure in accordance with Article 40-7(2) of the FIEA” in Article
8(vi)e(8) of the FIB Cabinet Office Ordinance.
(iii) In cases where the business operator handles commodity-related market derivatives transactions, supervisors
shall confirm that internal procedures and rules on confirmation of the willingness to be solicited have been
established and a control environment for conducting ex-post facto examination on the status of
implementation has been developed, in the documents specifying the contents and methods of the business
operator’s business operations.
(iv) A business operator that intends to handle crypto-and other assets related over-the-counter derivatives
transactions needs to attach a document explaining the outline of the crypto-and other assets or financial
indicators (referred to as an "outline document" in (iii)) to the application for registration based on Article
9(x) of the FIB Cabinet Office Ordinance. The contents of the outline document to be attached are to conformto the format, etc. separately published by Financial Instruments Firms Associations.
(Note) It should be kept in mind that an outline document is also required in the case of making advance
notification of crypto-and other assets, etc. to be newly made subject to crypto-and other assets-related
over-the-counter derivatives transactions.
(4) Authorization Column of Registry Book of Financial Instruments Business Operators
When authorization has been granted to a financial instruments business, the fact of authorization shall berecorded in the authorization column of the book of registry of the Financial Instruments Business Operator, basedon Article 30(1) of the FIEA. Authorization granted by the FSA to Financial Instruments Business Operators under
its jurisdiction each month shall be collectively notified by the 15th day of the following month to individual Local
Finance Bureaus at which the business operators have been registered.
(5) Points of Attention Regarding Business Operators That Do Not Have Plans to Join Any Financial Instruments
Firms’ Association
Supervisors shall notify the following points and request appropriate responses to business operators who do
not have plan to join any Financial Instruments Firms' Association at the time of submission of a registration request.
(i) That supervisory responses in accordance with IV-3-7 shall be taken if the operator fails to introduce internal
rules that are in line with Rules Set by Associations, etc. or a system to ensure compliance with such rules
after registration(ii) That failure to revise internal rules in accordance with revisions in Rule Set by Associations, etc., mayconstitute a situation that corresponds to (i).
(6) Points of Attention Regarding Applications for New Registrations
Supervisors shall confirm with a business operator who applies for a new registration whether there are grounds
for rejecting the application, in principle, by requiring the submission of the following documents.
Of the prima facie evidence, certificates of savings and other deposit balances issued by financial institutions
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shall be originals.
(i) Prima facie evidence of documents which show the calculation of net assets (referring to net assets prescribedin Article 29-4(1)(v)(b) of the FIEA)(ii) Prima facie evidence of documents which show the calculation of the ratio prescribed in Article 294(1)(vi)(a) of the FIEA
(iii)

Prima facie evidence of documents which show the calculation of net assets and the capital-to-risk ratio

for the most recent month(iv)For a business operator who intends to conduct currency-related derivatives transactions, etc. (referring to
the currency-related derivatives transactions, etc. prescribed in Article 143(3) of the FIB Cabinet Office
Ordinance), copies of the trust agreements relating to those trust accounts that have been opened at either
trust companies or financial institutions conducting trust business for the purpose of conducting thesegregated management of money.
IV-4-2 Approval and Notification
IV-4-2-1 Authorization
The Proprietary Trading System (PTS) has functions similar to exchanges, and thus the FIEA stipulates that an
authorization system shall be maintained for the operations of the PTS, as under the former Securities and ExchangeAct. Based on this, business authorization prescribed in Article 2(8)(x) of the FIEA needs to be examined with due
consideration to the following points:(i) The following points shall be considered when deciding whether the relevant operation falls under the PTS
category:
A. A system acting as an agent for transactions involving securities in the financial instruments exchange
markets or the over-the-counter (OTC) securities markets, or acting as an agent for transactions involving
securities for another Financial Instruments Business Operator shall not fall under the category of the
PTS or financial instruments exchange market, etc.
(Note) For example, if the brokerage service is one prescribed in Article 70-2(7) of the FIB Cabinet Office
Ordinance that is provided by using a system that conducts determination of a price or any othertransaction conditions or an act similar thereto prescribed in the same paragraph, the system shall,basically, not fall under the category of the PTS or financial instruments exchange markets, etc. On theother hand, even in the case of such brokerage service, if orders are integrated, offset or otherwise
combined within the system, the system may fall under the category of the PTS or financial instruments
exchange markets, etc.
B. Some cross trading systems, in which securities are traded with clients, may fall under the category of
the PTS or financial instruments exchange market, etc., if the trade is conducted based on bid and offer
price indications, bringing together supply and demand for securities on a number of orders.
C. Financial instruments business operators and information vendors, which provide information on stock
prices and financial information, may fall under the category of Financial Instruments Business
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Operators (intermediary) and are required to obtain approval for the PTS operations in the cases whereindicative prices presented by several Financial Instruments Business Operators are shown in the list
(price competition) and order-matching methods concerning business conditions are provided, including
distribution of exclusive terminals and setting up of links, etc., for order placement and negotiation.
(ii) The following points shall be considered when authorizing the operations:
A. Internal control
Whether the following items have been developed regarding the state of internal control ofoperations:a. Personnel in charge of management of operations have, in principle, at least five years of experiencein securities-related operations, and a division in charge of operations has an organization and staff
necessary for the implementation of the operations
b. A system to implement verification at the time of transaction based on the Anti-Criminal Proceed Act
has been established in operations
c. Methods and measures have been developed in the operations to exclude transactions that undermine
the fairness of trade, such as insider trading, market manipulation, intentional market making, andshort selling and other acts which would infringe on restrictions on short-selling. Furthermore, thesaid methods and measures are listed in the content and methods of operations concerning
authorization as the “important matters related to the securing of fair trade,” prescribed in Article
17(13) of the FIB Cabinet Office Ordinanced. In the case of handling securities for specified investors in the operations, methods and measures
have been developed to prohibit the transactions that are restricted under Article 40-4 of the FIEA;
in such case, said items are listed in the content and methods of operations concerning authorization
as the “criteria for the commencement of transactions with customers and the customer management
methods,” prescribed in Article 17(v) of the FIB Cabinet Office Ordinancee. In-house regulations for operations have been developed in compliance with laws and regulations,such as the FIEA, etc.
f. If, as part of the said business, a financial instruments business operator is to handle margintransactions, the following measures shall be taken:i) Appropriate measures to prevent conflicts of interest, such as ensuring that the financial
instruments business operator or its group companies etc. is not the effective provider of the funds
or sharesii) Based on the self-regulatory rules of the Japan Securities Dealers Association, rules shall beestablished relating to the handling of margin transactions as part of the said business, and by, forexample, requiring compliance with said rules by participants in margin transactions as part of saidbusiness, equivalency with financial instruments exchange self-regulatory functions pertaining tomargin transactions shall be achieved with respect to the handling of margin transactions as part ofthe said business.
B. Accountability to Clients230

Whether a system allowing for sufficient explanations concerning the following has been developed,
when providing clients with explanations:a. The method to determine trading prices.
b. Trading rules covering from order placement to confirmation and settlement.
c. The handling of settlement failure.
d. The possibility of a contract at the offered price.
C. Ensuring of Safety and Certainty of System Capacity, etc.
Whether the following items have been developed regarding safety/certainty of system capacity for
operations:a. To rationally estimate the number of orders and contracts, and to ensure system capacity sufficientfor the estimation.
b. To perform sufficient tests based on the estimation mentioned above.
c. To prevent the occurrence of excess system capacity and system failure, and to establish a monitoring
method and a system for early detection.
d. To have developed a method to handle system failures (including providing explanations to, making
contact with clients) and to have developed such a system.
e. To have a dual system (back-up system).
f. To receive third-party evaluation (from an external organization) on the above items and to confirm
the safety and certainty of system capacity, etc.
D. Measures for Confidentiality of Trade Information
Whether sufficient measures are taken, including the following items, with respect to confidentialityof clients’ trade information:a. To clearly separate the operators engaged in the operations of the relevant business division fromthose engaged in other divisions.
b. To prohibit persons engaged in the relevant operations from conducting the operations using
information related to other operations, and to prohibit persons engaged in other operations fromconducting their operations using information pertaining to the relevant operations.
c. To have accurately taken measures for the prevention of leakage of client information.
d. To have developed in-house regulations in respect to the above measures.
(iii)

The following conditions shall be attached to the authorization of the relevant operations:A. Disclosure of Price Information, etc. (limited to the cases of securities traded in the relevant business(securities specified in the items of Article 14 of the Cabinet Office Ordinance Concerning Financial
Instruments Firms’ Associations, etc.)).
“To disclose the best quotations/trading prices, etc., of the PTS in such a form which allows
comparison with other PTSs and in such a form which allows free access from the outside in real time.
However, information shall be disclosed in such a way which allows free access from the outside
until a disclosure format which allows comparison with other PTSs is established.”
B. Quantity Standards for Trade Volume231

The figures of trade volume of the PTS shall be used for the quantity standards. However, it isnecessary to make sure that the figures obtained using the trade volume of a PTS system network towhich the said PTS belongs (referring to a network comprising PTSs in the relevant area in the cases
where orders of the said PTS are matched with orders of another PTS by using an electronic information
processing organization) would not conflict with the quantity standards.
a. In the case of a PTS that handles share certificates and bonds with share options and determines prices
by a method other than auctions (limited to those listed in financial instruments exchanges or thoseregistered pursuant to Article 67-11(1) of the FIEA):
1. In the cases where the ratio of average payments of daily transactions of share certificates or bonds
with share options traded on financial instruments exchanges or OTC markets (limited to thoselisted in financial instruments exchanges and those registered pursuant to Article 67-11 (1) of the
FIEA) exceeds 10% of the sum of transaction payments of any security and exceeds 5% of the entire
share certificates and bonds with share options of the previous six months, the following measures
shall be taken:
A. To expand and develop a system (organization/personnel) for administering trade andinspection in order to ensure trade fairness.
B. To establish a system equivalent to the accumulated reserve for breach of contract losses in
the financial instruments exchanges in order to ensure settlement.
C. To establish a periodic monitoring system to ensure the safety and certainty of system capacity,etc.
2. If the said ratio exceeds 20% of any security and 10% of the total share certificates and bonds withshare options of the previous six months, a license to establish a financial instruments exchange
market shall be obtained.
3. In addition to the above, new criteria shall be introduced within the boundaries of PTSs that tradeother debit securities, if, with the expansion in trading volume, etc., the need arises from theviewpoint of public welfare or investor protection.”b. Other cases“New criteria shall be introduced within the boundaries of PTSs that trade other debit securities,
if, with the expansion in trading volume, etc., the need arises from the viewpoint of public welfare orinvestor protection.”
C. Report on the Trade Volume
a. In the case of a PTS that determines prices by the auction method:“With regard to the ratio, etc., prescribed in Article 1-10(i) and (ii) of the FIEA Enforcement
Order, a Financial Instruments Business Operator shall submit a report about end-of-month figures
to the Commissioner of the Financial Services Agency or the Director General of the Local Finance
Bureau that supervises the said Financial Instruments Business Operator, by the 20th of the following
month.”(Note) With regard to the “gross trading volume” concerning the PTS prescribed in Article 1-10(i) and232

(ii) of the FIEA Enforcement Order, the figures obtained pursuant to the proviso of “B. Quantity
standards concerning trade volume” shall also be reported.
b. In the case of a PTS in which prices are determined by a method other than the auction method:“Regarding the ratio prescribed in a-1 and a-2 of B above, etc., a Financial Instruments Business
Operator shall submit a report about the end-of-month figures to the Commissioner of the Financial
Services Agency or the Director-General of the Finance Bureau that supervises the said Financial
Instruments Business Operator, by the 20th of the following month.”
D. “New criteria shall be introduced, within its boundaries, if the need arises from the viewpoint of publicwelfare or investor protection.”(iv) The following points shall be considered as a supervisory response after authorization is given for the
relevant operations:A. To verify the trading volume, etc., using the reports, etc., in order to judge whether authorization
requirements are being met.
B. To verify the progress of implementation of various measures that have been examined at the time ofauthorization by requesting reports, on an as needed basis.
C. When changes are made to the method used to determine trade prices and the operation methods,
including delivery and other settlement methods, after the approval, early submission of an application
for change shall be requested.
IV-4-2-2 Approval(1)When approving other businesses, based on Article 35(4) of the FIEA, supervisors shall pay attention to thefollowing points:(i) Whether the business violates applicable laws and regulations.
(ii) Whether the calculation of the value of the loss risk equivalent related to the relevant business is appropriate,
and whether it is ensured that the calculated value is properly reflected in the applicant Financial Instruments
Business Operator’s capital adequacy ratio.
(iii) Whether the division in charge of calculating and managing the value of the loss risk equivalent related to
the relevant business is independent from the sales division.
(iv) In cases where the relevant business involves the signing of contracts, whether the Financial Instruments
Business Operator has prescribed the specific procedures necessary for investor protection regarding thesigning of contracts with customers.
(v) Whether the Financial Instruments Business Operator has established internal rules regarding the relevantbusiness.
(vi) Whether the applicant Financial Instruments Business Operator’s capital adequacy ratio is more than 140%.
(2) Points of Attention Regarding Deposits, etc. of Crypto-and Other Assets
While crypto-and other assets are deemed to be money pertaining to purchase and sale of securities based on
Article 2-2 of the FIEA, it should be kept in mind that, even when a Financial Instruments Business Operator
233

receives deposits, etc. of crypto-and other assets from customers in relation to purchase and sale of securities, itneeds to obtain the approval for other services under Article 35(4) of the FIEA, if the receipt of deposits, etc. cannot
be considered to be services incidental to financial instruments business.
IV-4-2-3 Notification
Supervisors shall receive and process notifications specified under the FIEA with due consideration of thefollowing points. When they have received notifications regarding the businesses specified under Article 35(2) ofthe FIEA in particular, supervisors shall pay attention to whether the procedures legally necessary for regulating thebusinesses have been implemented. In addition, regarding the businesses listed below, they shall check whether
their contents and methods meet the following criteria. In this case, the provision of relevant written documents andthe implementation of paper-based procedures may be substituted by electronic means using computer systems andother information technologies, subject to customers’ consent. Regarding businesses that do not meet the following
criteria, the applicant business operators shall be required to file an application based on Article 35(4) of the FIEA.
(1) Businesses Related to Signing of Association Contracts as Specified under Article 667 of the Civil Code andIntermediary, Brokerage and Agency Businesses Therefor and Businesses Related to Signing of Anonymous
Association Contracts as Specified under Article 535 of the Commercial Code and Intermediary, Brokerage andAgency Services Therefor (excluding the businesses specified under Article 2(8)(ix) of the FIEA)
When soliciting customers to sign association contracts, whether the Financial Instruments Business Operator
and its officers and employees provide sufficient explanations regarding the contents of the contracts and makesolicitation in an appropriate manner suited to the customers’ intentions, knowledge and experiences regarding therelevant associations, as well as their financial capacity and the nature of their investment funds. At the time of thesigning of the contracts, whether they provide the customers with written explanations regarding the contents of thecontracts.
(2) Business Related to Signing of Loan Participation Contracts and Intermediary, Brokerage and Agency Services
Therefor.
(i) Description of Business
The loan participation contract is a contract envisaged by “Accounting Treatment and Representation ofLoan Participation,” a report issued on June 1, 1995 by the Japanese Institute of Certified Public Accountants.
(ii) Conduct of Business.
Supervisors shall examine whether the Financial Instruments Business Operator meets the following
requirements regarding the conduct of business:
A. To take due care to protect the original debtors and the transferees in executing business.
B. To provide the transferees with sufficient explanations regarding the nature and contents of the relevant
debts.
C. To establish adequate arrangements and procedures for evaluating the relevant debts and ensure
appropriate price formation
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D. To provide appropriate solicitation in light of the transferees’ intentions and experiences as well as theirfinancial capacity.
E. At the time of the signing of the contract, to provide the transferee with written explanations regarding
the contents of the contract.
IV-4-2-4 Points to Consider Concerning Cumulative Investment Business
The following points shall be considered concerning the conclusion of a contract for cumulative investmentprescribed in Article 35(1) (vii) of the FIEA:(1) Type of Securities Traded in Cumulative Investment(i)

Government bond certificates(ii)

Local government bond certificates(iii)

Bank debentures and other claims issued by juridical persons pursuant to(iv)

Corporate bond certificates that are deemed to be issued periodically, in substantial amounts, such as

special laws

corporate bond certificates issued by electricity business operators, etc.
(v)

Investment trust beneficiary certificates (excluding listed investment trust beneficiary certificates;

hereinafter the same shall apply in IV-4-2-4)
A. Unit type investment trusts
B. Open investment trusts (excluding bond investment trusts; hereinafter the same shall apply in IV-4-2-4)
C. Bond investment trusts(vi)

Foreign ETFs(vii) Investment certificates of investment juridical persons (excluding listed investment certificates;
hereinafter the same shall apply in IV-4-2-4)(viii) Foreign investment certificates(ix)

Certificates of shares (limited to the certificates of shares listed in financial instruments exchanges or

those registered in the registry of OTC traded securities held at the Japan Security Dealers Association, andthose listed in (10); hereinafter the same shall apply in IV-4-2-4)(x)

Listed investment trust beneficiary certificates (limited to those listed in (11); hereinafter the same shallapply in IV-4-2-4)(xi)

Listed investment certificates (limited to those listed in (12); hereinafter the same shall apply in IV-4-2-

4)(2) Method of Purchase of Negotiable Securities in Cumulative Investment(i)

Negotiable securities to be purchased shall be limited to those newly issued (provided, however, that thisshall not apply to certificates of shares, listed investment trust beneficiary certificates and listed investment
certificates), and the type and the method of appropriation for purchase shall be specified in advance in thecontract. However, in the cases where there is no new issuance at the time specified in the contract or where
new issuance is not adequately funded, the same type of negotiable securities that have already been issued
235may be purchased, pursuant to the provisions of the prescribed contract.
(ii)

When payment from a client, or securities deposited by a Financial Instruments Business Operator(hereinafter referred to as “paid-up money”) accrued from the acceptance of fruits or redemption of investment
in negotiable securities deposited by a client (hereinafter referred to as “deposited negotiable securities”) has
reached the purchase price of negotiable securities to be purchased by the client, the Financial Instruments
Business Operator shall purchase the said negotiable securities, without delay. However, the client may instruct
the Financial Instruments Business Operator to cancel the purchase of negotiable securities at any time.
(iii)

The purchase price of negotiable securities shall be set as follows:
A. The secondary offering price for the government bonds, local government bonds, financial bonds andother bonds and corporate bonds issued by juridical persons pursuant to special laws, however, in thecase applicable to the proviso of (i) above, the market value of the financial instruments exchangeprescribed in the contract or any other appropriate value;
B. The following prices shall be applied to the following investment trust beneficiary certificates:
a. Unit type investment trust: Public offer priceb. Open investment trust: Net asset value on the purchase date or one day prior to the purchase date (inthe case of an open investment trust in which the value of assets retained in the trust is collected at
the time of purchase, the amount obtained by adding the said value of assets retained in the trust to
the net asset value)c. Open bond investment trust: net asset value on the purchase date or one day prior to the purchasedate
C. Net asset value on one day prior to the purchase date for foreign investment fund beneficiary certificates
D. Value as specified in the bylaws or the equivalent document for investment certificates or foreign
investment certificates
E. Market value at the financial instruments exchange prescribed in the contract for certificates of shares(when there are several contract prices at the exchanges of the said stock, their weighted average price)
F. Market value of the financial instruments exchange prescribed in the contract for listed investment trust
beneficiary certificates (when there are several contract prices at the exchanges of the said stock, theirweighted average price)
G. Market value of the financial instruments exchange prescribed in the contract for listed investment
beneficiary certificates (when there are several contract prices at the exchanges of the said stock, theirweighted average price)(3) Payment of Money and Management Method for Deposits in Cumulative Investment(i)

A client may pay, in part or in full, the buying price of negotiable securities as needed, however, this isdone in a different way in the cases listed below from (8) to (12)(ii)

Payments received from a client, etc., shall be listed as cumulative deposit, and the maturity of the said

deposit, such as interest, shall not be paid to the client.

236

(4) Timing of Transfer and Delivery of Ownership Right of Securities in Cumulative Investment
In the case of joint purchase, joint possession shall be completed when the trade session and the number of
securities purchased by the relevant clients are finalized and the ownership rights of the said securities shall betransferred to the said clients. Fruits of investment in the said securities and the right to the principal of the clientsshall come into effect on the said purchase date.
(5) Method of Custody of Securities in Cumulative Investment(i)

Securities purchased in cumulative investment activities shall be in custody in the following manner:
A. Deposit balance in securities based on cumulative investment, new deposit balance and amount ofredemption shall be managed separately from other securities
In this case, securities jointly owned by a Financial Instruments Business Operator and its client(s)shall be further separated.
B. The Financial Instruments Business Operator may re-deposit the said securities in its own name insecurities finance companies, banks or trust companies, instead of managing the said securities itself.
Here, in the cases where the rights and interests of the clients are deemed to be undamaged, a global
certificate may be used for custody or re-deposit, upon obtaining consent from the client.
C. When returning deposited securities in response to the request made by a client, a clause may be includedin the contract to the effect that return of securities may be replaced by the return of money obtained byselling the said securities at the market price (including necessary fees).

(ii)

Securities purchased not under the cumulative investment contract may be stored as securities based on

the cumulative investment contract, when the client requests. However, the said securities shall be limited tothe same type of securities as those purchased under the said cumulative investment contract.
(6) Cancellation of a Contract for Cumulative Investment(i)

A contract shall be cancelled when a client requests. A client may request the cancellation at any time.

(ii)

When a client has not paid, in part nor in full, the buying price of securities for a consecutive period of

one year or more, cancellation shall be effective; provided, however, that this shall not apply to contracts
prescribed in the provisions of (7) below which allows purchase of negotiable certificates within one year ofthe date of previous purchase, solely as the consideration of the fruits of investment in securities or deposit inredemption, when the client has deposited securities to a Financial Instruments Business Operator based on a
cumulative investment contract.
(iii)

Cancellation shall be effective when a Financial Instruments Business Operator can no longer conduct

cumulative investment activities.
(iv)

In addition to the above, when a client has not paid, in part nor in full, the buying price of securities for aconsecutive period of three months or more, a Financial Instruments Business Operator may cancel thecontract; provided, however, that this shall not apply to the contract prescribed in the proviso of (ii) above(excluding the cases where all of the following conditions from A through D are met).
A. Reports, etc., to a client have been returned due to the forwarding address being unknown, etc.
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B. The address of the said client is unknown despite efforts being made to find it
C. No payment of the buying price or sales have been made for one year or more after the return of a report,
etc., mentioned in A. above.
D. The balance is small (less than ¥10,000).
(7) A Financial Instruments Business Operator may conclude a contract to the effect that the Financial Instruments
Business Operator shall periodically return part or all of the securities deposited or part or all of the fruits/redemptionof investment in the said securities to a client when requested.
(8) The following can be done for joint purchase of government bonds in cumulative investment:(i)

A contract shall be concluded with a client who applies to purchase government bonds jointly with otherclients to the effect that a Financial Instruments Business Operator shall buy the said government bonds in theform of cumulative investment. In this case, regardless of (3)-(i) above, an amount less than the minimum
amount of payment may be accepted from the second payment and onwards, and when the sum of paymentsof the client and other clients reaches the purchase value (or an amount equal to the integral multiple of thatamount), the Financial Instruments Business Operator shall buy the said government bonds, without delay(ii)

In the case of (i) above, when the total amount of payments from the clients is less than the purchase valueof the government bonds, the Financial Instruments Business Operator shall jointly buy the bonds by paying
the difference between the purchase value of the minimum unit and the said amount.
(iii)

Clients who made a joint purchase (including the Financial Instruments Business Operator in the case of(ii) above) shall acquire ownership rights (co- ownership) in accordance with their respective shares(iv)

A Financial Instruments Business Operator shall set up an account for each client, in order to manage theclients’ shares and the receipt of payments on fruits/redemption of the share of the government bonds co-ownedby the clients, etc.
(9) The following shall be done for cumulative investment activity (hereinafter referred to as “property accumulation
savings”) based on the Act on the Promotion of Workers’ Property Accumulation (hereinafter referred to as the“Property Accumulation Act”):(i)With respect to the purchase value of securities as listed in (1)(v)(B) above among the methods for buying

securities, the following shall be used regardless of (2)(iii)(B)(b) above.
A. With respect to purchase under the workers’ property accumulation savings contract, prescribed in Article
6(1) of the Property Accumulation Act, net asset value on the date of purchase (in the case of an open
investment trust in which the value of assets retained in the trust is collected at the time of purchase, theamount obtained by adding the said value of assets retained in the trust to the net asset value).
B. Net asset value on the date of purchase for a purchase under the workers’ property accumulation pension
savings contract, prescribed in Article 6, paragraph 2 of the Property Accumulation Act, and under thecontract on workers’ property accumulation savings for house construction prescribed in paragraph 4 ofthe said article.
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(ii)

The following shall be used with respect to payment and management of deposits, regardless of (3)(i) and(ii) above.
A. The amount to be paid for the purchase of securities by clients shall be at least ¥1,000 (however, one yen
in the cases listed below from B-b through e)
B. Payment shall be made in the following manner in line with the contract concluded between a business
entity and a Financial Instruments Business Operator:a.

Payment by deduction from the said client’s salariesb.

Payment by a business operator to the account of the said client for the purpose of encouraging
property accumulation savingsc.

Payment made from the said client’s workers’ property accumulation benefit or workers’ property
accumulation fundd.

In the cases where a client has changed employment, payment from the property accumulation
handling organization of the former workplacee.

Payment of savings to be returned to the account of the said client by a business operator prescribedin Article 6(1) of the Property Accumulation Act.

C. Payments, etc., from a client shall be separately accounted as “asset-building savings.”
D. Payments from a client shall be used for the purchase of negotiable certificates of the said client byadding the equivalent amount of interest to ordinary deposits. However, fruits of deposited securities,
such as interest, shall not be paid to the client with respect to deposits generated from the receipt offruits/redemption of investment in deposited securities.
(iii)

A clause may be included to the effect that when the government bonds are bought jointly between a client

and another client with respect to property accumulation, and when the total amount of purchase balance andpayment of the said government bonds of one client has reached an integral multiple of ¥10,000, the said
government bonds may be sold to buy corporate bonds jointly with other clients at integral multiples of¥10,000 as a unit/client. In this case, the provisions listed in (8)(ii) through (iv) above shall be applied to thepurchase of corporate bonds.
(iv)

Deposit balance and the redemption amount of securities based on property accumulation activity shallbe managed separately from other securities based on cumulative investment. In this case, the Financial
Instruments Business Operator may re-deposit the said securities in its own name in securities financecompanies, banks or trust companies instead of storing them themselves.
(v)

Cancellation shall be effectuated by the following methods, regardless of (6) above.
A. Contracts concerning property accumulation savings shall be cancelled in the following cases:
a. When a client makes a request. A client may request cancellation at any timeb. When a client no longer meets the requirements of property accumulation savings prescribed in theProperty Accumulation Act
c. When a Financial Instruments Business Operator can no longer conduct “property accumulation
savings” business.
B. In addition to the above, based on the said contract, the said contract may be cancelled when a client has
239re-deposited securities in a Financial Instruments Business Operator, etc., and when the client has not
paid, in part nor in full, the payment for the purchase of securities for a consecutive period of one year
or more following the first payment, after three years have passed under the workers’ property
accumulation savings contract, or after five years have passed under the workers’ property accumulation
pension savings contract or the contract on workers’ property accumulation savings for house
construction.
However, this shall not apply to the cases where a client can purchase securities solely for theconsideration of the deposited money from fruits or redemption of investment in the said securities when
the client has deposited the securities to a Financial Instruments Business Operator, etc., pursuant to thesaid contract.
(vi)

Report on balance, etc., may be submitted to a client via the employer of the said client.

(10) The following shall be done for joint purchase cumulative investment of stock certificates:(i)

A clause shall be included in a contract to the effect that stock certificates can be jointly purchased withother clients applying for joint purchase in the form of cumulative investment.
In this case, a Financial Instruments Business Operator shall conclude a contract with a client in advance,
specifying the name of the purchasing certificates, the amount of payment of the client per payment, and thedate of execution of purchase, etc., and shall perform purchase operations in line with the said contract.
(ii)

When the sum of payment, etc, of one client and other clients (or its integral multiple) reaches the purchasevalue of the stock certificates, a Financial Instruments Business Operator shall buy the said stock certificateswithout delay.
(iii)

In the case of (ii) above, when the sum of payments from one client and other clients is not sufficientenough for the purchase value of the stock certificates, a Financial Instruments Business Operator shall keep
the said fractional part until the next purchase or shall buy the stock certificates by paying the difference
between the purchase value of the minimum unit and the said amount.
(iv)

Clients (including a Financial Instruments Business Operator in the case of (iii) above where the Financial

Instruments Business Operator has bought stock certificates jointly with a client) shall acquire the ownership(co-ownership) of the purchased stock certificates and hold co-ownership rights in accordance with theproportion of the paid amount (excluding the case in (iii) above where a Financial Instruments Business
Operator keeps the fractional part). The name of the stock certificates purchased jointly among the said clientsshall be the name of the Financial Instruments Business Operator. However, when a co-owner’s share hasreached a number of unit shares, the stock certificates shall be divided into share units by the record dateprescribed in Article 124(1) of the Companies Act, such as the first end of period of the issuing company of
the said stock certificates, and the said units shall be excluded from the application of the cumulative investment
contract.
(v)

Dividends on the stock certificates co-owned by clients will be distributed according to their respective

shares and shall then be re-invested.
(vi)

Stock certificates co-owned by clients shall be managed separately from the other shares and the240ownership share of the clients and the dividends on their respective shares shall be managed by setting up an
account for individual clients.
(11) The following shall be done for joint purchase cumulative investment of listed investment trust beneficiary
certificates:(i)

A clause shall be included in a contract to the effect that listed investment trust beneficiary certificates

can be jointly purchased with other clients applying for joint purchase in the form of cumulative investment.
In this case, a Financial Instruments Business Operator shall conclude a contract with a client in advance,
specifying the name of the purchasing certificates, the amount of payment of the client per payment and dateof execution of purchase, etc., and shall perform purchase operations in line with the said contract.
(ii)

When the sum of payments, etc, of one client and others (or its integral multiple) reaches the purchasevalue of the listed investment trust beneficiary certificates, a Financial Instruments Business Operator shallbuy the said certificates without delay.
(iii)

In the case of (iii) above, when the sum of payments from one client and other clients is not sufficientenough for the purchase value of the listed investment trust beneficiary certificates, a Financial Instruments
Business Operator shall keep the said fractional part until the next purchase, or shall buy the stock certificatesby paying the difference between the purchase value of the minimum unit and the said amount.
(iv)

Clients (including a Financial Instruments Business Operator in the case of (iv) above where the Financial

Instruments Business Operator has bought listed investment trust beneficiary certificates jointly with a client)shall acquire the ownership (co-ownership) of the purchased listed investment trust beneficiary certificates andhold ownership rights in accordance with the proportion of the paid amount (excluding the case above (iv)where a Financial Instruments Business Operator keeps the fractional part). The name of the listed investment
trust beneficiary certificates purchased jointly among the said clients shall be the name of the Financial
Instruments Business Operator. However, when a co-owner’s share has reached a number of unit shares, theshares shall be divided into share units and the said units shall be excluded from the application of the
cumulative investment contract.
(v)

Dividends on the listed investment trust beneficiary certificates co-owned by clients will be distributed

according to their respective shares and shall then be re-invested.
(vi)

Listed investment trust beneficiary certificates co-owned by clients shall be managed separately from theother shares, and the ownership share of the clients and the dividends on their respective shares shall be
managed by setting up an account for individual clients.
(12) The following shall be done for joint purchase cumulative investment of listed investment certificates:(i)

A clause shall be included in a contract to the effect that listed investment certificates can be jointly

purchased with other clients applying for joint purchase in the form of cumulative investment.
In this case, a Financial Instruments Business Operator shall conclude a contract with a client in advance,
specifying the name of the purchasing certificates, the amount of payment of the client per payment and dateof execution of purchase, etc., and shall perform purchase operations in line with the said contract.
241

(ii)

When the sum of payments, etc, of one client and other clients (or its integral multiple) reaches thepurchase value of the listed investment certificates, a Financial Instruments Business Operator shall buy thesaid certificates without delay.
(iii)

In the case of (ii) above, when the sum of payments from one client and other clients is not sufficientenough for the purchase value of the listed investment certificates, a Financial Instruments Business Operator
shall keep the said fractional part until the next purchase, or shall buy the stock certificates by paying thedifference between the purchase value of the minimum unit and the said amount.
(iv)

Clients (including a Financial Instruments Business Operator in the case of (iii) above where the Financial

Instruments Business Operator has bought listed investment certificates jointly with a client) shall acquire theownership (co-ownership) of the purchased listed investment trust beneficiary certificates and hold ownershiprights in accordance with the proportion of the paid amount (excluding the case of (iii) above where a Financial
Instruments Business Operator keeps the fractional part). The name of the listed investment certificatespurchased jointly among the said clients shall be the name of the Financial Instruments Business Operator.
However, when a co-owner’s share has reached a number of unit shares, the listed investment certificates shallbe divided into share units by the record date as provided for in Article 77-3(2) of the Investment Trust Act,
such as the first end of period of the issuing investment corporation of the said listed investment certificates,
and the said units shall be excluded from the application of the cumulative investment contract.
(v)

Dividends on the listed investment certificates co-owned by clients will be distributed according to theirrespective shares and shall then be re-invested.
(vi)

Listed investment certificates co-owned by clients shall be managed separately from the other shares, andthe ownership share of the clients and the dividends on their respective shares shall be managed by setting up
an account for individual clients.
IV-4-3 Registration of Sales Representatives(1) Scope of Registered Sales Representatives
Of Financial Instruments Business Operators’ officers and employees engaging in in-branch business operations(including over-the-counter services), those who are in charge of any of the following operations need to beregistered in the Registry of Sales Representatives specified under Article 64(1) of the FIEA.
(i)

Explanations of the contents of financial instruments transactions for solicitation purposes(ii)

Solicitation for financial instruments transactions(iii)

Order-taking(iv)

Provision of information for solicitation purposes (excluding the provision of information regarding back-office operations and objective information requested by customers)(v)

Activities specified under Article 64(1)(i) and (ii) of the FIEA(2) Items to be Notified
It should be kept in mind that the case of a sales representative who has ceased to engage in the specified sales242representative operations temporarily, due to an intra-company personnel transfer shall not be deemed to fall under
the provision of Article 64-4(iii) of the FIEA.
IV-4-4 Financial Instruments Transaction Liability Reserves
It should be kept in mind that a Financial Instruments Business Operator may withdraw funds from the financial
instruments transaction liability reserves specified under Article 46-5 of the FIEA, only in cases where the following
requirements are met:(i)

An illegal or inappropriate act by an officer or employee of the business operator has been recognized.

(ii)

The amount of the withdrawn funds is appropriate and commensurate with the amount necessary tocompensate the losses caused by the illegal or inappropriate act.
IV-4-5 Books and Documents Related to Service of Handling Electronic Public Offerings
The "records of information displayed on computer screens as specified in Article 146-2(1)" prescribed in Article
157(1)(xviii)(b) shall include printouts of web pages showing relevant information, and, when such documents arebeing created using electromagnetic records, electromagnetic records of the relevant web pages.

243IV-5 Treatment of Designated Parent Company Groups
Financial instruments business groups conduct large, complex business operations, and as a result of theconcentration of risk, their potential risk to the financial system is increasing. On the other hand, as organizations—especially groups with international operations—grow to immense size and as they become compartmentalized, thegovernance of entire groups is becoming difficult, and the location of groups’ overall risks are becoming less clear.
Therefore, in cases where a Financial Instruments Business Operator engages in large and complex businesses as agroup, there is a risk of financial or business-related problems, etc. brought about by the parent company,
subsidiaries or fellow subsidiaries within the group leading to the sudden collapse of that Financial Instruments
Business Operator, and, as a result, the market intermediary function of Financial Instruments Business Operators
ceasing to function properly, a wide range of investors being adversely affected, and by extension, causing concern
for the financial system.
In view of these circumstances, from the perspective of making Financial Instruments Business Operators, which
are engaged in large and complex businesses as a group, subject to regulation and supervision on a consolidated
basis, it has been stipulated that those large Financial Instruments Business Operators, which are deemed to be
conducting financial services as a group, shall be subject to the consolidated regulation and supervision of the entire
group, including the parent company (“upstream consolidation”).
With regard to designated parent company groups that are subject to this upstream consolidation, it is importantto thoroughly ensure robust and comprehensive group-wide risk management under appropriate governance.
Supervisors shall therefore conduct supervision with due consideration of the following points.
A “designated parent company group” refers to a group comprised of a designated parent company and its
subsidiary corporations, etc.
IV-5-1 Governance
The following points, in addition to III-1, shall also be taken into consideration with regard to the governanceof designated parent company groups:(i)Whether the directors of the designated parent company have the knowledge and experience to conduct

governance of the group companies, including overseas offices, in an appropriate, fair and efficient manner,
and whether they have sufficient social credibility.
(ii)

Whether the designated parent company has clearly specified a management policy and plans based on

the overall vision that the group is striving for, and whether it has communicated these across the entire group,
including at overseas offices. Also, whether the Business Management Company periodically reviews the
progress status of the plans, including at overseas offices, and where necessary, whether it revises the plans,
including the significance of their establishment and their positioning within the group.
(iii)

Whether the designated parent company fully understands the increased organizational complexity

associated with forming a designated parent company group, as well as the subsequent increased difficulty of
governance, and whether it has developed an appropriate control environment for governance. In particular, interms of preparedness for ensuring the appropriate operation of its overseas offices, whether the designatedparent company has achieved an appropriate combination of direct management and the necessary244authorization of management teams at its overseas offices, and whether it has clarified the division of
responsibility.
(iv)

Whether the designated parent company has, while taking into consideration the nature of business

operations and risk profiles of its overseas offices, developed a control environment wherein the internal audit
divisions of the entire group or of the overseas offices can conduct internal audits appropriately. Also, whether
it has implemented appropriate measures in light of the results of internal audits and so forth.
(v)

Whether the designated parent company has, in light of the positioning of overseas offices and theirbusiness strategy and business plan, developed a sufficient internal control environment at overseas offices
taking into account their actual nature of business operations and risk profiles.
(vi)

Whether the designated parent company, having identified the operational and financial condition of theentire group, including overseas offices, and having fully understood the profile of risks faced by each base,has properly identified the status of risks and taken necessary actions.
IV-5-1-1 In the Case of a Designated Parent Company that is a Company with Auditors(1) Representative Director(i)

Whether the representative director counts legal compliance among the most important management issues,and is leading efforts to establish a control environment for legal compliance.
(ii)

Whether the representative director fully recognizes that disregard of the risk management division may

have a serious impact on corporate earnings and attaches importance to said division.
(iii)

Whether the representative director establishes an internal control environment to disclose financial

information and other corporate information in an appropriate and timely manner.
(iv)

Whether the representative director, based on the recognition of the importance of internal audits, sets

appropriate objectives for internal audits and establishes arrangements for enabling the internal audit section to
fully perform its functions (including securing the independence of the internal audit section), and periodicallychecks the effectiveness of the functions. With regard to the control environment for internal audit, whether the
representative director actively makes efforts to establish an effective environment in view of issues pointed
out in auditor’s audits and inspections by inspection departments.
Whether the representative director immediately implements appropriate measures based on the results ofinternal audits.
(v)

Whether the representative director, based on an adequate recognition of the importance and usefulnessof auditor’s audits, recognizes that it is important to establish an environment that ensures the effectivenessthereof.
In particular, whether the representative director understands the developments that address changes in theenvironment surrounding auditor’s audits, for example the Auditor’s Auditing Standards (Japan Audit &Supervisory Board Members Association), and guarantees smooth auditing activities of auditors.
(vi)

Whether the representative director fully understands that banning any relationship with anti-social forces

and firmly excluding such forces are vital for maintaining public confidence in the designated parent company
245

group and securing the appropriateness and soundness of its business. In addition, based on this understanding,whether the representative director has made clear, both throughout the company and to the outside, a basic
policy decided by the board of directors with due consideration of the “Government Guideline.”(2) Directors and Board of Directors(i)Whether directors check and prevent autocratic management by the representative director and otherofficers who are responsible for business execution, and are actively involved in the board of directors' decisionmaking and checking process concerning business execution.
(ii)

In the case where an outside director is elected, whether the outside director recognizes his/her

significance from the perspective of ensuring objectivity of decision-making concerning management, and isactively involved in the board of directors. In addition, when deciding proposals regarding the election ofoutside directors, whether the designated parent company group examines the personal, capital, business andother relationships with the designated parent company group, in view of the roles expected of outside directors,
and carefully examines their independence and eligibility.
Furthermore, whether the designated parent company group establishes some kind of framework so as toenable outside directors to make appropriate judgments at the board of directors’ meetings, such as continuous
provision of information.
(iii)

Whether the board of directors implements measures to ensure its appropriateness and fairness upon, forexample, making important management decisions concerning legal compliance and risk control by making
use of the advice of experts from outside the company or voluntary committees that consist of experts fromoutside the company, as necessary.
(iv)

Whether the board of directors has specified a management policy based on the overall vision of thedesirable status of the designated parent company group. Whether it has established management plans in linewith the management policy and communicated the plans throughout the company. Whether it regularly
reviews and revises the progress status thereof.
(v)

Whether the directors and board of directors are sincerely leading efforts in legal compliance, andappropriately perform their functions so as to establish a company-wide internal control environment.
(vi)

Whether the board of directors fully recognizes that disregarding the risk management division may havea serious impact on corporate earnings, and attaches importance to said division. In particular, whether the
director in charge has in-depth knowledge and understanding of the methods of measuring, monitoring andmanaging risks, in addition to an understanding of where risks reside and what kind of risks they are.
(vii)

Whether the board of directors has established a policy for managing risks based on strategic objectives

and communicated the policy throughout the company. Whether the risk management policy is reviewed andrevised on a periodic or as-needed basis. In addition, whether the board of directors makes use of risk-related
information in the execution of business and the development of risk management systems by, for example,
making necessary decisions based on risk-related information reported periodically.
(viii)

Whether the board of directors has fostered a culture within the company that emphasizes and clearly

indicates to employees of all ranks the importance of governance, as well as reviews and establishes appropriate
246and effective governance.
(ix)

Whether the board of directors has set appropriate objectives for internal audits and establishedarrangements for enabling the internal audit section to fully perform its functions based on the recognition of
the importance of internal audits (including securing the independence of the internal audit section), andperiodically checks the effectiveness thereof. With regard to the control environment for internal audits,
whether the board of directors is actively making efforts to establish an effective environment in view of issues
that were pointed out in auditor’s audits and inspections by inspection departments.
In addition, whether the board of directors approves basic matters concerning internal audit plans, including
audit policy and priority items, in light of the risk management status, etc., of divisions subject to audits, andimplements appropriate measures based on the results of internal audits.
(x)

Whether directors, based on an adequate recognition of the importance and usefulness of auditor’s audits,

recognize that it is important to establish an environment that ensures the effectiveness thereof. When deciding
proposals regarding the election of auditors, whether the directors carefully examine their independence andeligibility. In particular, whether directors recognize that the election of outside auditors is compulsory fromthe perspective of further improving the neutrality and independence of the audit system, and establish somekind of framework so as to enable outside auditors to make appropriate judgments, such as continuous provisionof information.
(xi)

Whether directors understand that establishing internal control environments such as for legal compliance,risk management, and financial reporting (the so-called internal control system) constitutes the duty of due careand duty of loyalty of directors, and endeavor to appropriately fulfill their obligations.
(xii)

Whether the board of directors has decided a basic policy based on the Government Guideline,

established a framework for implementing it and clearly positioned the prevention of damage that could be
inflicted by anti-social forces in the internal control system as a matter of legal compliance and risk
management by, for example, periodically examining the effectiveness thereof.
(xiii)In the decision process, etc. of proposals regarding the election of directors engaging in the ordinary

business of a designated parent company, whether elements such as the following are appropriately taken into
consideration concerning their eligibility:
A. Knowledge and Experience to Conduct Governance in an Appropriate, Fair and Efficient Manner
Whether the directors of the designated parent company understand the particulars of the viewpoints
regarding governance indicated in the FIEA and other relevant regulations, as well as supervisory
guidelines, and have the knowledge and experience necessary for exercising such viewpoints, sufficientknowledge and experience regarding compliance and risk management to conduct the operations of thedesignated parent company group in a sound and appropriate manner, and knowledge and experience toconduct other financial instruments businesses.
B. Sufficient Social Credibility
a. Whether the directors have been involved with anti-social forces.
b. Whether the directors are currently or were formerly members of organized crime groups, or have close
relationships therewith.
247

c. Whether the directors have been imposed a fine (including similar punishments imposed under foreignlaws and regulations thereto) for violation of the FIEA and other finance-related laws and regulationsof Japan or other foreign laws and regulations equivalent thereto, or for committing a crime under the
Penal Code or under the Act on Punishment of Physical Violence and Others.
d. Whether the directors have been sentenced to imprisonment with work or more severe punishment(including similar punishments imposed under foreign laws or regulations equivalent thereto).
e. Whether the corporation to which the directors belonged or currently belong has received administrative
disposition concerning legal compliance in the past such as a business improvement order, businesssuspension order, or rescission of license, registration or permit from financial supervisory authorities,
and whether the directors were responsible for the cause of said disposition as the party to the act orfrom a position of giving directions and orders to the party concerned by intention or gross negligence(especially considerable inattention despite being in a situation where it was possible to be aware of andavoid certain consequences).
f. Whether the directors have received an order of dismissal from the position of officer, etc. from financial
supervisory authorities.
g. Whether the directors have been the cause of the bankruptcy, etc., of a financial institution as an officer.
(3) Auditors and Board of Auditors(i)

Whether the independence of the board of auditors is ensured in accordance with the purpose of the boardof auditors system.
(ii)

Whether auditors and the board of auditors properly exercise the broad authority granted thereto, as well

as appropriately conducting audits of business operations in addition to audits of accounting affairs and taking
necessary measures in a timely manner, based on the recognition that their basic responsibilities are to ensure
the sound and sustainable growth of the designated parent company group by auditing the execution of duties
of directors as an independent organization.
(iii)

Whether auditors and the board of auditors secure a system that assists the execution of duties of auditorsand make effective use thereof in order to improve the effectiveness of audits and execute auditing duties in asmooth manner.
(iv)

Whether individual auditors recognize the importance of their own independence and actively take theinitiative to conduct audits. Whether outside auditors, in particular, are aware that their election is required fromthe perspective of further improving the neutrality and independence of the audit system, and conduct audits
under the recognition that they are especially expected to objectively express their audit opinions. In addition,
whether full-time auditors monitor and examine on a daily basis the internal control environment forgovernance and administration thereof, such as by actively striving to establish an audit environment and gather
information, based on the nature of a full-time employee.
(v)With regard to proposals regarding the election of auditors that the directors submit to the general meetingof shareholders, whether the board of auditors carefully examines their independence and eligibility upondeliberation of consent.
248

In particular, whether the board of auditors examines the personal, capital, business and other relationships
with the designated parent company group, with regard to outside auditors.
(vi)

Whether the auditors of a designated parent company understand that, since they bear the responsibility

to audit business operations, they have the responsibility to audit whether or not directors establish an internal
control environment (so-called internal control system) and that this constitutes auditors’ duty of due care, andendeavor to properly fulfill the duty.
(vii)

In the decision process, etc. of proposals regarding the election of auditors of a designated parent

company, whether elements such as the following are appropriately taken into consideration concerning theireligibility:
A. Knowledge and Experience to Audit the Execution of Duties of Directors of a Designated Parent Company
in an Appropriate, Fair and Efficient Manner
Whether the auditors of the designated parent company have sufficient knowledge and experience toactively conduct audits based on their own independence and responsibility, as well as knowledge andexperience to ensure sound and proper operation of business of the designated parent company group byauditing the execution of duties of directors from an independent position.
B. Sufficient Social Credibility
a. Whether the auditors have been involved with anti-social forces.
b. Whether the auditors are members of organized crime groups, or have close relationships therewith.
c. Whether the auditors have been imposed a fine (including similar punishments imposed under foreignlaws and regulations thereto) for violation of the FIEA and other finance-related laws and regulations ofJapan or other foreign laws and regulations equivalent thereto, or for committing a crime under the Penal
Code or under the Act on Punishment of Physical Violence and Others.
d. Whether the auditors have been sentenced to imprisonment with work or more severe punishment(including similar punishments imposed under foreign laws or regulations equivalent thereto).
e. Whether the corporation to which the auditors belonged or currently belong has received administrative
disposition concerning legal compliance in the past such as a business improvement order, businesssuspension order, or rescission of license, registration or permit from financial supervisory authorities,
and whether the auditors were responsible for the cause of said disposition as the party to the act or froma position of giving directions and orders to the party concerned by intention or gross negligence(especially considerable inattention despite being in a situation where it was possible to be aware of andavoid certain consequences).
f. Whether the auditors have received an order of dismissal from the position of officer, etc. from financial
supervisory authorities.
g. Whether the auditors have been the cause of the bankruptcy, etc., of a financial institution as an officer.
(Reference) Auditor’s Auditing Standards (Japan Audit & Supervisory Board Members Association)(4) Internal Audit Section(i)Whether the internal audit section has been established as an independent organization so as to fully check249

the actions of divisions subject to audit, while being equipped with the environment and ability to gather
important information concerning the state of business of divisions subject to audit, as well as a system toenable effective internal audits that appropriately respond to the state of business and environment surrounding
the designated parent company group.
(ii)

Whether the internal audit section formulates efficient and effective internal audit plans in considerationof frequency and depth in accordance with the type and degree of risks and based on its understanding of thestatus of risk management, etc. by divisions subject to audit, reviews the plans appropriately according to thesituation, and implements efficient and effective internal audits based on the internal audit plan.
(iii)

Whether the internal audit section reports important issues pointed out in internal audits without any

delay to the representative director and board of directors. Whether the internal audit section accurately grasps
the improvement status of the issues pointed out.
(5) Use of External Audits(i)Whether the designated parent company sufficiently recognizes that effective external audits are essential

to ensuring sound and proper operation of the business of the designated parent company group and effectively
uses them.
(ii)

Whether the designated parent company periodically examines if external audits are effectively conducted,

and takes appropriate measures regarding the results of external audits.
(iii)

Whether the continuous audit years, etc. of the certified public accountant involved are treatedappropriately.
(6) Coordination of Audit Functions
Whether the coordination between external audit functions and the internal audit section or auditors and board ofauditors is functioning effectively.
IV-5-1-2 In the Case of a Designated Parent Company that is a Company with a Nominating Committee, etc.
(1) Directors and Board of Directors(i)Whether the board of directors clarifies the authority to decide the execution of duties, such as the basic

management policy, duties of executive officers, and matters concerning command and order relationships andother relationships between executive officers.
Whether the board of directors has established a system to ensure that the execution of duties by executive
officers complies with laws and regulations, as well as a system necessary to ensure the appropriateness ofoperations, and periodically examines the effectiveness thereof. In addition, with regard to the control
environment for internal audit, whether the board of directors actively makes efforts in establishing an effective
environment in view of issues pointed out in inspections by the audit committee or inspection departments.
(ii)

Whether the board of directors actively makes efforts to develop a system necessary to execute the dutiesof the audit committee (audit assistant system, information reporting & control system, internal control system).
250

(iii)

Whether the board of directors has fostered a culture within the company that emphasizes and clearly

indicates to employees of all ranks the importance of governance, as well as reviews and establishes appropriate
and effective governance.
(iv)

Whether the board of directors makes use of committees and appropriately exercises its supervisory

authority over business execution in coordination with the committees.
(v)

Whether the board of directors has established an internal control environment to disclose financial

information and other corporate information in an appropriate and timely manner.
(vi)

Whether the directors are actively involved in the board of directors' decisions on business execution andthe checking process concerning business execution, by directors and executive officers. Whether directors
understand that establishing internal control environments such as for legal compliance, risk management, andfinancial reporting (the so-called internal control system) constitutes the duty of due care and duty of loyalty
of directors, and endeavor to appropriately fulfill their obligations.
(vii)

Whether the board of directors has decided a basic policy based on the Government Guideline,

established a framework for implementing it and clearly positioned the prevention of damage that could be
inflicted by anti-social forces in the internal control system as a matter of legal compliance and risk
management by, for example, periodically examining the effectiveness thereof.
(viii)In the decision process, etc. of proposals regarding the election of directors engaging in the ordinary

business of a designated parent company, whether elements such as the following are appropriately taken into
consideration concerning their eligibility:
A. Knowledge and Experience to Conduct Governance in an Appropriate, Fair and Efficient Manner
Whether the directors of the designated parent company have sufficient knowledge and experience toactively decide, at the board of directors’ meetings, matters concerning basic management policies andinternal control systems as well as business execution, and to check the execution of duties of directors
and executive officers, as well as the knowledge and experience to ensure sound and proper operation of
the business of the designated parent company group by conducting the governance indicated in the FIEA
and other relevant regulations as well as supervisory guidelines.
B. Sufficient Social Credibility
a. Whether the directors have been involved with anti-social forces.
b. Whether the directors are members of organized crime groups, or have close relationships therewith.
c. Whether the directors have been imposed a fine (including similar punishments imposed under foreignlaws and regulations thereto) for violation of the FIEA and other finance-related laws and regulations ofJapan or other foreign laws and regulations equivalent thereto, or for committing a crime under the Penal
Code or under the Act on Punishment of Physical Violence and Others.
d. Whether the directors have been sentenced to imprisonment with work or more severe punishment(including similar punishments imposed under foreign laws or regulations equivalent thereto).
e. Whether the corporation to which the directors belonged or currently belong has received administrative
disposition concerning legal compliance in the past such as a business improvement order, businesssuspension order, or rescission of license, registration or permit from financial supervisory authorities,
251and whether the directors were responsible for the cause of said disposition as the party to the act or froma position of giving directions and orders to the party concerned by intention or gross negligence(especially considerable inattention despite being in a situation where it was possible to be aware of andavoid certain consequences).
f. Whether the directors have received an order of dismissal from officer, etc. from financial supervisory
authorities.
g. Whether the directors have been the cause of the bankruptcy, etc., of a financial institution as an officer.
(2) Audit Committee, etc.
(i)

Whether the independence of each committee is ensured in accordance with the purpose of the system of

the committees.
(ii)

Whether the audit committee properly exercises the broad authority granted thereto, as well as

appropriately conducting audits of business operations in addition to audits of accounting affairs and taking
necessary measures in a timely manner.
(iii)

Whether the audit committee makes effective use of employees who should assist the duties of the audit

committee, the internal audit section, accounting auditor, etc. in order to conduct audits of the compliance andadequacy of the execution of duties by the directors and executive officers.
In view of the institutional basis of the audit committee that consists mainly of outside directors, which is toconduct so-called organizational audits through the internal control system, whether a system is in place for theinternal audit section, in particular, to support the audit committee, in comparison to auditors of a company
with auditors who are able to conduct so-called physical audits.
(iv)

In the decision process, etc. of proposals regarding the election of audit committee members, whether

elements such as the following are appropriately taken into consideration concerning their eligibility:
A. Knowledge and Experience to Audit the Execution of Duties of Executive Officers and Directors of a
Designated Parent Company in an Appropriate, Fair and Efficient Manner
Whether the auditor committee members of the designated parent company have sufficient knowledge
and experience to monitor and examine the status of the establishment and administration of the internal
control system, as well as actively fulfilling their role in the deliberations of the board of directors
concerning the establishment and administration of the internal control system, and the knowledge andexperience to ensure sound and proper operation of business of the designated parent company group byauditing the duties of executive officers and directors from an independent position.
B. Sufficient Social Credibility
a. Whether the auditors have been involved with anti-social forces.
b. Whether the auditors are members of organized crime groups, or have close relationships therewith.
c. Whether the auditors have been imposed a fine (including similar punishments imposed under foreignlaws and regulations thereto) for violation of the FIEA and other finance-related laws and regulations ofJapan or other foreign laws and regulations equivalent thereto, or for committing a crime under the Penal
Code or under the Act on Punishment of Physical Violence and Others.
252

d. Whether the auditors have been sentenced to imprisonment with work or more severe punishment(including similar punishments imposed under foreign laws or regulations equivalent thereto).
e. Whether the corporation to which the auditors belonged or currently belong has received administrative
disposition concerning legal compliance in the past such as a business improvement order, businesssuspension order, or rescission of license, registration or permit from financial supervisory authorities,
and whether the auditors were responsible for the cause of said disposition as the party to the act or froma position of giving directions and orders to the party concerned by intention or gross negligence(especially considerable inattention despite being in a situation where it was possible to be aware of andavoid certain consequences).
f. Whether the auditors have received an order of dismissal from the position of officer, etc. from financial
supervisory authorities.
g. Whether the auditors have been the cause of the bankruptcy, etc., of a financial institution as an officer.
(Reference) Auditor’s Auditing Standards (Japan Audit & Supervisory Board Members Association)(3) Executive Officers (Including Representative Executive Officers)(i)

Whether executive officers make decisions on business execution in accordance with the basic

management policy decided by the board of directors, based on sufficient acknowledgement of the authorities
and responsibilities delegated by resolution of the board of directors.
(ii)

Whether executive officers have established management plans in line with the basic management policy

and communicated the plans throughout the company. Whether they regularly review and revise the progressstatus thereof.
(iii)

Whether executive officers are sincerely leading efforts in legal compliance, and appropriately performtheir function to establish and execute a company-wide internal control environment.
(iv)

Whether executive officers fully recognize that disregarding the risk management division may have aserious impact on corporate earnings, and attach importance to said division. In particular, whether the
executive officer in charge has in-depth knowledge and understanding concerning the methods of measuring,monitoring and managing risks, in addition to an understanding of where risks reside and what kind of risks
they are.
(v)

Whether executive officers have set up a policy for managing risks based on the basic management policy

and communicated the policy throughout the company. Whether the risk management policy is reviewed andrevised on a periodic or as-needed basis. In addition, whether the board of directors makes use of risk-related
information in the execution of business and the development of risk management systems by, for example,
making necessary decisions based on risk-related information reported periodically.
(vi)

Whether executive officers have taken measures to enable internal audit functions to fully perform basedon the recognition of the importance of internal audits, and implements appropriate measures based on the
results of internal audits.
(vii)

Whether executive officers fully understand that banning any relationship with anti-social forces andfirmly excluding such forces are vital for maintaining public confidence in the designated parent company
253

group and securing the appropriateness and soundness of its business. In addition, based on this understanding,whether the executive officers have made clear, both throughout the company and to the outside, a basic policy
decided by the board of directors with due consideration of the Government Guideline.
(viii)In the election process of executive officers, etc., whether elements such as the following areappropriately taken into consideration concerning their eligibility:
A. Knowledge and Experience to Conduct Governance in an Appropriate, Fair and Efficient Manner
Whether the executive officers understand the particulars of the viewpoints regarding governanceindicated in the FIEA and other relevant regulations, as well as supervisory guidelines, and have theknowledge and experience necessary for exercising such viewpoints, sufficient knowledge and experience
regarding compliance and risk management to conduct the operations of the designated parent company
group in a sound and appropriate manner, and knowledge and experience to conduct other financial
instruments businesses.
B. Sufficient Social Credibility
a. Whether the executive officers have been involved with anti-social forces.
b. Whether the executive officers are members of organized crime groups, or have close relationships
therewith.
c. Whether the executive officers have been imposed a fine (including similar punishments imposed under
foreign laws and regulations thereto) for violation of the FIEA and other finance-related laws andregulations of Japan or other foreign laws and regulations equivalent thereto, or for committing a crime
under the Penal Code or under the Act on Punishment of Physical Violence and Others.
d. Whether the executive officers have been sentenced to imprisonment with work or more severe
punishment (including similar punishments imposed under foreign laws or regulations equivalent
thereto).
e. Whether the corporation to which the executive officers belonged or currently belong has received
administrative disposition concerning legal compliance in the past such as a business improvement order,
business suspension order, or rescission of license, registration or permit from financial supervisory
authorities, and whether the executive officers were responsible for the cause of said disposition as theparty to the act or from a position of giving directions and orders to the party concerned by intention or
gross negligence (especially considerable inattention despite being in a situation where it was possible
to be aware of and avoid certain consequences).
f. Whether the executive officers have received an order of dismissal from the position of officer, etc. fromfinancial supervisory authorities.
g. Whether the executive officers have been the cause of the bankruptcy, etc., of a financial institution as
an officer.
(4) Internal Audit Section(i)Whether the internal audit section has been established as an independent organization so as to fully checkthe actions of divisions subject to audit, while being equipped with the environment and ability to gather
254important information concerning the state of business of divisions subject to audit, as well as a system toenable effective internal audits that appropriately respond to the state of business and environment surrounding
the designated parent company group.
(ii)

Whether the internal audit section formulates efficient and effective internal audit plans in considerationof frequency and depth in accordance with the type and degree of risks and based on its understanding of thestatus of risk management, etc. by divisions subject to audit, reviews the plans appropriately according to thesituation, and implements efficient and effective internal audits based on the internal audit plan.
(iii)

Whether the internal audit section reports important issues pointed out in internal audits without any

delay to the representative director and audit committee. Whether the internal audit section accurately grasps
the improvement status of the issues pointed out.
(5) Use of External Audits(i)Whether the designated parent company sufficiently recognizes that effective external audits are essential

to ensuring sound and proper operation of the business of the designated parent company group and effectively
uses them.
(ii)

Whether the designated parent company periodically examines if external audits are effectively conducted,

and takes appropriate measures regarding the results of external audits.
(iii)

Whether the continuous audit years, etc. of the certified public accountant involved are treatedappropriately.
(6) Coordination of Audit Functions
Whether the coordination between external audit functions and the internal audit section or auditors and board ofauditors is functioning effectively.
IV-5-1-3 In the Case of a Designated Parent Company that is a Company with Audit and Supervisory Committees(1) Representative Director(i)

Whether the representative director counts legal compliance among the most important management issues,and is leading efforts to establish a control environment for legal compliance.
(ii)

Whether the representative director fully recognizes that disregard of the risk management division may

have a serious impact on corporate earnings and attaches importance to said division.
(iii)

Whether the representative director establishes an internal control environment to disclose financial

information and other corporate information in an appropriate and timely manner.
(iv)

Whether the representative director, based on the recognition of the importance of internal audits, sets

appropriate objectives for internal audits and establishes arrangements for enabling the internal audit section to
fully perform its functions (including securing the independence of the internal audit section), and periodicallychecks the effectiveness of the functions. With regard to the control environment for internal audit, whether the
representative director actively makes efforts to establish an effective environment in view of issues pointed
255

out in audits by the audit and supervisory committee and inspections by inspection departments.
Whether the representative director implements appropriate measures based on the results of internal audits
immediately.
(v)

Whether the representative director, based on an adequate recognition of the importance and usefulnessof audits by the audit and supervisory committee, recognizes that it is important to establish an environmentthat ensures the effectiveness thereof.
(vi)

Whether the representative director fully understands that banning any relationship with anti-social forces

and firmly excluding such forces are vital for maintaining public confidence in the designated parent company
group and securing the appropriateness and soundness of its business. In addition, based on this understanding,whether the representative director has made clear, both throughout the company and to the outside, a basic
policy decided by the board of directors with due consideration of the Government Guideline.
(2) Directors and Board of Directors(i)Whether directors check and prevent autocratic management by the representative director and otherofficers who are responsible for business execution, and are actively involved in the board of directors' decisionmaking and checking process concerning business execution.
(ii)

Whether outside directors recognize their significance from the perspective of ensuring objectivity ofdecision-making concerning management, and are actively involved in the board of directors. In addition, when
deciding proposals regarding the election of outside directors, whether the designated parent company groupexamines the personal, capital, business and other relationships with the designated parent company group, inview of the roles expected of outside directors, and carefully examines their independence and eligibility.
Furthermore, whether the designated parent company group establishes some kind of framework so as toenable outside directors to make appropriate judgments at the board of directors’ meetings, such as continuous
provision of information.
(iii)

Whether the board of directors implements measures to ensure appropriateness and fairness upon, forexample, making important management decisions concerning legal compliance and risk control by making
use of the advice of experts outside the company or voluntary committees that consist of experts outside thecompany, as necessary.
(iv)

Whether the board of directors has specified a management policy based on the overall vision of thedesirable status of the designated parent company group. Whether it has established management plans in linewith the management policy and communicated the plans throughout the company. Whether it regularly
reviews and revises the progress status thereof.
(v)

Whether the directors and board of directors are sincerely leading efforts in legal compliance, andappropriately perform their functions so as to establish a company-wide internal control environment.
(vi)

Whether the board of directors fully recognizes that disregarding the risk management division may havea serious impact on corporate earnings, and attaches importance to said division. In particular, whether the
director in charge has in-depth knowledge and understanding concerning the methods of measuring, monitoringand managing risks, in addition to an understanding of where risks reside and what kind of risks they are.
256

(vii)

Whether the board of directors has established a policy for managing risks based on strategic objectives

and communicated the policy throughout the company. Whether the risk management policy is reviewed andrevised on a periodic or as-needed basis. In addition, whether the board of directors makes use of risk-related
information in the execution of business and the development of risk management systems by, for example,
making necessary decisions based on risk-related information reported periodically.
(viii)

Whether the board of directors has fostered a culture within the company that emphasizes and clearly

indicates to employees of all ranks the importance of governance, as well as reviews and establishes appropriate
and effective governance.
(ix)

Whether the board of directors has set appropriate objectives for internal audits and establishedarrangements for enabling the internal audit section to fully perform its functions based on the recognition of
the importance of internal audits (including securing the independence of the internal audit section), andperiodically checks the effectiveness thereof. With regard to the control environment for internal audits,
whether the board of directors is actively making efforts to establish an effective environment in view of issues
that were pointed out in audits by the audit and supervisory committee and inspections by inspection
departments.
In addition, whether the board of directors approves basic matters concerning internal audit plans, including
audit policy and priority items, in light of the risk management status, etc., of divisions subject to audits, andimplements appropriate measures based on the results of internal audits.
(x)

Whether directors, based on adequate recognition of the importance and usefulness of audits by the audit

and supervisory committee, recognize that it is important to establish an environment that ensures theeffectiveness thereof. When deciding proposals regarding the election of directors who are members of theaudit and supervisory committee, whether the directors carefully examine their independence and eligibility. In
particular, whether directors recognize that the election of outside directors who are members of the audit andsupervisory committee is compulsory from the perspective of further improving the neutrality andindependence of the audit system, and establishes some kind of framework so as to enable outside directors
who are members of the audit and supervisory committee to make appropriate judgments, such as continuous
provision of information.
(xi)

Whether directors understand that establishing internal control environments such as for legal compliance,risk management, and financial reporting (the so-called internal control system) constitutes the duty of due careand duty of loyalty of directors, and endeavor to appropriately fulfill their obligations.
(xii)

Whether the board of directors has decided a basic policy based on the Government Guideline,

established a framework for implementing it and clearly positioned the prevention of damage that could be
inflicted by anti-social forces in the internal control system as a matter of legal compliance and risk
management by, for example, periodically examining the effectiveness thereof.
(xiii)In the decision process, etc. of proposals regarding the election of directors engaging in the ordinary

business of a designated parent company, whether elements such as the following are appropriately taken into
consideration concerning their eligibility:
A. Knowledge and Experience to Conduct Governance in an Appropriate, Fair and Efficient Manner257

Whether the directors of the designated parent company understand the particulars of the viewpoints
regarding governance indicated in the FIEA and other relevant regulations, as well as supervisory
guidelines, and have the knowledge and experience necessary for exercising such viewpoints, sufficientknowledge and experience regarding compliance and risk management to conduct the operations of thedesignated parent company group in a sound and appropriate manner, and knowledge and experience toconduct other financial instruments businesses.
B. Sufficient Social Credibility
a. Whether the directors have been involved with anti-social forces.
b. Whether the directors are members of organized crime groups, or have close relationships therewith.
c. Whether the directors have been imposed a fine (including similar punishments imposed under foreignlaws and regulations thereto) for violation of the FIEA and other finance-related laws and regulations ofJapan or other foreign laws and regulations equivalent thereto, or for committing a crime under the Penal
Code or under the Act on Punishment of Physical Violence and Others.
d. Whether the directors have been sentenced to imprisonment with work or more severe punishment(including similar punishments imposed under foreign laws or regulations equivalent thereto).
e. Whether the corporation to which the directors belonged or currently belong has received administrative
disposition concerning legal compliance in the past such as a business improvement order, businesssuspension order, or rescission of license, registration or permit from financial supervisory authorities,
and whether the directors were responsible for the cause of said disposition as the party to the act or froma position of giving directions and orders to the party concerned by intention or gross negligence(especially considerable inattention despite being in a situation where it was possible to be aware of andavoid certain consequences).
f. Whether the directors have received an order of dismissal from the position of officer, etc. from financial
supervisory authorities.
g. Whether the directors have the experience of being the cause of the bankruptcy, etc., of a financial
institution as an officer.
(3) Audit and Supervisory Committee(i)Whether the independence of the audit and supervisory committee is ensured in accordance with the

purpose of its system.
(ii)

Whether the audit and supervisory committee properly exercises the broad authority granted thereto, as

well as appropriately conducting audits of business operations in addition to audits of accounting affairs andtaking necessary measures in a timely manner.
(iii)

Whether the audit and supervisory committee makes effective use of employees who should assist theduties of the audit and supervisory committee, the internal audit section, accounting auditor, etc. in order to
conduct audits of the compliance and adequacy of the execution of duties by the directors.
In view of the institutional basis of the audit and supervisory committee that consists mainly of outside
directors, which is to conduct so-called organizational audits through the internal control system, whether a258system is in place for the internal audit section, in particular, to support the audit and supervisory committee,
in comparison to auditors of a company with auditors who are able to conduct so-called physical audits.
(iv)

With regard to proposals regarding the election of directors who are members of the audit and supervisorycommittee that the directors submit to the general meeting of shareholders, whether the audit and supervisorycommittee carefully examines their independence and eligibility upon deliberation of consent.
In particular, whether the audit and supervisory committee examines the personal, capital, business and otherrelationships with the designated parent company group, with regard to outside auditors who are members of
the audit and supervisory committee.
(v)

In the decision process, etc. of proposals regarding the election of directors who are members of the audit

and supervisory committee of a Designated Parent Company, whether elements such as the following areappropriately taken into consideration concerning their eligibility:
A. Knowledge and Experience to Audit the Execution of Duties of Executive Officers and Directors of a
Designated Parent Company in an Appropriate, Fair and Efficient Manner
Whether the members of the audit and supervisory committee have sufficient knowledge and experience
to monitor and examine the status of the establishment and administration of the internal control system,
as well as actively fulfilling their role in the deliberations of the board of directors concerning theestablishment and administration of the internal control system, and the knowledge and experience toensure sound and proper operation of business of the designated parent company group by auditing theduties of directors from an independent position.
B. Sufficient Social Credibility
a. Whether the members of the audit and supervisory committee have been involved with anti-social forces.
b. Whether the members of the audit and supervisory committee are members of organized crime groups,
or have close relationships therewith.
c. Whether the members of the audit and supervisory committee have been imposed a fine (including similar
punishments imposed under foreign laws and regulations thereto) for violation of the FIEA and otherfinance-related laws and regulations of Japan or other foreign laws and regulations equivalent thereto, orfor committing a crime under the Penal Code or under the Act on Punishment of Physical Violence andOthers.
d. Whether the members of the audit and supervisory committee have been sentenced to imprisonment withwork or more severe punishment (including similar punishments imposed under foreign laws or
regulations equivalent thereto).
e. Whether the corporation to which the members of the audit and supervisory committee belonged or
currently belong has received administrative disposition concerning legal compliance in the past such asa business improvement order, business suspension order, or rescission of license, registration or permit
from financial supervisory authorities, and whether the members of the audit and supervisory committee
were responsible for the cause of said disposition as the party to the act or from a position of giving
directions and orders to the party concerned by intention or gross negligence (especially considerable
inattention despite being in a situation where it was possible to be aware of and avoid certain259

consequences).
f. Whether the members of the audit and supervisory committee have received an order of dismissal fromthe position of officer, etc. from financial supervisory authorities.
g. Whether the members of the audit and supervisory committee have been the cause of the bankruptcy,
etc., of a financial institution as an officer.
(Reference) Auditor’s Auditing Standards (Japan Audit & Supervisory Board Members Association)(4) Internal Audit Section(i)Whether the internal audit section has been established as an independent organization so as to fully checkthe actions of divisions subject to audit, while being equipped with the environment and ability to gather
important information concerning the state of business of divisions subject to audit, as well as a system toenable effective internal audits that appropriately respond to the state of business and environment surrounding
the designated parent company group.
(ii)

Whether the internal audit section formulates efficient and effective internal audit plans in considerationof frequency and depth in accordance with the type and degree of risks and based on its understanding of thestatus of risk management, etc. by divisions subject to audit, reviews the plans appropriately according to thesituation, and implements efficient and effective internal audits based on the internal audit plan.
(iii)

Whether the internal audit section reports important issues pointed out in internal audits without any

delay to the representative director and the audit and supervisory committee. Whether the internal audit section
accurately grasps the improvement status of the issues pointed out.
(5) Use of External Audits(i)Whether the designated parent company sufficiently recognizes that effective external audits are essential

to ensuring sound and proper operation of the business of the designated parent company group and effectively
uses them.
(ii)

Whether the designated parent company periodically examines if external audits are effectivelyfunctioning, and takes appropriate measures regarding the results of external audits.
(iii)

Whether the continuous audit years, etc. of the certified public accountant involved are treatedappropriately.
(6) Coordination of Audit Functions
Whether the coordination between external audit functions and the internal audit section or the audit andsupervisory committee is functioning effectively.
(Reference) The following may be used as reference regarding the viewpoints in supervising the control
environment of governance:(i)“Framework for Internal Control Systems in Banking Organisations” The Basel Committee on Banking

Supervision (September 1998)
260

(ii)

“Enhancing Corporate Governance for Banking Organisations” The Basel Committee on Banking

Supervision (February 2006)(iii)“Guideline for How Companies Prevent Damage from Anti-Social Forces” (agreed upon at a meeting on

June 19, 2007 of cabinet ministers responsible for anti-crime measures)(iv)“Principles for Enhancing Corporate Governance” The Basel Committee on Banking Supervision(October 2010)(v)“Corporate Governance Principles for Banks” The Basel Committee on Banking Supervision (July 2015)(Note) Hereinafter in the Guidelines, descriptions presume cases of designated parent companies that are companies
with auditors, in principle; however, in the case of designated parent companies that are companies withnominating committees, etc., or companies with an audit and supervisory committee, examinations shall bemade by reading the Guidelines in accordance with the actual situation as needed, based on the purpose of the
Guidelines.
IV-5-2 Appropriateness of Business Operations
The following points shall also be taken into consideration with regard to the appropriateness of business
operations of designated parent company groups:(i)Whether the designated parent company has, in order to ensure thorough group-wide compliance with therelevant laws, regulations and rules of each country, established an appropriate control environment for legal
compliance in accordance with the size of its overseas offices and the characteristics of its business operations,for example, by ensuring necessary staffing (such as the allocation of officers and employees who are adept in
the relevant laws, regulations and rules of the local area) and developing rules and regulations. Whether thedesignated parent company continuously examines whether adequate control environments are being secured
at overseas offices and other places.
(ii)

Whether the designated parent company continuously checks how adept officers and employees atoverseas offices and other places are in the relevant laws, regulations and rules of the local area, and whether
it examines if control environments have been secured for education and training to be appropriately conducted
as necessary.
(iii)

From the viewpoint of preventing violations of the law and inappropriate business operations, whether

there is a control environment in place in which the division of roles between the designated parent company
and the overseas offices and other places is clarified, and in which the functions of checking and supervising
the sales division, etc. can be properly exercised.
(iv)

Whether the designated parent company has developed a control environment wherein, in cases where a

problem at an overseas base has been identified, information is promptly shared between the designated parent
company and the overseas base and necessary actions are taken swiftly, and reports are made immediately to
the Japanese and other relevant supervisory authorities.

261

IV-5-3 Adequacy of Equity Capital
The following points shall also be taken into consideration with regard to the capital adequacy of designatedparent company groups:(Note) In cases where a group does not fall under the category of a designated parent company group, but is required,by the supervisory authorities of the countries where it has business operations, to be monitored in Japan for its
financial soundness as a group (on a consolidated basis), if the Financial Instruments Business Operators within thegroup have obtained approval for the use of an internal control model-based approach pursuant to the provisions ofArticle 10 of the Capital Adequacy Notice, the value of the market risk equivalent as part of the group’s requisite
equity capital may be calculated using the same approach.
IV-5-3-1 Appropriateness and Sufficiency of the Equity Capital of Final Designated Parent Companies
In order to secure the confidence of the markets, etc., it is extremely important that final designated parent
companies work to improve their capital adequacy and retain a sufficient financial basis that is suited to the risks.
To this end, a final designated parent company needs to have a process for evaluating its overall capital adequacyin the context of its risk profile, and it needs to implement appropriate measures for maintaining a sufficient levelof equity capital.
IV-5-3-1-1 Directors and Board of Directors(1) Whether the directors understand the nature and level of the risks taken by the final designated parent company
as well as the relationship between risk and the appropriate level of equity capital.
(2) Whether the directors and the board of directors understand that, in order to achieve their strategic objectives, acapital plan, which is consistent with this, is an essential component, and whether they have formulated an
appropriate capital plan according to the strategic objectives.
(3) In formulating management plans, whether the board of directors has analyzed the amount of equity capitalneeded now and in the future in relation to the strategic objectives, and whether it has given an outline in the
management plans of the advisable level of equity capital in view of the strategic objectives as well as the amountof capital needed to be financed and the appropriate method for financing.
(4) Whether the directors have been sufficiently involved in adopting a process for evaluating the overall capital
adequacy in the context of the risk profile and in implementing appropriate measures for maintaining a sufficientlevel of equity capital in terms of both quality and quantity.
(5) In the case of a final designated parent company which computes the consolidated capital adequacy ratio
pursuant to Article 2 of the “the Notice of the Establishment of Standards for Determining Whether the Adequacyof Equity Capital of a Final Designated Parent Company and its Subsidiary Corporations, etc., is Appropriate
262

Compared to the Assets Held by the Final Designated Parent Company and its Subsidiary Corporations, etc.”(hereinafter the “Capital Adequacy Notice on Final Designated Parent Company”), whether the directors and theboard of directors, when preparing the capital plan, fully take into consideration of such capital buffer which is
required to be gradually reserved in and after 2016 in accordance with “Basel III: A global regulatory framework
for more resilient banks and banking systems” (the Basel Committee on Banking Supervision, December 2010;
hereinafter Basel III) and “Global systematically important banks: Assessment methodology and the additional loss
absorbency requirement” (the Basel Committee on Banking Supervision, July 2011) (the agreements at the BaselCommittee on Banking Supervision, including the foregoing documents, are hereinafter referred to as the “Basel
Capital Accord”).
IV-5-3-1-2 Evaluating Capital Adequacy(1) Whether the control environment for the final designated parent company to evaluate its overall capital adequacyin the context of its risk profile is appropriate and includes the following:(i)A policy and procedures for accurately recognizing, evaluating/measuring and reporting all risks(ii)

A process to evaluate capital adequacy in comparison to the risks recognized and evaluated/measured in(i) above(iii)

A process for setting equity capital targets in comparison to risk, taking strategic objectives andmanagement plans into account(iv)

An internal control process that includes an examination by the internal audit section for ensuring that theoverall risk management processes of the final designated parent company are appropriate.
(2) The final designated parent company which computes the consolidated capital adequacy ratio pursuant to Article
2 of the Capital Adequacy Notice on Final Designated Parent Company is required to have the capital (Common
Equity Tier 1, Tier 1 Capital, and Total regulatory capital) in excess of the level required in the Capital Adequacy
Notice on Final Designated Parent Company in consideration of the purpose of the Basel Capital Accord. Whether
the final designated parent company analyzes, not only the quantity of equity capital, but also the quality of equity
capital which includes at least the following points, when evaluating capital adequacy:(i)Whether Common Equity Tier 1 mainly consists of shareholders’ equity in the form of common stock andwhether capital in the form of common stock, capital surplus and retained earnings account for the main partof Common Equity Tier 1. Whether there is a risk that the ratio of Common Equity Tier 1 greatly fluctuates forthe reason that Common Equity Tier 1 is excessively dependent on accumulated other comprehensive income,including valuation difference on available-for-sale securities.
(ii)

Whether common stock, Additional Tier 1 capital instruments and Tier 2 capital instruments satisfy all

the requirements specified in the Capital Adequacy Notice on Final Designated Parent Company and fully
conform to the purpose of the Basel Capital Accord.
(iii)

Whether common stock consists of voting stock of a single type. If stock of a type for which matters forwhich voting rights can be exercised at general shareholders meetings are limited is issued as common stock263

under the Capital Adequacy Notice on Final Designated Parent Company, whether such stock has the same
conditions as those for voting common stock, except for matters relating to voting rights, and whether suchstock satisfies all requirements of the Capital Adequacy Notice on Final Designated Parent Company.
(iv)

Whether a final designated parent company has provided direct or indirect financing necessary for

acquiring instruments to holders of capital-raising instruments, and whether subsidiaries, etc., or affiliates, etc.,of the final designated parent company has acquired such instruments.
(v)

In the case that capital-raising instruments are paid for in property other than cash, whether the value of

properties contributed in kind is properly computed and such payment has been approved by the supervisory
authorities.
(3) Deferred Tax Assets
With respect to matters relevant to the quality of equity capital, given that the large amount of deferred tax assets
and the large ratio of deferred tax assets to equity capital is a potential problem from the perspective of the soundnessof the final designated parent company, the following points shall also be taken into consideration:(i)

Given the vulnerabilities of deferred tax assets, such as the fact that their qualification as assets relies on

future taxable income, whether they have been recorded appropriately in light of the purpose of accounting
standards, etc. on tax effect accounting.
(ii)

With regard to the basis for including deferred tax assets and the procedures for calculating them, in order

to increase the reliability of the amount recorded for deferred tax assets, in addition to disclosing the matterslisted in A to F below when announcing summaries of accounts (including interim results) and at otherappropriate times, whether the final designated parent company provides easy-to-understand explanations
suited to the calculation procedures and based on the disclosed figures.
A. The basis for including deferred tax assets (in cases where past business results and other circumstances
are used as the main criteria, the illustrative classifications set forth in the Personal Information
Protection Guidelines (Note) (including the nonrecurring, special factors in the case of the proviso of(iv)) and the estimation period for future taxable income (X years).
B. Taxable income for the past five years (actual figures for each fiscal year before using losses carriedforward).
C. Estimated figure for the adjusted net business profit on which the estimation was made (total value for
X years).
D. Estimated figure for the net income before tax on which the estimation was made (total value for X years).
E. Estimated figure for the taxable income before adjustments (total value for X years).
F. Common items to be disclosed regarding the main causes of the deferred tax assets and liabilities.
a. Deferred tax assets: including allowance for doubtful accounts, taxable depreciation of securities,
valuation profit or loss on other securities, reserve for retirement allowances, and losses carriedforward.
b. Deferred tax liabilities: including gains on the contribution of securities to retirement benefit trusts,
valuation profit or loss on other securities, and unrealized gains on lease transactions.
264

(Note) “Audit Treatment of Judgments with Regard to Recoverability of Deferred Tax Assets” (November
9, 1999, Japanese Institute of Certified Public Accountants)(4) The final designated parent company which computes the consolidated capital adequacy ratio pursuant to Article
2 of the Capital Adequacy Notice on Final Designated Parent Company is required to hold additional capital(Common Equity Tier 1 Capital related to capital conservation buffer and countercyclical buffer) in excess of thelevel required in the Capital Adequacy Notice on Final Designated Parent Company in consideration of the purposeof the Basel Capital Accord. Furthermore, the final designated parent company that was designated based on theprovisions of Article 2-2(5)(i) of the Capital Adequacy Notice on Final Designated Parent Company (hereinafterreferred to as “G-SIBs designated by the Capital Adequacy Notice on Final Designated Parent Company”) or the
final designated parent company that was designated based on the provisions of Article 2-2(5)(ii) of the Capital
Adequacy Notice on Final Designated Parent Company (hereinafter referred to as “D-SIBs designated by the Capital
Adequacy Notice on Final Designated Parent Company”) are required to hold additional capital (Common Equity
Tier 1 Capital) in excess of the level required in the Capital Adequacy Notice on Final Designated Parent Company
as a G-SIB buffer or D-SIB buffer respectively.
A capital conservation buffer is a capital buffer that can be used to absorb losses during periods of financial andeconomic stress.
A countercyclical buffer is a buffer against losses that may arise from future business fluctuations, in cases
where credit has grown excessively in financial markets. It is computed by summing up the figures that wereobtained according to the country or region by multiplying the ratio stipulated by the financial authorities of eachcountry or region by the percentage that was obtained by dividing the amount of credit risk assets related to thecountry or region in question by the total amount of credit risk assets in possession. A ratio specified by the FSA
Commissioner under Article 2-2(4)(i) of the Capital Adequacy Notice on Final Designated Parent Company(hereinafter referred to as the “Countercyclical Buffer Ratio”) shall be determined, in consideration of appropriate
benchmark statistics acknowledged by the FSA (e.g. total credit to GDP ratio and Diffusion Index (DI) of financial
institutions' lending attitudes) and in light of discussions with the Bank of Japan in a comprehensive manner. If thelevel of the Countercyclical Buffer Ratio is raised, such revised ratio shall be implemented within one year from thedate of announcement. If the level of the ratio is reduced, the revised ratio shall be implemented on the date of theannouncement.
The G-SIB buffer and D-SIB buffer are meant for G-SIBs designated by the Capital Adequacy Notice on Final
Designated Parent Company and D-SIBs designated by Capital Adequacy Notice on Final Designated Parent
Company, respectively, to enhance capital for absorbing losses with the aim of reducing the possibility of bankruptcy
in view of the systemic importance of the final designated parent company, etc. in question. The buffer level foreach bank is specified in the Capital Adequacy Notice on Final Designated Parent Company in consideration of
their systemic importance.
The evaluation of systemic importance pertaining to the selection of global systemically important banks (GSIBs) is conducted by the Financial Stability Board, targeting internationally active banks for which, an amount of
Attached List of Formats II, p. 32, item number 3 from among the quantitative disclosure items stipulated in Article2653 (5) of the “Regulatory Notice of the Establishment of Matters to be Included in a Document Stating the Capital
Adequacy by a Final Designated Parent Company in Cases Specified by the FSA Commissioner” (hereinafterreferred to as the “Notice of Disclosure”) (the total exposure as defined for use in the Basel III leverage ratio)translated to euros at the exchange rate as of the end of the fiscal year that ended most recently exceeds 200 billion
euros. G-SIBs are deemed based on the following five criteria: (1) “scale;” (2) “interconnectivity;” (3)“substitutability/financial infrastructure;” (4) “complexity;” and (5) “global activities,” and designated in the Capital
Adequacy Notice on Final Designated Parent Company in view thereof.
The evaluation of systemic importance pertaining to the selection of domestic systemically important banks (DSIBs) is conducted by the authorities of each country. Upon evaluation of systemic importance in Japan, domestic
banks, etc. with 15 trillion yen or more in total assets on a consolidated basis are subject. The score of each bank,etc. is computed using 13 indicators in four categories which are: (1) “scale;” (2) “interconnectivity;” (3)“substitutability/financial infrastructure;” and (4) “complexity.” Then of those included in such banks, etc. that areinternational active bank (including final designated parent companies) that were evaluated as systemicallyimportant by comprehensive judgment that takes into consideration the above scores as well as the characteristics
of each bank such as their importance in specific markets are deemed as D-SIBs. Of the D-SIBs, final designatedparent companies are designated in the Capital Adequacy Notice on Final Designated Parent Company.
The 13 indicators in the four categories and the weight of each indicator upon computation of the score are as
below.
Category

Evaluation indicator

WeightScale

Total exposure as defined for use in the Basel III leverage ratio(*)

25%

Interconnectivity

Total amount of the following intra-financial system assets(*)

5%

・The amount of deposits and loans to financial institutions (including
the amount of commitment not yet withdrawn)
・ The amount of securities issued by financial institutions, etc.
(collateralized bonds, senior unsecured bonds, subordinated bonds,
short-term bonds, negotiable deposits and stocks) held
・The amount of current exposure of repo-type transactions with financial
institutions, etc. (must be able to consider the effect of legally valid
bilateral netting contracts, limited to those that are no less than zero.)・The estimated fair value amount and the amount of add-ons calculatedusing the current exposure method of derivative transactions andtransactions with long settlement periods with financial institutions,etc. that are conducted through other than financial markets, etc. (mustbe able to consider the effect of legally valid bilateral netting contracts,
limited to those that are no less than zero.)
Total amount of the following intra-financial system liabilities(*)
・The amount of deposits and borrowings from financial institutions, etc.
266

5%

(including the amount of commitment not yet withdrawn)
・The amount of current exposure of repo-type transactions with financial
institutions, etc. (must be able to consider the effect of legally valid
bilateral netting contracts, limited to those that are no more than zero.)・The estimated fair value amount and the amount of add-ons calculatedusing the current exposure method of derivative transactions andtransactions with long settlement periods with financial institutions,etc. that are conducted through other than financial markets, etc. (mustbe able to consider the effect of legally valid bilateral netting contracts,
limited to those that are no more than zero.)
Outstanding securities issued (collateralized bonds, senior unsecured

5%bonds, subordinated bonds, short-term bonds, negotiable deposits andstocks)(*)
The amount of stocks of available-for-sale securities with market value

5%

Of general deposits, etc., the amount of the portion that exceeds 10 million

5%yen, when the balance exceeds 10 million yen
Substitutability/

The annual sum of settlements via the Bank of Japan Financial Network

financial

System, the Japanese Banks’ Payment Clearing System and other similar

infrastructure

settlement systems during the fiscal year that ended most recently (limited

8.33%

to settlements in Japanese yen)
The balance of trust assets and similar assets (limited to those entrusted by

8.33%

domestic residents)
The annual sum of underwriting pertaining to bonds and stocks during the4.165%

fiscal year that ended most recently (limited to underwritings in thedomestic bond market and stock market)
Complexity

Total amount of trading volume

4.165%The balance of the amount of notional principal pertaining to derivative

8.33%

transactions and transactions with long settlement periods with financial
institutions, etc. that are conducted through other than financial markets,
etc.(*)
Outstanding cross-jurisdictional claims

8.33%

Outstanding cross-jurisdictional liabilities

8.33%(*) Including the amount of exposure of insurance subsidiaries(5) An Ultimate designated parent company is required to have Tier 1 Capital in excess of the level required in theStandards to Determine Soundness Concerning Leverage Stipulated in Complimentary Indices to the Standards toDetermine Whether the Adequacy of Equity Capital of a Ultimate Designated Parent Company and its Subsidiary267

Corporations, etc., are Appropriate Compared to the Assets of the Ultimate Designated Parent Company and its
Subsidiary Corporations, etc. (hereinafter referred to as the “Consolidated Leverage Ratio Notice”) with regard to
the consolidated leverage ratio (meaning the consolidated leverage ratio specified in Article 2 of the Consolidated
Leverage Ratio Notice), which is a complimentary index to the standards to determine whether the adequacy ofequity capital is appropriate and which is a simple and non-risk based index for restraining an excessive build-up ofleverage.
Pursuant to the proviso to Article 2 of the Consolidated Leverage Ratio Notice, in order to achieve harmonization
with the monetary policy implemented by the Bank of Japan under an exceptional macroeconomic environment
where the Bank of Japan implements a monetary policy that causes substantial changes in the amount of money
deposited with the Bank of Japan by financial institutions, the minimum required ratio is to be revised, while
excluding the amount deposited with the Bank of Japan from the total exposure amount, which is the denominatorof the consolidated leverage ratio, and the ratio is to be separately designated by the FSA Commissioner. The revised
minimum required ratio is to be further revised as needed in light of the macroeconomic environment, etc.
IV-5-3-1-3 Confirming the Eligibility of Capital-Raising Instruments as Equity Capital for Consolidated Capital
Adequacy Ratio
In relation to the evaluation of capital adequacy, with regard to final designated parent companies that calculate
their consolidated capital adequacy ratio based on Article 3 of the Capital Adequacy Notice on Final DesignatedParent Company, in such cases as where there has been notification of an issuance, etc. pertaining to a capital-raising
instrument, such as preferred equity investment certificates, subordinated loans and subordinated bonds issued by aspecial purpose company overseas, confirmation shall be made as to whether these are eligible as equity capital
under the regulations on consolidated capital adequacy ratios, giving due consideration to the purposes of the Capital
Adequacy Notice on Final Designated Parent Company and the Basel Capital Accord and the “Instruments Eligiblefor Inclusion in Tier 1 Capital” (Basel Committee on Banking Supervision, 1998). For details of the supervisory
viewpoints, reference shall be made, as necessary, to III-2-1-1-3 of the Comprehensive Guidelines for Supervisionof Major Banks, etc.
Furthermore, with regard to confirming the eligibility of subordinated loans and subordinated bonds of final
designated parent companies that calculate their consolidated capital adequacy ratio based on Article 4 of the Capital
Adequacy Notice on Final Designated Parent Company, reference shall be made, as necessary, to IV-2-1(1) of thisGuideline.
IV-5-3-2 Accuracy of Consolidated Capital Adequacy Ratio of Final Designated Parent Companies
Supervisors shall check the calculation of risk assets for the consolidated capital adequacy ratio with due
consideration of the following points.
IV-5-3-2-1 Judgment of Eligibility for Intentional Holdings and Checks concerning the Use of the Proportionate
Consolidation Method268

(1) In view of the point raised in the Basel Capital Accord, namely, that the financing of capital within a financial
system (so-called double gearing) “makes the banking system more vulnerable to the rapid transmission of problems
from one institution to another,” in Japan, the Capital Adequacy Notice on Final Designated Parent Company
prescribes cases where a financial institution intentionally holds the shares or other capital instruments of otherfinancial institutions, etc. for the purpose of improving the equity capital of the other financial institutions, etc.
(hereinafter referred to as “intentional holdings”) as cases where they must be deducted as an “adjustment”fromthe equity capital of a final designated parent company that calculates its consolidated capital adequacy ratio basedon Article 2 of the Capital Adequacy Notice on Final Designated Parent Company.
For details of the supervisory viewpoints regarding judgment of these “intentional holdings,” reference shall be
made, as necessary, to III-2-1-2-2 (excluding (2-2)) of the Comprehensive Guidelines for Supervision of Major
Banks, etc.
(2) In cases where there has been notification regarding the use of the proportionate consolidation method foraffiliated companies engaged in financial services when calculating the consolidated capital adequacy ratio,reference shall be made, as necessary, to III-2-1-2-2(4) of the Comprehensive Guidelines for Supervision of Major
Banks, etc.
IV-5-3-2-2 Method of Calculating Risk Assets(1) In cases where assets have been securitized, even if such securitization constitutes a transfer in legal terms,
whether the risk has been completely transferred to the transferee or otherwise effectively transferred.
(2) The reduction effect on risk assets shall, in principle, be recognized for an assignment of claims with rights ofrepurchase; provided, however, that in cases where assignments of claims with rights of repurchase have been madeacross different accounting periods, the reduction effect on risk assets shall not be recognized for those where acontract is entered which provides an incentive to effect the redemption by exercising the said right within one year
following the relevant accounting period.
Notwithstanding the above, in cases where an assignment of claims with rights of repurchase has been madewith the intention of temporarily raising the consolidated capital adequacy ratio, the reduction effect on risk assets
shall not be recognized.
(3) In cases where claims with bank guarantees, etc. are held into the following accounting period or at the end of
the accounting period, the reduction effect on risk assets will, in principle, only be recognized where the remaining
period of the relevant claim and the period of the guarantee, etc. are equal; provided, however, that even if theremaining period of the guarantee, etc. is less than the remaining period of the claim, in cases where there are
justifiable reasons for the guarantee, etc. and there is an ongoing expectation for a reduction in credit risk (Note),
the reduction effect on risk assets shall be recognized.
Notwithstanding the above, in cases where a contract of guarantee, etc. has been made with the intention of269

temporarily raising the consolidated capital adequacy ratio, the reduction effect on risk assets shall not be recognized.
(Note) For the time being, this shall apply to cases where the remaining period of the guarantee, etc. is one year
or longer (provided, however, that even if the remaining period of the guarantee, etc. is one year or longer,
if a contract is entered which effectively provides an incentive to cancel the contract of guarantee, etc.
within one year, the reduction effect on risk assets shall not be recognized).
(4) Of the positions subject to calculation of foreign exchange risk when calculating the market risk equivalent of a
final designated parent company that calculates its consolidated capital adequacy ratio based on Article 2 of theCapital Adequacy Notice on Final Designated Parent Company, for the time being, any positions pertaining to longterm contributions, etc. denominated in foreign currencies that are indicated at acquisition value in the financial
statements shall be permitted to be excluded from foreign exchange risk.
(5) Regarding capital treatment of securitisations of nonperforming loans, whether any act falling under regulatory
arbitrage is being conducted.
In particular, even in cases satisfying all of the requirements set forth in Article 245-4(2) of the Capital Adequacy
Notice on Final Designated Parent Company, if the purpose is to reduce risk assets in relation to loans other thannonperforming loans, the risk weight specified in the same paragraph may not be applied.
IV-5-3-2-3 Internal Control, etc. for Assets and Transactions Related to Trading Operations
In the case of a final designated parent company that calculates its consolidated capital adequacy ratio based on
Article 2 of the Capital Adequacy Notice on Final Designated Parent Company, transactions subject to market risk
regulations are primarily comprised of assets and liabilities relating to trading operations prescribed in Article 11 of
the Capital Adequacy Notice on Final Designated Parent Company. In addition to clarifying the transactions subject
to market risk regulations and eliminating any inappropriate transactions (Note), subject transactions need to beproperly managed by the final designated parent company. Based on this perspective, supervisors shall check thefollowing points.
(1) Whether the transactions subject to market risk regulations and the methods for managing them have been clearly
documented (including the method for properly valuing the transactions according to their specific characteristics,
based on the expected holding period and the probability that the holding period will exceed that expected).
(2) Whether periodic internal audits (internal audits and accounting audits on the appropriateness of the valuation
method and the operation thereof) are used to confirm that the transactions are properly managed according to thesaid documents.
(Note) The Application of Basel II to Trading Activities and the Treatment of Double Default Effects (BaselCommittee on Banking Supervision, 2005) illustrates unhedged hedge fund holdings and privately placed
stock as inappropriate (paragraph 271).

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IV-5-3-3 Accuracy of Calculation of the Consolidated Leverage Ratio of Final Designated Parent Company
IV-5-3-3-1 SignificanceRegarding the consolidated leverage ratio, as this is a fundamental index to display the soundness of financial
affairs of an ultimate designated parent company, calculations must be done accurately.
The accuracy of the consolidated leverage ratio calculation must adequately take into account the Consolidated
Leverage Ratio Notice and the purpose of the Basel Capital Accord.

IV-5-3-3-2 Consistency of Calculation Methods for the Consolidated Leverage Ratio
In a case where, for example, transitional measures are adopted in the Consolidated Leverage Ratio Notice andthe final designated parent company is allowed some discretion related to the calculation method for the
consolidated leverage ratio, a consistent calculation method must be adopted, excluding cases where a change ismade based on a rational reason.

IV-5-3-4 Disclosing the Adequacy of Equity Capital and Other Items(1) The aim of disclosing the adequacy of equity capital and other items based on the third pillar of International
Convergence of Capital Measurement and Capital Standards and Leverage Ratio (market discipline) is tocomplement the first pillar (minimum capital and minimum leverage ratio requirements) and the second pillar(supervisory review process), and to maintain the soundness of the management of financial institutions throughassigning rules for external market evaluations. Therefore, in cases where a final designated parent company that
calculates its consolidated capital adequacy ratio based on Article 2 of the Capital Adequacy Notice on Final
Designated Parent Company, and calculates its consolidated leverage ratio based on Article 2 of the Consolidated
Leverage Ratio Notice, makes disclosure pursuant to the Notice of Disclosure, important matters need to beappropriately disclosed in accordance with the purpose of the Notice of Disclosure, namely, the disciplining of
external valuation by markets, and in light of the actual business conditions and risk profile.
(2) On the other hand, with regard to matters that are not necessarily important considering the actual businessconditions and risk profile of the final designated parent company, it is undeniable that detailed disclosure of suchinformation may instead impede the purpose of the Notice of Disclosure, namely, the disciplining of externalvaluation by markets. To this end, in cases where there are items that are not important in light of the actual businessconditions and risk profile, it shall be acceptable to disclose the items that were not disclosed and the reasons why
they were determined to not be important.
(3) With regard to information of proprietary value and information relating to confidentiality, in cases wheredisclosing such information may cause significant damage to the position of the final designated parent company, it
shall be acceptable to disclose the items that were not disclosed and the reasons why, together with more general
information about the relevant items.
271

(4) When checking the status of disclosure, there should not be a focus on the completeness of the items stipulated
in the Notice of Disclosure; rather it needs to be checked whether the items that are important considering the actual
business conditions and risk profile of the final designated parent company have been properly disclosed, andwhether their content is useful for the disciplining of external valuation by markets.
(Note) For details of the supervisory viewpoints, reference shall be made, as necessary III-3-2-4-4 and III-3-25(2) of the Comprehensive Guidelines for Supervision of Major Banks, etc.
IV-5-3-5 Early Corrective Action
IV-5-3-5-1 SignificanceIn order to secure financial soundness, it is extremely important that final designated parent companies
proactively work to improve their equity capital and retain a sufficient financial basis that is suited to the risks.
Supervisors need to encourage the early correction of the their management by issuing necessary correction orders
in a prompt and appropriate manner based on the objective standard of the consolidated capital adequacy ratio andthe consolidated leverage ratio as a role of complementing the efforts of the final designated parent company.
IV-5-3-5-2 Supervisory Method and Actions
Early corrective action, which stipulates the specific measures in the Notice Stipulating the Category Pertaining
to the Soundness of Management of a Final Designated Parent Company and its Subsidiary Corporations, etc., andthe Specification of Orders According to that Category (hereinafter referred to as the “Notice of Category”), shallbe managed as follows.
(1) Consolidated Capital Adequacy Ratio or the Consolidated Leverage Ratio Forming Basis for the Issuance of anOrder
The consolidated capital adequacy ratio or consolidated leverage ratio related to the categories set forth in thetables in Article 1(1)(i) and (iii) as well as Article 4 of the Notice of Category (hereinafter referred to as the “Early
Corrective Action Category”) shall be based on the following consolidated capital adequacy ratios or consolidated
leverage ratios:(i)

The consolidated capital adequacy ratio or consolidated leverage ratio reported in the consolidated

financial results status report (however, after submitting the Business Report: the consolidated capital adequacy
ratio or consolidated leverage ratio that was reported; and after filing a document stating the soundness ofmanagement pursuant to Article 57-17(2) of the FIEA: the consolidated capital adequacy ratio or consolidated
leverage ratio that was reported)(ii)

At times other than when (i) above has been reported: the consolidated capital adequacy ratio or

consolidated leverage ratio reported by a final designated parent company following discussion between the
final designated parent company and an audit firm based on the inspection results of the authorities.
(Note) The consolidated capital adequacy ratio of a final designated parent company consists of the following
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three ratios: the consolidated Common Equity Tier 1 ratio, the consolidated Tier 1 Capital ratio, and theconsolidated Total regulatory capital ratio, as well as the capital buffer ratio. Of this, the consolidated
capital adequacy ratio, which is the standard for determining issuance of early corrective action order,
is the consolidated Common Equity Tier 1 ratio, the consolidated Tier 1 Capital ratio, and theconsolidated Total regulatory capital ratio.
(2) Orders Based on the Early Corrective Action Category(i) Difference between a Category 1/Leverage Category 1 Order, a Category 2/Leverage Category 2 Orderand a Category 3/Leverage Category 3 OrderThe purpose of Category 1 or Leverage Category 1 order, which is “for submission and implementation ofa plan deemed reasonable for ensuring the soundness of management (which, in principle, includes measurespertaining to capital enhancement),” is ensuring to steadily achieve a level above the range of the consolidated
capital adequacy ratio related to Category 1 or the consolidated leverage ratio related to Leverage Category 1
as a standard for ensuring the soundness of management. Therefore, supervisors shall emphasize that, ingeneral, the plan ensures the soundness of management, and they shall basically respect the autonomy of the
final designated parent company when implementing that plan.
The purpose of Category 2 or Leverage Category 2 order “pertaining to any of the following measures
which contribute to improving the capital adequacy of a final designated parent company and its subsidiarycorporations, etc.” is to promptly improve a consolidated capital adequacy ratio or a consolidated leverage
ratio which falls considerably below the level ensuring soundness of management. Therefore, although theindividual measures shall be based on the opinions of the final designated parent company because of the needto take into account the actual management conditions of the final designated parent company, the details of
the measures shall be prescribed at the discretion of the authorities. In addition, when implementing themeasures, the final designated parent company will basically need to fulfill the orders for each measure.
Category 3 or Leverage Category 3 order “to select between a measure to improve the equity capital of a
final designated parent company and its subsidiary corporations, etc., a measure to merge, and a measure tocease being the parent company (meaning a parent company specified in Article 57-2(8) of the FIEA;
hereinafter the same shall apply in this Article and the following Article) of a relevant Special Financial
Instruments Business Operator within a specified period of not more than three months, and to implement themeasure pertaining to the said selection” forces a final designated parent company, whose capital adequacy is
extremely low, to either immediately improve this situation or to abandon continuing business as a final
designated parent company.
(ii)

Period leading to improvement
The time needed to improve the consolidated capital adequacy ratio or the consolidated leverage ratio

must be sufficient for the plans formulated by a final designated parent company for improving management
to urgently maintain and improve the confidence of markets, etc. in the said final designated parent company.
Therefore, the plans need to be plans for recovering to a level above the range of the consolidated capital
adequacy ratio related to Category 1 or the consolidated leverage ratio related to Leverage Category 1 within273

a period of at least one year (in principle, by the end of the following accounting period).
In cases where a final designated parent company has, based on Article 2(1) of the Notice of Category,submitted a plan deemed reasonable for ensuring improvement of the consolidated capital adequacy ratio or
the consolidated leverage ratio beyond the scope of the consolidated capital adequacy ratio or the consolidated
leverage ratio pertaining to the Early Corrective Action Category applicable to the said final designated parent
company, if supervisors issue the said final designated parent company with an order listed in the category of
the same table pertaining to the consolidated capital adequacy ratio or the consolidated leverage ratio which
exceeds the scope of the consolidated capital adequacy ratio or the consolidated leverage ratio pertaining to
the category in the table which is applicable to the said final designated parent company, period necessary to
improve the abovementioned consolidated capital adequacy ratio or the consolidated leverage ratio shall notinclude the period for ensuring improvement of the consolidated capital adequacy ratio or the consolidated
leverage ratio set forth in (3) below beyond the scope of the consolidated capital adequacy ratio or the
consolidated leverage ratio pertaining to the category in the table which is applicable to the said final
designated parent company.
(3) Standards for Judging the Reasonableness Prescribed in Article 2(1) of the Notice of Category
The standards for judging the reasonableness of a “plan deemed reasonable for ensuring improvement beyond
the scope of the category” set forth in Article 2(1) of the Notice of Category shall be as follows:
・ A plan by which, in principle, the consolidated capital adequacy ratio or the consolidated leverage ratio
steadily improves beyond the scope of the consolidated capital adequacy ratio or the consolidated leverage
ratio pertaining to the Early Corrective Action Category which is applicable to a final designated parent
company, within a period of three months, including specific capital enhancement plans aimed at sound andappropriate business operations of the said final designated parent company and by which the confidence ofmarkets, etc. in the said final designated parent company can be secured.
(Note) In the case of capital increases, etc., the intent of the financiers, etc. needs to be clear.
(4) Consolidated Capital Adequacy Ratio or the Consolidated Leverage Ratio Providing Basis for Order Category
In applying Article 2(1) of the Notice of Category, the “order specified in the category (excluding the NonApplicable Category or Non-Applicable Leverage Category) of the same table not higher than the consolidated
capital adequacy ratio or the consolidated leverage ratio that is expected following implementation of the plan” shall,in principle, be regarded as the order listed in the category (excluding the Non-Applicable Category or NonApplicable Leverage Category) pertaining to the level of the consolidated capital adequacy ratio or the consolidated
leverage ratio expected with certainty after three months.
(5) Reports on the Progress of Plans, etc.
Supervisors shall require reports to be made on the progress of a plan every period (including interim periods)
until implementation of the plan is complete, and shall, in principle, not issue new orders during the term of the planunless if subsequent progress diverges considerably from plan; provided, however, that in the case of a final274

designated parent company issued with Category 3 or Leverage Category 3 order, if its consolidated capital
adequacy ratio or consolidated leverage ratio as a basis of the order subsequently falls within the range of theconsolidated capital adequacy ratio or the consolidated leverage ratio related to Category 1/Leverage Category 1 orCategory 2/Leverage Category 2, supervisors may issue the order listed in the category pertaining to theconsolidated capital adequacy ratio or the consolidated leverage ratio at that point in time, and in the case of a final
designated parent company issued with Category 2 or Leverage Category 2 order, if its consolidated capital
adequacy ratio as a basis of the order subsequently falls within the range of the consolidated capital adequacy ratio
for Category 1, or if its consolidated leverage ratio as a basis of the leverage subsequently falls within the range ofthe consolidated leverage ratio for Leverage Category 1, supervisors may issue Category 1 or Leverage Category 1
order at that point in time.
Furthermore, in cases where a final designated parent company has, based on Article 2(1) of the Notice ofCategory, submitted a plan deemed reasonable for ensuring improvement of its consolidated capital adequacy ratioor consolidated leverage ratio beyond the scope of the consolidated capital adequacy ratio or the consolidated
leverage ratio pertaining to the Early Corrective Action Category which is applicable to the said final designatedparent company, and where supervisors have issued the said final designated parent company with an order listed
in the category of the same table pertaining to the consolidated capital adequacy ratio or the consolidated leverage
ratio which exceeds the scope of the consolidated capital adequacy ratio or the consolidated leverage ratio pertaining
to the category in the table which is applicable to the said final designated parent company, in principle, if,
immediately after the time needed for procedures for a capital increase, etc. has elapsed, the consolidated capital
adequacy ratio or the consolidated leverage ratio of the said final designated parent company has not reached a level
at least as high as the consolidated capital adequacy ratio or the consolidated leverage ratio pertaining to the category
in the table in which the order received by the said final designated parent company is listed, supervisors shall issue
the order listed in the category of the table pertaining to the consolidated capital adequacy ratio or the consolidated
leverage ratio at that point in time.
(6) Standards for Evaluating the Assets Listed in Article 2(2) of the Notice of Category(i)“Securities” set forth in item (i)The term “published closing price” set forth in Article 2(2)(i) of the Notice of Category shall be theexchange price, standard quotation or standard price, etc. The expression “value equivalent thereto calculatedusing a reasonable method” shall be either the appraised value acquired from a Financial Instruments Business
Operator, etc. as market price information on the day of the calculation, or a value deemed reasonable basedon the final designated parent company’s own method of evaluation.
In performing the calculation, the following points shall be taken into consideration:
A. For stocks or company bonds, for which there are serious concerns about their redemption and so forth
due to such circumstances as the issuing company falling into insolvency, calculations shall be madeusing an evaluation based on actual conditions.
B. For securities denominated in foreign currencies, calculations shall be made using the mean TT rate on
the date of the calculation to convert them into yen.
275

(ii)

“Tangible fixed assets” set forth in item (ii)
A. Land
The appraised value (appraised within the past one year) or the appraised value deemed appropriate
which has been calculated with reference given to the most recent roadside land price, posted price,benchmark land value, objective examples of sales and so forth.
B. Buildings and Movables
In principle, the book value.

(iii)“Assets other than the assets listed in the preceding two items” in item (iii)
Article 2(2)(i) of the Notice of Category and the above item (i) shall be applied mutatis mutandis to theevaluation of securities (including foreign securities) that are invested as trust property for a money trust(limited to those operated independently with a principal purpose of securities investment). Money trusts
incorporating derivative transactions shall be calculated by including any unsettled valuation gains and losses
pertaining to the said transactions.
(Note) In the case of a final designated parent company which has adopted International Financial ReportingStandards (IFRS) or United States Generally Accepted Accounting Principles (US-GAAP), it shallevaluate assets according to those accounting standards.
(7) Others(i)When issuing an order pertaining to the provisions of Article 1(1)(i) and (iii) and Article 2 of the Noticeof Category, supervisors shall abide by the Administrative Procedure Act and other relevant laws andregulations, and shall keep in mind that it is necessary to take appropriate procedures, such as granting
opportunities for making explanations based on Article 13(1)(ii) of the same act.
(ii)

Supervisors shall, in principle, require that a final designated parent company below the range of theconsolidated capital adequacy ratio related to Category 1 or the consolidated leverage ratio related to Leverage
Category 1 calculate the value of its assets listed in each item of Article 2(2) of the Notice of Category by themethod specified in the relevant item and submit a revised balance sheet reflecting this (forms may be at its
discretion).
(iii)

Early corrective action is exercised on the premise that the consolidated capital adequacy ratio or the

consolidated leverage ratio properly represents the financial conditions of the final designated parent company.
Therefore, supervisors shall have final designated parent companies pay sufficient attention to prevent suchacts as the deliberate manipulation of a consolidated capital adequacy ratio or a consolidated leverage ratio forthe purpose of avoiding any early corrective action being exercised.
(8) Orders Based on the Categories Set Forth in the Table in Article 4 of the Notice of Category
With regard to the implementation of early corrective action based on Article 4 of the Notice of Category,reference shall be made, as necessary, to IV-2-2.

276

IV-5-3-6 Capital Distribution Constraint Measure
IV-5-3-6-1 SignificanceIn order to alleviate procyclicality or systemic risks in the financial system, authorities, for their part, need toencourage the maintenance of the credit functions of the final designated parent company by issuing orders forcapital distribution constraint measures according to the situation in a prompt and appropriate manner based on theobjective standard of the consolidated capital buffer ratio(for G-SIBs designated by the Capital Adequacy Noticeon Final Designated Parent Company, including the leverage buffer ratio).

IV-5-3-6-2 Supervisory Method and Actions
The capital distribution constraint measure scheme, which stipulates the specific measures in the Notice ofCategory (defined in IV-5-3-5-2) shall be managed as follows.
(1) Consolidated Capital Buffer Ratio or Consolidated Leverage Buffer Ratio Forming Basis for the Issuance of anOrder
The consolidated capital buffer ratio or the consolidated leverage buffer ratio related to the categories set forthin the tables in Article 1(1)(ii) and (iv) of the Notice of Category (hereinafter referred to as the “Capital Distribution
Constraint Measure Categories”) shall be based on the following consolidated capital buffer ratios or consolidated
leverage buffer ratios::(i)

The consolidated capital buffer ratio or the consolidated leverage buffer ratio reported in the consolidated

financial results status report (however, after submitting the Business Report: the consolidated capital buffer
ratio or the consolidated leverage buffer ratio that was reported; and after filing a document stating thesoundness of management pursuant to Article 57-17(2) of the Act: the consolidated capital buffer ratio or the
consolidated leverage buffer ratio that was reported)(ii)

At times other than when (i) above has been reported: the consolidated capital buffer ratio or the

consolidated leverage buffer ratio reported by a final designated parent company following discussion between
the final designated parent company and an audit firm based on the inspection results of the authorities.
(2) Orders in Accordance with the Capital Distribution Constraint Measure Categories(i)Action related to Consolidated Capital Buffer Category 1 Order to Consolidated Capital Buffer Category

4 Order or Consolidated Leverage Buffer Category 1 Order to Consolidated Leverage Buffer Category 4 Order
Supervisors shall emphasize that the purpose of the plan in the “order for submission and implementationof an improvement plan deemed reasonable for recovering the consolidated capital buffer ratio including
contents to constrain the amount of capital distributions” stated in the table of Article 1(1)(ii) of the Notice ofCategory or the plan in the "order for submission and implementation of an improvement plan deemed277

reasonable for recovering the consolidated leverage buffer ratio including contents to constrain the amount of
capital distributions" stated in the table of Article 1(1)(iv) of the Notice of Category is to steadily recover the
consolidated capital buffer ratio or the consolidated leverage buffer ratio. Furthermore, particulars related tothe capital distribution constraint shall ensure that the amount of capital distributions is restricted within the
maximum amount of allowable amount of capital distributions according to the order stated in each category,
and upon implementation the plan, supervisors shall basically respect the judgment of the final designatedparent company on which of the events subject to restriction shall be subject to the restriction.
(ii)

Allowable Amount of Capital Distributions“Cases where there are special reasons,” which are stipulated in Article 1(5) of the Notice of Category,are, for example, cases where the final designated parent company carries out new funding to raise the Common
Equity Tier 1 ratio during the fiscal year in which a capital distribution constraint plan was implemented andmakes payments that exceeds the allowable amount of capital distributions up to the amount that was funded.
(iii)

Calculation Method of Adjusted Profit After Tax
In calculating the “amount equivalent to the amount of tax required to be paid when said equivalent amount

was not recorded as expense” stipulated in Article 1(6) of the Notice of Category, calculation may be performed,
as a simplified method of calculating that amount, by multiplying the amount of capital distributions that was
actually recorded as expense in accounting in said previous fiscal year (excluding, however, the amount thatwas not included as expenses for tax purpose) by the effective statutory tax rate of the relevant previous fiscal
year-end in tax payment units and adding the actual tax amount of the previous fiscal year.
(iv)

Significance of Bonus“Bonus” that is specified in Article 1(5)(v) of the Notice of Category is salaries, etc. paid separately from

regular salaries, and refers to payments provided under the name of bonus, summer allowance, year-end
allowance, term-end allowance, etc., or other similar payments. If it is unclear whether salaries, etc. have thenature of bonus, items such as the following shall correspond to bonus:
A. Payments based on net income
B. Payments with no predetermination of amount or standard
C. Payments with no predetermination of timing. However, excludes cases where the employment contract
itself is temporary.
D. Salaries stipulated in Article 34(1)(ii) of the Corporation Tax Law (excluding payments made pursuant toprovisions to continuously pay a fixed amount at a designated timing each year to those who do not receive
any other regular salary.)
E. Profit-linked salaries stipulated in Article 34(1)(iii) of the Corporation Tax Law
In addition, “bonuses and other property benefits of the like” are property benefits with the above nature,
regardless of name, and include, for example, temporary payments that are made in addition to salaries orretirement benefits, etc.
(v)

Significance of Subsidiary Corporations, etc.
Supervisors shall basically respect the judgment of the final designated parent company concerning thepresence or absence of substantiality related to the judgment of eligibility for “subsidiary corporation, etc.”278

stipulated in the table stated in Article 1(1)(i) of the Notice of Category. However, if a designated parent
company group (refers to Designated Parent Company Groups of this Guideline; the same shall apply
hereinafter in this Item and the following Item) has been formed, care shall be taken whether that subsidiarycorporation, etc. has important significance, in consideration of the impact on its financial condition or
management status. For example, the use of specific standards is possible: “Said subsidiary corporation, etc.
shall only fall under the category of subsidiary corporation, etc. if its ratio of total assets to the consolidated
total assets of the final designated parent company exceeds 2%.” However, it should be kept in mind that, evenif said subsidiary corporation, etc. is small in size, if it is important operationally, whether it is included in thesubsidiary corporations, etc.
(vi)

Significance of Operationally Important Officers and Employees“Operationally important” officers and employees specified in Article 1(5)(v) of the Notice of Category

are selected from among recipients of a high level of remuneration, etc. from the final designated parent
company or subsidiary corporation, etc., who are persons having a material effect on the business operations
or assets of a final designated parent company and its major subsidiary corporations, etc. Standards describedin IV-5-6-2(2)(i)B.b. and c. of this Guideline shall also be referred to upon selection.
By decision of the final designated parent company, “officers” may exclude outside directors and outsidecompany auditors of that final designated parent company. However, such outside director or outside company
auditor shall be included in “officer” if he/she is a recipient of a high level of remuneration, etc. from the final
designated parent company and falls under the category of a person having a material effect on the business
operations or assets of a final designated parent company and its major subsidiary corporations, etc.
(3) Submission of Plan and Reports on the Progress Thereof
Supervisors shall require a plan related to the order in accordance with the Capital Distribution Constraint
Measure Categories to be submitted every period (including interim periods) and shall require reports to be madeon the progress of the plan as needed.
(4) Others(i)When issuing an order pertaining to the provisions of Article 1(1)(ii) and (iv) and Article 3 of the Noticeof Category, supervisors shall abide by the Administrative Procedure Act and other relevant laws andregulations, and shall keep in mind that it is necessary to take appropriate procedures, such as granting
opportunities for making explanations based on Article 13(1)(ii) of the same Act.
(ii)

If the consolidated capital adequacy ratio or the consolidated leverage ratio (including the consolidated

leverage buffer ratio) of the final designated parent company falls under any category of the order in accordancewith the Early Corrective Action Category and the order in accordance with the Capital Distribution Constraint
Measure Categories, supervisors shall issue an order including the order in accordance with either category.
IV-5-3-7 Early Warning System279

(1) Basic Concept
As a means of ensuring the soundness of the management of final designated parent companies, “early corrective
action” based on the consolidated capital adequacy ratio and consolidated leverage ratio has been establishedpursuant to Article 57-21(3) of the FIEA. Even in the case of a final designated parent company that is not subject
to this measure, continuous efforts to improve management are needed so as to maintain and further enhance its
soundness. To this end, the authorities shall implement an early, administrative preventive measure (early warning
system).
(2) Hearings(i)Supervisors shall constantly monitor and analyze the profitability, profit management systems and othercircumstances by means of hearings on financial results.
(ii)

At the hearings with top managers, which are held as necessary, supervisors shall confirm with the

managers of the final designated parent company about their management strategies aimed at improving
profitability, their policies for efforts aimed at business restructuring and so forth.
(iii)

In cases where a medium-term management plan or the like has been formulated for the final designatedparent company, supervisors shall conduct hearings on an as-necessary basis, and examine the details of its
management strategies, efforts aimed at business restructuring and so forth.
(3) Early Warning System
With respect to a final designated parent company found to be in need of improvements in profitability on thebasis of a fundamental profit index, the supervisor shall encourage steady improvements by implementing measures(i) to (iii) below and, when necessary, requiring the submission of reports based on Article 57-23 of the Act. In
addition, in cases where action is deemed to be necessary in order ensure the implementation of the improvement
plan, supervisors shall issue a business improvement order based on Article 57-19 of the Act.
(i)

Analysis by authority
Supervisors shall comprehensively analyze the background and factors that led the related final designatedparent company to its current risk-taking and capital equity, including not only profitability but businessenvironment/model, and establish a hypothesis regarding issues and causes facing the final designated parent
company.
(ii)

Defining and sharing issues through dialogue
Based on the hypothesis, supervisors shall hold in-depth dialogues with the final designated parent

company incorporating the final designated parent company’s self-assessment sufficiently, and define/shareissues and causes thereof.
(iii) Supervision and dialogue towards improvement
Based on the issues shared with the final designated parent company, supervisors shall encourage the final
designated parent company to develop necessary measures for improvement, including corrective actions to
the identified causes. Supervisors shall follow up on the status of the measures as necessary.

280

IV-5-4 Soundness Regarding Liquidity
IV-5-4-1 SignificanceIn order to secure financial soundness, it is necessary to not only secure adequate equity capital but also
prepare for liquidity risks. For short-term preparedness for liquidity risks, it is important to raise the company's
financial strength, which would enable it to continue operations at times when funding becomes difficult, by holding
sufficient liquid assets in line with the liquidity risk levels. The FSA therefore needs to grasp the liquidity risks ofdesignated parent company groups and direct them to hold sufficient liquid assets as necessary.
From such perspective, final designated parent companies are required to use the objective standards, namely
the Consolidated Liquidity Coverage Ratio (as defined in Article 2 of the Standards for Disclosing Status ofSoundness Regarding Liquidity Aspects of the Soundness of Business Operation of Final Designated Parent
Companies and Their Subsidiary Corporations, etc., prescribed as the standards by which final designated parent
companies judge the soundness of business operations of themselves and their subsidiaries, etc. in accordance withthe provisions of Article 57-17(1) of the FIEA (hereinafter the "Consolidated Liquidity Ratio Notice"; the same shallapply hereinafter); the same shall apply hereinafter) and the Consolidated Net Stable Funding Ratio (as defined in
Article 73 of the Consolidated Liquidity Ratio Notice; the same shall apply hereinafter), and hold sufficient liquid
assets.
IV-5-4-2 Accuracy of Calculation of the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable
Funding Ratio
IV-5-4-2-1 Significance
The Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio are fundamental
indicators to show the soundness of liquidity held by final designated parent companies and, as such, must be
calculated accurately.
Regarding the accuracy of the calculations of the Consolidated Liquidity Coverage Ratio and the Consolidated
Net Stable Funding Ratio, the designated parent company carefully considers the purport of the Consolidated
Liquidity Ratio Notice and the Basel Capital Accord.
IV-5-4-2-2 Points of Attention
The designated parent company carefully examines the accuracy of the calculations of the Consolidated
Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio in accordance with the Consolidated
Liquidity Ratio Notice.
(1) Points of Attention Regarding Cases in which a Final Designated Parent Company Formulates SpecificCalculation Methods and Methods of Identifying Assets and Liabilities
In cases of applying the special clause regarding the qualifying operational deposits prescribed in Article 28 of
the Consolidated Liquidity Ratio Notice, or the special clause regarding mutually related assets and liabilities281

prescribed in Article 99 of the same notice that pertain to the additional collateral amount required in times ofmarket-value changes based on the scenario method prescribed in Article 37 of the same notice and measurementof the Consolidated Net Stable Funding Ratio, out of the outflow items in the Consolidated Liquidity Coverage
Ratio, a final designated parent company is required to formulate specific calculation methods or identify subject
assets and liabilities within the scope of the prescribed requirements. In such cases, supervisors shall make sure thatthe calculation methods or the methods of identifying assets and liabilities have been formulated according to theConsolidated Liquidity Ratio Notice by checking the following points beforehand.
(i) In cases in which a final designated parent company plans to use the special article regarding the qualifying
operational deposits, whether the method to calculate the amount of the qualifying operational deposits isformulated in ways that meet the requirements, qualitative standards and quantitative standards for
operational deposits.
(ii) In cases where a final designated parent company plans to use the additional collateral amount required intimes of market-value changes based on the scenario method, whether both the formulation of the stressscenario and the method to estimate the amount meets the selection standards for stress scenarios, quantitative
standards and qualitative standards.
(iii) The designated parent company meets all the requirements prescribed in Article 99 of the Consolidated
Liquidity Ratio Notice if the company plans to use the special clause regarding mutually related assets andliabilities.
(2) The scope of calculations with respect to the Consolidated Liquidity Coverage Ratio and the Consolidated Net
Stable Funding Ratio
The final designated parent company appropriately considers the followings points with respect to thecalculations of the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, andinternal controls in the scope:(i) The scope of "entities that are considered to be of low importance from the viewpoint of managing risks
related to liquidity" in the definition of "Financial Institutions, etc."
The "Financial Institutions, etc." prescribed in Article 1(xix) of the Consolidated Liquidity Ratio Noticeexclude "entities that are considered to be of low importance from the viewpoint of managing risks related toliquidity." In relation to this, supervisors shall check whether the company is engaging in inappropriate
practices, such as arbitrarily excluding an entity deemed to be of importance from the definition of "Financial
Institutions, etc." with the purpose of raising the Consolidated Liquidity Coverage Ratio by reducing cash
outflows or of raising the Consolidated Net Stable Funding Ratio by increasing the amount of available stable
funding.
(ii) Handling of consolidated subsidiary companies, etc. that are small in scale
For small-scale consolidated subsidiaries, etc. having only a significantly small impact on the levels of
the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, simplified
calculations are allowed as long as they are conservative, such as assuming the eligible high quality liquidity
asset or the amount of available stable funding to be zero. In such cases, supervisors shall check whether the282

company is engaging in inappropriate practices, such as applying the relevant calculation to a financial
institution that represents a significantly large percentage of assets (debts) relative to the total consolidated
assets (total consolidated debts), or applying the relevant calculation to an entity for which a large amount ofcash outflows from off-balance sheet items is expected, by ignoring that probability, and categorizing it as asmall-scale consolidated subsidiary, etc.
(3) The scope of Past Liquidity Stress Periods
In judging the "Past Liquidity Stress Periods" prescribed in Article 1(xxxii) of the Consolidated Liquidity Ratio
Notice, final designated parent companies are urged to look into data as far back as the late 1990s, as long as it ispossible, while they are basically required to refer to data as old as 2007 (2008 in the case of companies in Japan).
In this regard, supervisors shall check whether the company uses the data that are available and cover the periods
that meet the requirements to be judged as past liquidity stress periods.
(4) Confirmation of Rate of Decline in Prices, etc.
In judging Level 2A and 2B assets under the Consolidated Liquidity Ratio Notice, companies are required toconfirm the extent of fall in prices or haircut rates of securities during past liquidity stress periods. Supervisors shallcheck if the company properly confirms credit ratings and maturity, such as making judgments through sufficientsegmentation.
(5) Appropriateness of the Classification of Cash Inflow/Outflow Items and the Outflow Rate
The Consolidated Liquidity Ratio Notice has a provision that requires a company to set a classification of cash
inflow/outflow items as well as the outflow rate (amount) or the cash inflow amount, and a provision concerning
the amount of available stable funding and the amount of required stable funding with regard to the Consolidated
Net Stable Funding Ratio. A final designated parent company is required to properly set them and verify them.
Attention should be paid to the points listed below.
(i) Whether a final designated parent company considers the need to set an additional classification for "Less
Stable Deposits" under Article 20 of the Consolidated Liquidity Ratio Notice as part of its internal controls
and, has introduced an appropriate classification if needed. In addition, whether a final designated parent
company has set the outflow rate as consistent with the outflow rate during past liquidity stress periods.
Further, whether a final designated parent company makes sure that the possibility is sufficiently low thatthe outflow rate will exceed 10 percent even based on the composition of the current less-stable deposits,instead of merely applying the past outflow rate.
(ii) Whether a final designated parent company makes an appropriate classification in consideration ofinternal controls for "Other Contingency Cash Outflow" prescribed in Article 52 of the Consolidated
Liquidity Ratio Notice and for contingent liabilities prescribed in Article 98(iii) of the same notice. Also,
whether the appropriateness of this classification is examined periodically.
(iii) Whether the "Amount of Other Contracted Cash Outflow" prescribed in Article 59 of the Consolidated
Liquidity Ratio Notice and the "Amount of Other Contracted Cash Inflow" prescribed in Article 72 of the283

same notice are set appropriately with consideration of the importance of managing liquidity risks. Also,
whether the appropriateness of these amounts is examined periodically.
(6) Validity of the Method of Setting Remaining Term to Maturity
In cases where a price evaluation model is used for the calculation of the remaining term to maturity whencalculating the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, whether afinal designated parent company understands that the model is formulated based on a certain premise and reviews
the premise and the logic of the model periodically and examines the appropriateness of the probability of theestimated remaining term.
(7) Appropriateness of the Method of Allocating Securities
In cases where a source for procuring securities is unknown (such as where a source for procuring securities
pledged as collateral is unknown in a short position transaction or a transaction under a repurchase agreement of
securities) and an allocation method arbitrarily specified by a final designated parent company is used whencalculating the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, whether the
allocation method is clearly indicated in the form of a document and is implemented appropriately in accordancewith that document.
(8) Consistency of Calculation Methods for the Consolidated Liquidity Coverage Ratio and the Consolidated Net
Stable Funding Ratio
Whether a final designated parent company uses consistent and conservative calculation methods in cases where
the final designated parent company is allowed a certain level of discretion regarding calculation methods for theConsolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, such as the handling ofnetting (referring to the offsetting of some amounts in the calculation process of cash outflow and inflow amounts)
under Article 34(2) of the Consolidated Liquidity Ratio Notice, and the handling of the special clause regarding thequalifying operational deposits prescribed in Article 28 of the same notice, the scenario method prescribed in Article
37 of the same notice, and the special clause regarding mutually related assets and liabilities prescribed in Article
99 of the same notice when adopting any of these clauses or method.
IV-5-4-2-3 Supervisory Method and Actions(1) Off-site Monitoring
Supervisors shall require final designated parent companies to submit detailed reports of the Consolidated
Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio on a regular basis in accordance with
Article 57-23 of the FIEA, and hold hearings as necessary in cases where any problems are found with regard to
the accuracy of the calculations.
For final designated parent companies that adopt the special clause regarding the qualifying operational depositsprescribed in Article 28 of the Consolidated Liquidity Ratio Notice, the scenario method prescribed in Article 37284

of the same notice, and the special clause regarding mutually related assets and liabilities prescribed in Article 99of the same notice, supervisors shall require them to submit reports periodically and review whether the calculation
method satisfies the requirements stipulated in the same notice and whether the calculation method has not beenchanged from the previous reporting period.
(2) In cases where a problem is found in the accuracy of the calculations of the Consolidated Liquidity Coverage
Ratio and the consolidated net stable funding ratio through the inspection or off-site monitoring as described in (1),supervisors shall instruct the company to submit a report based on Article 57-23 of the FIEA, and in cases where aserious problem is found, supervisors shall issue an order for business improvement in accordance with Article 5719 of the FIEA.
IV-5-4-3 Supervisory Measures Regarding the Regulation on Consolidated Liquidity Ratio
In order to complement final designated parent companies' efforts in managing liquidity risks, supervisors shalltake necessary measures in a timely and appropriate manner by using the objective standards, namely theConsolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, and request final designatedparent companies to make efforts to improve their business management.
IV-5-4-3-1 Supervisory Method(1) Periodical Monitoring (Monthly or Quarterly)Supervisors shall request final designated parent companies to periodically submit reports concerning theConsolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio and shall constantly
ascertain the status of their liquidity risks.
(i) Consolidated liquidity coverage ratio (monthly)
Supervisors shall request final designated parent companies to submit a report concerning the Consolidated
Liquidity Coverage Ratio as of the reporting date, which can be either the final day or final business day ofeach month, in a specified format by the 10th business day of the next month. On that occasion, supervisors
shall review the level of and trends of changes in the Consolidated Liquidity Coverage Ratio, and analyze thefactors and background of such changes by ascertaining the composition of the numerator and denominator of
the Consolidated Liquidity Coverage Ratio.
By analyzing other off-site monitoring data and financial/economic indicators, the supervisors shall also
check whether there are any signals that indicate the liquidity stress in the financial system as a whole.
(ii) Consolidated net stable funding ratio (quarterly)Supervisors shall request final designated parent companies to submit a report concerning the Consolidated
Net Stable Funding Ratio as of the reporting date, which is the final day of each quarter. On that occasion,
supervisors shall review the level of and trends of changes in the Consolidated Net Stable Funding Ratio, andanalyze the factors and background of such changes by ascertaining the composition of the numerator anddenominator of the Consolidated Net Stable Funding Ratio.
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(Note) Although the reporting date of the Consolidated Liquidity Coverage Ratio is basically the last day of themonth, it is permitted to use the final business day of the month based on the accounting rules adopted byindividual final designated parent companies. Final designated parent companies shall constantly adopt thesame reporting date except for cases where they change the reporting date due to reasonable grounds.
(2) Monitoring on an As-Necessary Basis
In addition to (1), supervisors shall instruct final designated parent companies to submit a report on the statusof the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio, if needed.
IV-5-4-3-2 Supervisory Actions(1) The Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio Serving as thePremise for Supervisory Measures
The Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio that serve as thepremise for supervisory measures under (2) shall be the one reported in the periodical or as-necessary monitoring
under IV-5-4-3-1.
(2) Supervisory Measures
If the Consolidated Liquidity Coverage Ratio or the Consolidated Net Stable Funding Ratio falls below theminimum required level, supervisors shall immediately instruct the company to submit a report on the reason andmeasures to improve the ratio, in accordance with Article 57-23 of the FIEA. If a significant improvement is deemednecessary, supervisors shall issue an order for business improvement in accordance with Article 57-19 of the FIEA.
If it is expected that the Consolidated Liquidity Coverage Ratio or the Consolidated Net Stable Funding Ratio
may fall below the minimum required level at some future date, supervisors shall hold hearings to ask the company
to explain the reason for such a situation and the likeliness of the situation to be improved. After the hearings withthe company, if there are still issues to be fixed, supervisors shall request the company to submit a report inaccordance with Article 57-23 of the FIEA, and issue an order for business improvement in accordance with Article
57-19 of the same Act, if there is the need for even more assured improvement.
However, supervisory actions should not be taken in a mechanical or uniform fashion; these actions should betaken with due regard to the details and effect of the measures taken by each final designated parent company intrying to maintain the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable Funding Ratio
respectively above the minimum-required level, and the potential impact on the financial system that may be causedby such measures.
(i) The report under Article 57-23 of the FIEA shall include the following. Supervisors shall request additional
information as necessary.
A. Factors that led the Consolidated Liquidity Coverage Ratio or the Consolidated Net Stable Funding Ratio
to fall below the minimum-required level (such as a decrease in some of the eligible high quality
liquidity assets that can be included in the calculation or in the amount of available stable funding,286

and/or an increase in the amount of some specific outflow or the amount of required stable funding,etc.), as well as their background
B. Prospect of the timeline of when the Consolidated Liquidity Coverage Ratio or the Consolidated Net
Stable Funding Ratio is expected to rise above the minimum-required level, and the expected changes
in the individual elements that comprise the numerator and denominator of the ratio.
C. Regarding the Consolidated Liquidity Coverage Ratio, the amount and types, etc. of liquid assets that are
not included in the eligible high quality liquidity assets but can be used to obtain funds in emergency
situations.
(Note) If a report is submitted in accordance with Article 57-23 of the FIEA, the following points can beanalyzed, taking into consideration information in the report.
a. Whether the fall in the Consolidated Liquidity Coverage Ratio or the Consolidated Net Stable Funding
Ratio is mainly due to temporary causes or long-term, structural causesb. Possibility that measures to maintain the minimum required levels of the Consolidated Liquidity
Coverage Ratio and the Consolidated Net Stable Funding Ratio may cause a negative impact to thefinancial system as a whole and the channels by which such impact may be transmitted(ii) As regards the order in accordance with Article 57-19 of the FIEA, supervisors shall instruct the company tosubmit an improvement plan that is deemed reasonable and to ensure such plan is implemented properly.
Such an improvement plan shall include the items listed below. In addition, supervisors shall instruct thecompany to submit reports on aspects such as A, B and C of (i) above and other reports, along with the
improvement plan.
A. Measures that have already been implemented and those planned to be implemented and the planned
timing of their implementation
B. Time required to implement the improvement plan
IV-5-4-4 Disclosure of the Soundness Status Related to Liquidity in Business Operations(1) General Points of Attention
Disclosure of the status of liquidity-related soundness in business operations aims to complement the functionsof the minimum required levels of the Consolidated Liquidity Coverage Ratio and the Consolidated Net Stable
Funding Ratio, financial institutions' own efforts to manage liquidity, as well as supervisory verification, and tomaintain the soundness of financial institutions' business operations by bringing the market to evaluate them torealize discipline, and therefore needs to be implemented appropriately in accordance with the purport of the"Notice of the Establishment of Matters to be Included in a Document Stating the Liquidity-Related Soundness ofManagement by a Final Designated Parent Company in Cases Specified by the FSA Commissioner" (hereinafterreferred to as the "Consolidated Liquidity Ratio Disclosure Notice"). In addition, final designated parent companies
must consider ideal methods of information disclosure that are useful to users, by taking into consideration degrees
of importance of the information subject to disclosure. In particular, extra caution must be taken to ensure
appropriate disclosure for information whose omission has the potential to change economic decisions by the users
287

of the relevant information.
However, with regard to information of proprietary value and information relating to confidentiality, in cases
where disclosing such information may cause significant damage to the position of a financial institution, it shallbe acceptable to keep such information while only disclosing the fact that the particular items were not disclosed
and the reasons therefor, together with more general information about the relevant items.
(Note) For details of supervisory viewpoints, reference shall be made, as necessary, to III-3-2-5 (2) of theComprehensive Guidelines for Supervision of Major Banks, etc.
(2) Qualitative Disclosure Items Regarding the Consolidated Liquidity Coverage Ratio(i) With regard to the "items regarding changes over time in the Consolidated Liquidity Coverage Ratio" in
Article 3(3)(i) of the Consolidated Liquidity Ratio Disclosure Notice, whether the main drivers of thechanges in the Consolidated Liquidity Coverage Ratio during the past two years and a qualitative explanationof their causes are provided. In addition, whether the "qualitative disclosure items regarding theConsolidated Liquidity Coverage Ratio" (those related to the final designated parent company's latest quarterand created using the format attached to the Consolidated Liquidity Ratio Disclosure Notice) are used.
(ii) Whether the following items are entered regarding the "items related to evaluation of the levels of theConsolidated Liquidity Coverage Ratio" in Article 3(3)(ii) of the Consolidated Liquidity Ratio Disclosure
Notice.
A. Evaluation of levels of consolidated liquidity coverage ratio by the final designated parent company
B. If a problem is recognized in A. above, actual countermeasures to tackle it.
C. If there is the possibility that an estimate of future consolidated liquidity coverage ratio by the final
designated parent company may significantly diverge from the disclosed ratio, qualitative explanationof that estimate.
D. If an actual figure diverged significantly from the initial estimate in C., additional explanation of thereason why such a difference occurred.
(iii) With regard to the "items related to total amount of eligible high quality liquidity assets" in Article 3(3)(iii)of the Consolidated Liquidity Ratio Disclosure Notice, whether the following items, for example, areincluded as necessary.
A. If there have been significant changes in the composition or the currencies of the eligible high quality
liquidity assets

in the calculation and their location, explanation of such changes

B. If there are significant currency mismatches in major currencies (for example. if the aggregate liabilities
denominated in that currency amount to 5% or more of the financial institution's total liabilities.)
between the total amount of eligible high quality liquidity assets and net cash outflows, the assessmentof such mismatches and explanation of practical countermeasures to address such mismatches(iv) With regard to the "other items related to the Consolidated Liquidity Coverage Ratio" in Article 3(3)(iv)of the Consolidated Liquidity Ratio Disclosure Notice, whether the following items, for example, areincluded as necessary. Whether not only the following items, but also other important items are included.
A. In cases where the "special clause regarding the qualifying operational deposits" prescribed in Article288

28 of the Consolidated Liquidity Ratio Notice is applied, an explanation on the following items.
a. Scope of items under the application of the Special Clause Regarding the Qualifying Operational
Deposits
b. The method used to estimate the amount of the qualifying operational deposits
B. In cases where the "additional collateral amount required in times of market-value changes based on
the scenario method" prescribed in Article 37 of the Consolidated Liquidity Ratio Notice is applied,an explanation of the methods used to estimate the additional collateral amount required in times ofmarket-value changes based on the scenario method.
C. In cases where there are important items in the "other contingency cash outflows" prescribed in Article
52, the "other contracted cash outflows" prescribed in Article 59, and the "amount of other contracted
cash inflows" prescribed in Article 72 of the Consolidated Liquidity Ratio Notice, a qualitative
explanation of such items.
(Note) In the breakdown of the Consolidated Liquidity Coverage Ratio (referring to daily average figures),
if there are items where daily figures are not used because of their insignificance in relation to impact
on the ratio and there is a practical reason (such as restriction by accounting requirements), details
shall be described of the items where daily figures are not used and the reason for not using themregarding items that are deemed useful to users of such information. The items where daily figures are
not used shall be reviewed periodically and, when any changes are made after the review, the reason
for conducting such a change shall be described.
(3) Qualitative Disclosure Items Regarding the Consolidated Net Stable Funding Ratio(i) Whether the designated parent company describes a qualitative explanation regarding the main drivers andreasons of the Consolidated Net Stable Funding Ratio in the past 3 years with respect to the requirement
prescribed in Article 3(4)(i) of the Consolidated Liquidity Ratio Disclosure Notice. In addition, the company
uses the format attached to the Consolidated Liquidity Ratio Disclosure Notice for the latest quarter and thepreceding quarter if the company explains the “qualitative disclosure items regarding the Consolidated Net
Stable Funding Ratio”.
(ii) Whether the designated parent company describes the following items if the company is compliant withthe requirements prescribed in Article 99 of the Consolidated Liquidity Ratio Notice are met in Article
3(4)(ii) of the Consolidated Liquidity Ratio Disclosure Notice.
A. In cases of the "special clause regarding mutually related assets and liabilities" prescribed in Article
99 of the Consolidated Liquidity Ratio Notice, an explanation on the scope of items under theapplication and their interrelationship.
(iii) With regard to the "other items related to the Consolidated Net Stable Funding Ratio" in Article 3(4)(iii)of the Consolidated Liquidity Ratio Disclosure Notice, whether the following items are entered.
A. Evaluation of the levels of the Consolidated Net Stable Funding Ratio by the final designated parent
company.
289

B. Practical measures against a problem if any is found in A. above, practical measures against thatproblem.
C. A qualitative explanation when a designated parent company prospects that there would be a large
discrepancy of the foreseeable Consolidated Net Stable Funding Ratio than what was originallydisclosed.
D. An additional explanation if the actual value largely differs from the initial perspective.
(4) Items Subject to Disclosure Regarding Management of Consolidated Liquidity Risks(i) Whether the structure for surely recognizing, measuring/assessing and reporting liquidity risks of the final
designated parent company, etc. is described in the "items regarding the framework of the policy andprocedures for liquidity risk management" in Article 3(2)(i) of the Consolidated Liquidity Ratio Disclosure
Notice.
(ii) With regard to the "items regarding indicators for management of liquidity-related risks" in Article 3(2)(ii)of the Consolidated Liquidity Ratio Disclosure Notice, whether the following indicators, etc., for example,
are included regarding the views on and the status of key indicators, etc. for risk management
measured/evaluated in (i), as necessary.
A. Liquid assets for internal risk management at financial institutions
B. Gaps between cash inflows and outflows classified by maturity of both on- and off-balance sheet items
C. Other important indicators, etc. that are monitored as part of internal risk management system
D. Usage of status of limitations in indicators, etc. in A.-C. above
E. Overview of internal stress tests and its utilization methods(iii) Regarding the "other items related to liquidity risk management" in Article 3(2)(iii) of the Consolidated
Liquidity Ratio Disclosure Notice, whether the following items, for example, are included as necessary.
Whether not only the following items, but also other important items are included.
A. Efforts to reduce liquidity risks
B. Measurement in liquidity stresses (Contingency Funding Plan ( CFP) )(5) Items Subject to Quarterly Disclosure at a Final Designated Parent Company
In relation to the "quantitative disclosure items regarding the Consolidated Liquidity Coverage Ratio" and the"quantitative disclosure items regarding the Consolidated Net Stable Funding Ratio" prescribed in Article 5 of theConsolidated Liquidity Ratio Disclosure Notice, a final designated parent company is required to disclose relevant
information for every quarter with due regard to the purport of the Basel Capital Accord. When a company discloses
such information (including past information) on a website, it is appropriate to post it in a way that enables users,
including investors, to easily find where the relevant information is displayed.
It is desirable that disclosures are made immediately after the release of the securities report prescribed in Article
24(1) or (3) of the FIEA that is due on the final day or final business day of each final designated parent company's
quarter, the quarterly report prescribed in Article 24-4-7(1) of the FIEA, or the semi-annual report prescribed in
Article 24-5(1) of the FIEA..
290

IV-5-4-5 Disclosure of the Soundness Status Related to TLAC (companies subject to TLAC regulation)(1) General Points of Attention
Disclosure of the status of TLAC-related soundness in business operations, with the aim of complementing thefunctions of the minimum required level in TLAC ratio, the final designated parent company's own efforts to manage
itself and supervisory verification and maintaining the soundness of business operations related to the bank’s total
loss-absorbing and recapitalization capacities by realizing discipline through external evaluation of the market,
needs to be implemented appropriately in accordance with the Notice of Disclosure, bearing in mind the following
items.
In addition, a financial institution that is subject to TLAC regulation must consider ideal methods of information
disclosure that are useful to users, by taking into consideration degrees of importance of the information subject todisclosure. Extra caution shall be taken to ensure appropriate disclosure is made of information whose omission has
the potential to change economic decisions by the users of the relevant information.
However, with regard to information of proprietary value and information relating to confidentiality, in cases
where disclosing such information may cause significant damage to the position of the bank, it shall be acceptableto keep such information by disclosing the fact that the particular items were not disclosed and the reasons why,
together with more general information about the relevant items.
(Reference)・“Pillar 3 disclosure requirements—consolidated and enhanced framework (Second Phase),” Basel Committeeon Banking Supervision (March 2017)(2) Points of Attention Regarding Individual Items to be Specified
Disclosure items related to TLAC are those listed in Article 3 (8) (including cases where Article 4 (6) applies),
Article 5 (1) (x to xii) of the Notice of Disclosure. Specifically, attention must be paid to the following items.
・ If there is a major change in quantitative disclosure items from the first half, provide an explanation as to whysuch change occurred.
・ For quarterly disclosure items:(i) In addition to the adequacy of equity capital and other items (refer to IV-5-3-3), companies are required
to properly disclose information for TLAC as well in every quarter with due regard to the purposes of theBasel Capital Accord, based on the items defined in Article 5 of the Notice of Disclosure. When suchinformation (including past information) is disclosed on a website, it is appropriate to be posted in ways thatmake it easy for users including investors, depositors, etc. to recognize where the relevant information isdisplayed.
Among the disclosure items defined in Article 5 of the Notice of Disclosure, if the items concerning TLAC
are disclosed based on Attached Formats No. 5 or 10 of the same Notice, it is desirable that disclosures are
made immediately after the release of the annual securities report prescribed based on Article 24(1) or (3)291

of FIEA, the quarterly securities report prescribed in Article 24-4-7(1) of FIEA, or the semi-annual securities
report prescribed in Article 24-5(1) of FIEA that is due on the final day of the quarter.
(ii) Regarding “Specifics of Contract Terms Related to other external TLAC-eligible instruments” described in
Article 5(1) (xii) of the Notice of Disclosure, in addition to the “Outline of Contract Terms Related to Other
External TLAC-eligible Instruments” described in Article 5(1) (xi), the terms of the said contract related toother external TLAC-eligible instruments should be recorded in ways that make it easy for users including
investors, depositors, etc. to become aware of it.
Regarding disclosure items related to other external TLAC-eligible instruments, it is desirable that the latest
information on revisions or other alterations to the issue, repayment or changes to terms for such otherexternal TLAC-eligible instruments, if made by the financial institution, be made available to users forreference.
IV-5-5 Control Environment for Risk Management
With regard to the control environment for risk management of designated parent company groups, in light ofthe size of the group and the complexity of its business operations, in addition to the evaluation points concerning
the control environment for risk management of individual Type I Financial Instruments Business Operators (fromIV-2-3 to IV-2-5), the following points shall also be taken into consideration:(i)

In cases where a group-wide framework is in place for the management of market risk, credit risk, liquidity

risk and other types of risk, whether the actual nature of business operations and the risk profile of overseas
offices have also been taken into account in the said framework, and whether appropriate consideration is given
to any risks that are unique to the overseas offices.
(ii)

In cases where a group-wide framework for risk management is applied, whether the role played byoverseas offices and the management framework applied to overseas offices are appropriate in light of thepositioning of overseas offices within the group as well as the actual nature of their business operations andrisk profiles.
(iii)

Even in cases where profit management and risk management vertically divided for each business line areconducted on a group basis, whether a control environment has been established by which overseas offices cansecure profit rationally and can manage risks appropriately. (Whether there are any overseas offices that are
weak in nature, likely to record successive deficits.)(iv)

In cases where the transactions contracted at the base in Japan are managed on the accounts of an overseas

base, in particular, whether, having clarified the positioning of the relevant overseas base in the overall group,
it is being managed appropriately in the group-based framework for risk management. Also, whether thetransfer prices pertaining to these transactions have been set in advance between the designated parent company
and the relevant overseas base, in an appropriate and rational manner.
(v)

In cases where the transactions contracted at overseas offices are managed on the accounts of the base inJapan, in addition to (iii) above, in particular, whether there is a control environment in place in which thecontent, risk and other aspects of the said transactions can be appropriately identified at the base in Japan.
(Note) For details of the supervisory viewpoints, reference shall be made, as necessary, to III-2-3-2-5 and III-2292

3-3 of the Comprehensive Guidelines for Supervision of Major Banks, etc.
IV-5-5-1 Integrated Control Environment for Risk Management
Supervisors shall check whether a designated parent company group, which calculates its consolidated capital
adequacy ratio based on Article 2 of the Capital Adequacy Notice on Final Designated Parent Company, identifies
the overall quantity of various risks involved in their individual business divisions, including risks not reflected in
the consolidated capital adequacy ratio, such as interest rate risk related to assets and liabilities not included in thecalculation of the value of the market risk equivalent and credit risk related to large-lot borrowers, by establishingan integrated control environment for group-wide risk management. Supervisors shall also check whether thefinancial instruments business group maintains a sufficient level of equity capital, in terms of both quality andquantity, in light of the overall risks identified.
(Note) For details of the supervisory viewpoints, refer to III-2-1 and III-2-3 of the Comprehensive Guidelines forSupervision of Major Banks, etc. as necessary.
IV-5-5-2 Control Environment for Managing Liquidity Risks
The following points shall also be taken into consideration with regard to the management of the liquidity ofdesignated parent company group (in particular, designated parent company groups that calculate their consolidated
capital adequacy ratios based on Article 2 of the Capital Adequacy Notice on Final Designated Parent Company):(i)

Whether the designated parent company clearly specifies and periodically revises the degree of liquidity

risk it can face as a group as well as the policy for managing liquidity risk, by reflecting the management
policies and strategies and the fund-raising capability of the entire group, including overseas offices.
(ii)

Whether a control environment has been developed in which liquidity is accurately identified for the entire

group, including overseas offices, and in which it is properly managed in cooperation with the risk management
divisions. For example, whether there is a control environment in place in which, having quantified the costsof raising funds and so forth taking into account the degree that liquidity is affected during times of stress,
these costs are used in the budget process, measurement of business results, approval of new products and so
on.
(iii)

Whether there is a control environment in place in which the status of the assets (amount of necessary

stabilization funds procured in light of the makeup, characteristics and distribution of assets) of the entire group,
including overseas offices, the status of funds currently procured (the makeup, characteristics and distributionof funding sources), and the ability to raise additional funds (including the status of security against asset
holdings and the potential for them to be accepted by a central bank or so forth as security) can be properly
identified for each base and for each currency.
(iv)

Whether there is a control environment in place in which the status of daytime liquidity at each base canbe properly identified with due consideration given to legal and administrative restrictions regarding thetransfer of funds.
(v)

Whether the designated parent company, in light of the identified liquidity of the overall group,

periodically checks the levels at which procurement from each financing instrument is possible, and undertakes
293necessary efforts, such as increasing the diversification of the financing means and maturity dates.
(vi)

Whether the designated parent company periodically specifies the potential risks for the liquidity of theentire group, including overseas offices, by conducting stress tests in ways that also properly reflect the risk
profiles of overseas offices as well as overseas market conditions.
(vii) Whether the designated parent company, based on the results of the stress test, has clearly indicateddiverse emergency financing instruments and the like for maintaining liquidity even in times of stress, and has
formulated a contingency plan which prescribes specific procedures and so forth. Also, whether it periodicallyconfirms the details of the contingency plan and makes necessary updates in order to ensure that it functions
properly.
(viii) Whether the designated parent company group’s consolidated Net Stable Funding Ratio falls below theminimum required level, the company promptly reports to the supervisor.
(Note 1) It is desirable that designated parent companies make positive efforts to regularly publicize the degreeof liquidity risk that the group can face, their policy for managing liquidity risk, and liquidity
conditions, while also giving consideration to international best practices.
(Note 2) For details of the supervisory viewpoints, refer to III-2-3-4 of the Comprehensive Guidelines forSupervision of Major Banks, etc.
IV-5-5-3 Supervisory Viewpoints for the Capability to Aggregate Data Relating to Risk Management andReporting to Board of Directors, etc.
IV-5-5-3-1 SignificanceFor financial institutions that conduct large and complicated business, it is necessary to develop management
information systems and risk management practices relating to data concerning the risk management of the entire
Group (hereinafter referred to as “risk data”), in order to accurately and promptly aggregate risk data and reportto the Board of Directors, etc. on risk management (hereinafter referred to as “risk reporting”), from the perspectiveof reducing potential for loss and securing financial soundness. The improvement of such risk data aggregation
capabilities and risk reporting practices of financial institutions is important in ensuring stability of the financial
system. Solid risk data aggregation capabilities and risk reporting practices are also important, in particular, forfinancial institutions and supervisory authorities to forecast the future and examine countermeasures based thereon
in times of stress or crisis, and will lead to the improved feasibility of recovery and resolution of financial institutions
as well as profitability.
Internationally, compliance with the “Principles for Effective Risk Data Aggregation and Risk Reporting” toenhance risk data aggregation capabilities and risk reporting practices is required of G-SIBs and D-SIBs as follows:banks, etc. that were deemed as G-SIBs by the Financial Stability Board before 2012: by January 2016; banks, etc.
that were deemed as G-SIBs after 2012: within three years after being deemed by the Financial Stability Board; DSIBs: no later than three years after being deemed as D-SIB, based on the agreement of the Basel Committee on
Banking Supervision (see the following note). In Japan, it is necessary to continue efforts for the establishment ofan IT infrastructure and process as well as the development and improvement of practices related to risk data294

aggregation and risk reporting in consideration of international moves, with the aim of improving the risk
management practices and decision-making processes of financial institutions.
“Principles for Effective Risk Data Aggregation and Risk Reporting,” the Basel Committee on Banking
Supervision, January 2013.
IV-5-5-3-2 Supervisory Viewpoints and Supervisory Method and Actions
Based on the agreement of the Basel Committee on Banking Supervision, supervisors shall, with regard to GSIBs or D-SIBs designated by the Capital Adequacy Notice on Final Designated Parent Company, monitor the
implementation of efforts toward the development and improvement of IT infrastructure and process as well aspractices relating to risk data aggregation and risk reporting, so that they can comply with the “Principles for
Effective Risk Data Aggregation and Risk Reporting” by no later than three years from the announcement of their
being so deemed, and promptly aggregate and report at the entire Group level information that is necessary forreporting to the Board of Directors, etc. and authorities. In doing so, supervisors shall take the following points into
consideration in particular.
(1) Comprehensive Governance Framework and IT Infrastructure(i)Whether other viewpoints in the guidelines for supervision or a strong governance framework consistent

with the principles and guidelines stipulated by the Basel Committee on Banking Supervision are introducedwith regard to risk data aggregation capabilities and risk reporting practices.
(ii)

Whether the data structure and IT infrastructure related to risk data aggregation capabilities and risk

reporting practices are designed, established and maintained in view of responses in times of stress or crisis as
well as in normal times.
(2) Risk Data Aggregation Capabilities(i)

Whether risk data that satisfy the accuracy and integrity that are deemed necessary in reporting in normal

times and in times of stress or crisis are being prepared. In addition, whether the majority of data automaticallyaggregated in order to minimize the possibility of error.
(ii)

Whether all major risk data are captured and aggregated on a Group consolidated basis. In addition, does

the framework enable aggregation by business unit, group company, type of asset held, industry and region of
exposure, and other important classification so that concentration and generation of exposure and risk can be
identified and reported.
(iii)

Whether the latest risk data are aggregated on a timely basis while satisfying the accuracy, integrity,

coverage and applicability that are deemed necessary. For reference, it is necessary to pay attention that the
specific timing of risk data aggregation should be decided based not only on the importance of the risk data in
the risk profile of the entire financial institution, the nature and potential volatility of the risk, and the reporting
frequency in both normal times and in times of stress or crisis, in view of the foregoing.
(iv)

Whether a framework is in place to enable aggregation of risk data that correspond to the various non-regular and as-necessary requests including responses in times of stress or crisis, changes in internal control295

necessity, and requests from the supervisory authorities.
(3) Risk Reporting(i)

Whether the risk report accurately reflects the aggregated risk data. In addition, whether the financial

institution carries out the necessary validations concerning the reported contents.
(ii)

Whether the risk report covers all of the important risks of the financial institution. In addition, whether

the depth and scope of the report are consistent with the size and complexity of operations, risk profile, and therequests from the recipient of the risk report such as the Board of Directors, etc.
(iii)

Whether the risk report comprehensively conveys useful information in a clear and concise manneraccording to the needs of the recipient of the risk report.
(iv)

Whether the Board of Directors decides the frequency of preparation and distribution of the risk reportbased on the necessity of the Board of Directors, etc., the nature and volatility of risks subject to report, as wellas importance from the perspective of effective and efficient decision-making and sound risk management. In
addition, whether the frequency of preparation and distribution in times of stress or crisis is greater than innormal times.
(v)

Whether the risk report is appropriately distributed to the recipients of the risk report such as the Boardof Directors, etc., while ensuring confidentiality.
IV-5-5-4 Credit Risk Management for Large Borrowers
IV-5-5-4-1 SignificanceThe criteria for judging the adequacy of the status of equity capital are not especially designed to protect
financial institutions from an excessive loss due to a sudden default of a single counterparty. Accordingly, from theperspective of complementing said criteria, designated parent company groups also need to put in place a framework
for measuring and managing large credit exposures.
From such perspective, final designated parent companies shall be required to measure and manage large credit
exposures appropriately using the objective standard of the limits on credit exposure for final designated parent
companies (referring to the limits on credit exposure for final designated parent companies specified in Article 1 of
the Regulatory Notice of Standards for Indicating Status of Soundness Regarding Large Exposure Prescribed as theStandards by which Final Designated Parent Companies Judge the Soundness of Their and Their Subsidiaries'
Business Operations; the same shall apply hereinafter).
IV-5-5-4-2 Main Supervisory Focus(1) Whether the board of directors selects large borrowers that may exert significant influence on business operations
based on a reasonable standard and monitors the statuses of their credit and financial conditions on an ongoing basis.
When credit provision to a single borrower is 5% or more of the final designated parent company's Tier 1 Capital,
whether final designated parent companies provide credit risk management for the large borrower taking into296

consideration the amount of credit provision to an entity deemed to have an economically interdependent
relationship (Note) with the borrower.
(Note) An entity deemed to have an economically interdependent relationship is that found by the final designatedparent companies to have any of the following relationships with its borrower(s): However, when an entity, which
has any of the following relationships, can avoid financial problems or a chain
reaction of defaults by finding other business partners or new funding sources in a timely manner, the entity does
not fall under the category of those deemed to have an economically interdependent relationship.
・A case where 50% or more of an entity’s annual gross revenue or gross expenditure arises solely from transactions
with another entity (for example, when an entity who owns residential or commercial real estate depends 50% ormore of their annual gross revenue on rent from another entity)
・A case where an entity bears all or part of the credit granted to another entity by such means as providing guarantee,
and when a claim for the guarantee is exercised, the entity may fall into default
・A case where most of the products of an entity are sold to another entity and said other entity is a significant clientthat cannot be replaced easily
・A case where an entity has provided a loan to another entity and the expected funds for repayment are the same
funds and said other entity has no other sufficient income source for repayment
・A case where an entity’s financial problem may cause a difficult situation for another entity from the perspectiveof timely loan repayment in full・A case where an entity’s insolvency or default may be related to another entity’s insolvency or default
・A case where multiple entities depend most of their fund procurement on a single funder, and none of them canfind other funders in the event of that funder's default(2) Whether important sectors for risk management, such as those with similar risk profiles (specific business types,
company groups, countries, regions, loan products, etc.), are internally defined in an appropriate manner.
Additionally, whether the breakdown of positions and risks by business type, country, region, etc. is appropriately
ascertained.
(3) Whether the control environment has been developed to diversify credit risks in accordance with the internal
definition of sectors, for example, by setting a credit limit by portfolio.
(4) From the perspective of recognizing credit risks and making responses at an early stage, whether the control
environment has been developed to control the amount of credit provision depending on credit risks, for example,
by appropriately setting contract terms, such as the security, guarantee, and grace period, in accordance with thecharacteristics and risk levels of borrowers and transactions.
(Note) Regarding credit risk management for counterparties to derivatives transactions, in particular, the"Supervisory Focus Points and Actions in Light of the Losses Resulting from the Default of a U.S. Investment Fund"issued by the FSA (April 20, 2022) shall also be referred to as necessary.

297

(5) When managing the credit-granting to funds or securitization products, whether final designated parent
companies identify the parties concerned (including originators, fund managers, and providers of protections suchas liquidity support for investment vehicles, CDS, and guarantees) who can be an additional risk factor inherent in
the structure itself other than the underlying asset, and, based on that understanding, manages credit for large
borrowers. More specifically, whether final designated parent companies consider (i) managing the total sum ofcredit-granting, etc. to the structures it is investing in when there are additional risk factors common to thesestructures, and (ii) managing the credit-granting, etc. to the structures relevant to the parties concerned who can be
an additional risk factor, together with the credit-granting, etc. to those concerned.
Note that final designated parent companies do not always need to manage the above-mentioned parties as anadditional risk factor. For example, when the assets managed by funds are not managed separately from those ofmanagement entities and other funds, final designated parent companies need to consider implementing credit risk
management combined with credit-granting to management entities and other funds. Moreover, when the ABCP
program in which final designated parent companies are investing relies on credit and liquidity enhancements by
the same sponsor company, or when the same party provides protections, such as CDS and guarantee, to synthetictype securitization products, final designated parent companies need to consider the necessity of managing sponsor
companies and protection providers as large borrowers.
(6) Whether stress tests are conducted, and whether analyses are conducted for scenarios wherein a large amount ofloss occurs in the measurement of credit risks.
IV-5-5-4-3 Supervisory Method and Actions(1) Off-site Monitoring
Supervisors shall require final designated parent companies to submit detailed reports on the status ofcompliance with the limits on credit exposure for final designated parent companies on a regular basis in accordancewith Article 57-23 of the FIEA. When finding any problem, such as that the total amount of credit provision granted
to any borrower exceeds the limits on credit exposure for final designated parent companies, supervisors shall holdhearings as necessary regarding the prospect of resolving the excess of the limit, etc.
(2) In cases where a problem is found in the status of compliance with the limits on credit exposure for final
designated parent companies through the inspection or off-site monitoring as described in (1), supervisors shallinstruct the final designated parent company to submit a report based on Article 57-23 of the FIEA, and in cases
where a serious problem is found or where the necessity of confirmed improvement is found, supervisors shall issue
an order for business improvement in accordance with Article 57-19 of the FIEA.
(3) Approval of Excess of the Limits on Credit Exposure(i)

When an application for approval was filed as referred to in the proviso to Article 1(1) of the Regulatory

Notice of Standards for Indicating Status of Soundness Regarding Large Exposure Prescribed as the Standards
298

by which Final Designated Parent Companies Judge the Soundness of Their and Their Subsidiaries' Business
Operations, supervisors shall screen whether there are any unavoidable reasons for exceeding the limits on credit
exposure, such as that the person who received credit provision has conducted a merger or has received thetransfer of business.
When granting an approval, in principle, supervisors shall request the final designated parent company tosubmit a plan for resolving the excess of the limits on credit and have it report the status of implementing the plan
on a regular basis, except for a case where the excess will be resolved by the end of the accounting period(including the end of the interim accounting period).
(ii)

Cases where an approval is to be granted under circumstances where "there are otherwise unavoidable

reasons as found appropriate by the FSA Commissioner" as referred to in Article 6(1)(vi) of the Regulatory
Notice of Standards for Indicating Status of Soundness Regarding Large Exposure Prescribed as the Standards
by which Final Designated Parent Companies Judge the Soundness of Their and Their Subsidiaries' Business
Operations include, for example, cases where there are any of the circumstances set forth in A to C below and
it is found that the soundness of the final designated parent company would not be impaired.
A. When credit provision is to be granted based on legal obligations
B. In the case of reorganization of a financial group or reconstruction of a business model, when it is foundnecessary for achieving the purpose of said reorganization, etc.
C. When it is credit provision to specific securitization products issued by a government agency, etc. and thenecessity of exceeding the limits on credit exposure is found for that agency
When there are any of the circumstances set forth in A to C above and an approval is to be granted as
referred to in the proviso to Article 1(1) of the Regulatory Notice of Standards for Indicating Status ofSoundness Regarding Large Exposure Prescribed as the Standards by which Final Designated Parent
Companies Judge the Soundness of Their and Their Subsidiaries' Business Operations, a plan for resolving theexcess of the limits on credit exposure shall not be requested, irrespective of the provisions of (i) above.
IV-5-6 Compensation StructureIV-5-6-1 Points of Attention Regarding Compensation Structures
It is possible for a designated parent company group to design and operate its compensation structure by giving
consideration to international employment and compensation practices. On the other hand, depending on that designand operation, it could result in increased incentives for officers and employees to take risks, and if this tendency
becomes excessive, it could lead to serious problems, such as for the group’s overall risk management.
Internationally as well, at the Financial Stability Board and other forums, discussion has been advanced on thedesign and operation of the compensation structures of financial institutions. The upshot is that designated parent
company groups need to ensure that compensation structures do not lead to officers and employees taking excessive
risks while also giving consideration to these international trends. In light of this, the supervisory authorities shallsupervise the compensation structures of these groups with due consideration of the following points while also
taking into account, inter alia, international guidelines published by the Financial Stability Board (Note) In
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performing actual supervision, supervisors shall also take into account the size of the group, the complexity of its
business operations and its establishment of overseas offices, and shall be mindful of not applying these guidelines
in a mechanical and uniform fashion.
In addition to the risk of officers and employees being provoked into taking excessive risks with regard to thecompensation structure, supervisors shall also take due care with regard to whether any similar risks are noticeablewith regard to employment practices, personnel evaluation systems and the like. Also, in light of the fact that senior
managers are charged with governance and other important responsibilities and that they receive compensation for
this, it should be kept in mind that they are duly required to conduct appropriate management.
(Note) “FSF Principles for Sound Compensation Practices,” Financial Stability Forum (April 2009)“FSB Principles for Sound Compensation Practices. Implementation Standards,” Financial Stability Board(September 2009)“Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices—
Application of Compensation Practices to Mitigate Misconduct Risk,” Financial Stability Board (March
2018)(1) Role of the Compensation Committee, etc.
(i)

With regard to the compensation structure for group officers and employees, whether an appropriate

control environment has been developed, which includes a committee to monitor the condition of that and abody or other organization by which the necessary checks of the management team can be exercised to ensure
the appropriate design and operation of the compensation structure (hereinafter referred to as the“compensation committee, etc.”). Also, whether the necessary authority, systems and so forth have been
secured so that the compensation committee, etc. can exercise the monitoring and checking function
independently from the sales divisions, etc. (including officers in charge of sales).
(ii)

Whether the compensation committee, etc. has confirmed that the overall level of compensation isconsistent with the present state and future forecasts of financial soundness of the entire group, and that it will
not have a material impact on the future adequacy of equity capital.
(iii)

Whether the compensation committee, etc. pays sufficient attention to the perspectives of risk

management, such as whether it cooperates closely with the risk management division regarding the evaluationof the appropriateness of the design and operation of the compensation structure.
(iv)

Whether the compensation committee, etc., through monitoring how the compensation structure isoperated, checks whether any problems have arisen, such as compensation being excessively linked to shortterm earnings or being overly reflective of performance.
(2) Consistency between Compensation Structure and Risk Management, etc.
(i)

Whether the compensation of employees in the risk management divisions and compliance divisions isdetermined independently from other business divisions, and whether such compensation appropriately reflects
the importance of their responsibilities. Also, whether, in addition to the degree to which risk management andlegal compliance goals are achieved, compensation-related performance for these employees is measured in a300

way which primarily reflects the degree of their contribution to the establishment of a control environment forrisk management and a control environment for legal compliance.
(ii)

Whether the productivity-linked portion of compensation for officers and employees (as for employees,

those employees who have a significant influence on the overall risk-taking of the group; hereinafter the same
shall apply in IV-5-6) is appropriate given their responsibilities and the actual scope of their work, and in lightof the policies concerning the financial soundness of the entire group and the degree of risk that the group can
face.
(iii)

In cases where a considerable portion of the compensation for officers and employees is linked to

productivity, whether the design takes into account the response to financial risks that could arise before thecompensation is finalized (estimates of the required equity capital and liquidity requirements).
(iv)

Whether the productivity-linked portion of compensation for officers and employees has been designed

to decrease to a significant degree in the event of poor business results.
(v)

Whether methods of paying compensation which emphasize the creation of more long-term corporate

value (for example, payments in stock or the granting of stock options) and methods of paying compensation
which also take into account the period of time up until risks are actualized (for example, setting fixed-periodtransfer restrictions in cases where payments are made in stock, setting exercise periods if stock options are
granted, or redemptions in the event compensation payments are carried over if business results are poor) havebeen adopted according to the responsibilities of officers and employees and the actual scope of their work.
(vi)With regard to a compensation structure that could adversely affect risk management (such as guaranteed

minimum bonuses paid across two or more years, or a system of large retirement allowances), whether
appropriate improvement measures have been examined and implemented.
(vii) Even in cases where a compensation structure has been designed which is consistent with risk
management, whether a control environment has been developed for properly monitoring and checking the riskof acts been conducted by officers or employees which could compromise the intent of that design (such astransactions which are likely to reduce risks superficially.
IV-5-6-2 Disclosure of the Compensation Structure(1) General Points of Attention
Giving due consideration to the purpose of ensuring that compensation structures do not lead to officers or
employees taking excessive risks through the disciplining of external valuation by markets and investors, and thereby
maintaining the soundness of the management of financial institutions, compensation structures need to be properly
disclosed for the items prescribed in the Public Notice of the Specifying Matters Pertaining to the Remuneration to
Be Specified by the FSA Commissioner as Having a Material Impact on the Business Operations or Assets of Ultimate
Designated Parent Companies and its Subsidiary Corporations Pursuant to Article 208-26(v) of the Cabinet Office
Order on Financial Instruments Business, etc. (hereinafter referred to as the “Notice of Remuneration”).
However, with regard to information which, if made public, could cause considerable harm to the competitive
position of the financial institution, or information which identifies individuals and which, if made public, could301

unduly harm the rights and interests of the individuals, or information relating to the confidentiality of the financial
institution, it shall be acceptable to keep such information to more general descriptions and to state the reasons why.
Furthermore, in cases where there are no items corresponding to the items prescribed in the Notice of Remuneration,
it shall be acceptable to state that there are no relevant items.
(Note) For details of supervisory viewpoints, reference shall be made, as necessary, to III-3-2-5 (2) of theComprehensive Guidelines for Supervision of Major Banks, etc.
(Reference)・“Pillar 3 disclosure requirements for remuneration”, Basel Committee on Banking Supervision (BCBS)(July 2011)
・“Pillar 3 disclosure requirements – consolidated and enhanced framework”, BCBS (March 2017)(2) Points of Attention Regarding Individual Items to be Specified(i)With regard to the “relevant officers” and “relevant employees” prescribed in item(ii)(a) of the Notice ofRemuneration as being subject to disclosure (hereinafter referred to as “relevant officers and employees ” inthis paragraph (2)), whether they have been stated appropriately, mindful of the following points for example.
A. Scope of “relevant officers”
a. Whether appropriate comments have notes have been appended in cases where outside directors or
outside company auditors are excluded from “relevant officers.”b. Whether persons who retired during the most recent business year have been included.
B. Scope of “relevant employees”
a. Scope of “major consolidated subsidiaries”
Whether the ultimate designated parent company has selected the scope of “major consolidated
subsidiaries” taking into account the importance of their effect on the group’s financial conditions
and management performance, so as not to compromise the purpose of disclosing the compensation
structure or interfere with the rational judgment of investors. Furthermore, whether the selection
process for major consolidated subsidiaries and an explanation on the scope of the selected major
consolidated subsidiaries have been stated appropriately. For example, descriptions using specificcriteria are possible: “A subsidiary shall only fall under the category of major consolidated
subsidiary if its ratio of total assets to the total consolidated assets of the designated parent company
group exceeds 2%.” However, it should be kept in mind whether important subsidiaries inmanagement are included in the major consolidated subsidiaries even if the subsidiaries are smallin size.
b. Scope of “recipients of a high level of remuneration”i)

In selecting the “recipients of a high level of remuneration” whether selections are made bysetting appropriate and rational standards suited to the actual conditions, using the average value of
remuneration received by relevant officers as the basis, and where necessary, taking into accountsuch factors as changes in past performance. Furthermore, whether the grounds for setting thosestandards and the reasonableness thereof have been stated appropriately. For example, in cases
302where the remuneration received by the relevant officers has decreased as a result of the event that
performance metrics are weak, it could be possible to set an adjusted standard for “recipients of ahigh level of remuneration” taking into account such factors as changes in past performance.
However, in such cases, whether appropriate notes have been appended on the reasonableness of
those standards.
ii) With regard to the scope of “remuneration” whether the scope includes economic benefits received
as exchange for executing his/her duties and for labor regardless of the name (for example, payments,
wages, salaries, allowances, bonuses). In cases where a relevant officer concurrently holds the postof an employee and his/her salaries as an employee are material, those salaries should be included
the scope of “remuneration”.
c. Scope of “persons having a material effect on the business operations or assets of a ultimate
designated parent company and its major consolidated subsidiaries”
Whether persons that have a material effect on the business operations or assets of the group havebeen selected based on an understanding of the risk-taking circumstances of the relevant employees.
Furthermore, whether an appropriate explanation has been given for the method of selection.
(ii)

Whether the following details, for example, have been included as “the name, organizational structure

and matters pertaining to the duties of the committee or other major organ which determines the remunerationof relevant officers and relevant employees and which supervises the payment of remuneration and theexecution of other business pertaining to remuneration” prescribed in item (ii)(a) of the Notice of Remuneration.
A. Establishment of a compensation committee (name, members, authority, and duties of the compensationcommittee and other measures for the compensation committee to exercise its monitoring and checking
function independently from the operational divisions (including officers in charge of operations) (scopeof the regions, business divisions or relevant officers and employees subject to monitoring and checking
by the compensation committee)).
B. In cases where the compensation committee requests or outsources advice on remuneration to an external
consultant, the name of the external consultant and the purpose and outline of that request or outsourcing.
C. In cases where the risk management division cooperates with the compensation committee in assessing
the appropriateness of the design and operation of the compensation structure, the circumstances of thatcooperation.
D. Total amount of “remuneration” paid to members of the compensation committee (not needed if it isdifficult to separate the amount associated with duties related to the committee) and the number of
meetings held.
(iii)

Whether the following details, for example, have been included as “matters related to assessment of theappropriateness of the design and operation of the system of remuneration for relevant officers and relevant
employees” prescribed in item (ii)(b) of the Notice of Remuneration.
A. In cases where a policy (including policies regarding types and offering forms of the remuneration) has
been stipulated for determining the remuneration of relevant officers and employees, an outline of thepolicy and its scope of application (scope of the regions, business divisions or relevant officers and303

employees to which the policy applies) and the rationale for adopting such policy.
B. An explanation of the types of persons included in the relevant officers and employees and the numberof persons in each category (for example, a breakdown of the relevant officers and the relevant employees
and a description of each category).
C. In cases where there has been a material change to the design and operation of the compensation structure,
an overview of any changes that were made, the reasons for those changes and their impact on
remuneration.
D. In cases where it has been confirmed that the overall level of remuneration is consistent with the present
state and future outlook of financial soundness for the designated parent company group, and that it will
not have a material effect on the future adequacy of equity capital, an explanation of this.
E. In cases where, through monitoring how the compensation structure is operated, it has been confirmedthat there are no problems such as compensation being excessively linked to short-term earnings or being
overly reflective of performance, an explanation of this.
(iv)

Whether the following details, for example, have been included as “matters related to the consistency

between risk management and the system of remuneration for relevant officers and relevant employees”
prescribed in item (ii)(c) of the Notice of Remuneration.
A. In cases where the compensation structure for relevant officers and employees in the risk management
and compliance divisions is designed and operated independently from other managed and monitored
business divisions, an explanation of this. (In particular, an explanation about whether the measurementof performance related to the remuneration of relevant officers and employees in the risk management
and compliance divisions appropriately reflects the importance of their responsibilities, and whether it
also reflects the degree to which risk management and legal compliance are achieved plus the degree of
their contribution to the establishment of a control environment for risk management and a control
environment for legal compliance.)
B. In cases where risks are taken into account when determining the remuneration of relevant officers andemployees, an outline of the types of risks considered and the methods for measuring, assessing andconsidering the risks. (In cases where there have been material changes since the previous business year,
including an outline of that.)(v) Whether the following items, for example, are included as “matters related to the link between performanceand the remuneration of relevant officers and employees” prescribed in item (ii)(d) of the Notice ofRemuneration.
A. In cases where a considerable portion of the remuneration for relevant officers and employees is linked
to performance:a. In cases where, when determining the performance-linked portion of remuneration for relevant
officers and employees, consideration is given to the responsibilities of the relevant officers andemployees and the actual scope of their work and to the policies concerning the financial soundnessof the group or the degree of risk that the group can bear, an outline of the methods used forconsidering these.
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b. An outline of the methods used to reflect the performance of the group, securities companies,business divisions or the relevant officers and employees in remuneration and the methods used tomeasure performance.
c. In cases where payment of remuneration linked to performance is deferred, an explanation that thedesign takes into account responses to financial risks that could occur before the amount of the
remuneration is finalized (estimates of the equity capital and liquidity requirements).
d. An outline of measures for decreasing the performance-linked portion in the event that performance
metrics are weak (particularly, an explanation on the criteria for determining “weak” performance
metrics).
e. Even in cases where a compensation structure has been designed which is consistent with risk
management, such as using risk-adjusted profit in calculating the amounts of remuneration, an outlineof the control environment for properly monitoring and checking the risk of acts been conducted byrelevant officers and employees which could compromise the intent of that design (such astransactions which are likely to reduce risks temporarily or superficially)
B. In cases where a compensation structure has been granted which could adversely affect risk management(such as guaranteed minimum bonuses paid across two or more years, or large retirement allowances thatare disproportionate to performance or risk conditions), an outline of the improvement and corrective
measures.
C. In cases where types of remuneration that emphasize the creation of more long-term corporate value (forexample, payments in stock or the granting of stock options) and forms of remuneration offered which
also take into account the period of time up until risks are actualized (for example, setting fixed-periodtransfer restrictions in cases where payments are made in stock, setting exercise periods if stock options
are granted, malus, or reduction of deferred remuneration or clawbacks if performance metrics are weak)
have been adopted in line with the responsibilities of relevant officers and employees and the nature of
their work, policy and overview of the remuneration system (if the ratio of variable remuneration that isdeferred differs among divisions to which related officers and employees belong, an explanation of thefactors considered to determine such ratios).
(vi)

Whether the “Qualitative Disclosure Items” prescribed in the Notice of Remuneration are recorded

following the format provided in the Attached List of Formats to the Notice of Remuneration.
(vii) Whether other important matters regarding the system of remuneration, if any, are properly stated as“matters of reference for the structure of remuneration” prescribed in item (ii)(e) of the Notice of Remuneration.
IV-5-7 Supervisory Method and Actions(1) With regard to group-based governance, appropriateness of business operations, appropriateness and sufficiency
of equity capital, control environments for risk management, and compensation structures, supervisors shall conducthearings on a periodic and ongoing basis on the group’s response to identified issues in light of international trends
and other factors. Supervisors shall actively utilize frameworks of cooperation with overseas authorities, and shall305

conduct in-depth hearings regarding any issues related to overseas offices that are consequently identified.
(2) Supervisors shall strive to identify the financial soundness of a group by requiring the designated parent company
to submit reports regarding the following items, for example, based on Article 57-23 of the FIEA.
In cases where it is deemed that a group needs to make improvements regarding its financial soundness,supervisors shall strive to understand the situation by holding in-depth hearings based on the submitted report, andthey shall urge the group to make voluntary improvements.
(i)

The risk management policy of the designated parent company group. (Any changes must be reported

immediately.)(ii)

The policy for budget allocation and financing adopted by the designated parent company group. (Thereport must be made each fiscal year.)(iii)

In the case of a final designated parent company that calculates its consolidated capital adequacy ratio

based on Article 3 of the Capital Adequacy Notice on Final Designated Parent Company, a report to the effectthat the consolidated capital adequacy ratio of the designated parent company group has fallen below 8%. (Thereport must be made immediately if the ratio falls below 8%.)(iv)

In the case of a final designated parent company that calculates its consolidated capital adequacy ratio

based on Article 4 of the Capital Adequacy Notice on Final Designated Parent Company, a report to the effectthat the consolidated capital adequacy ratio of the designated parent company group has fallen below 140%.
(The report must be made immediately if the ratio falls below 140%.)(3) In cases where offsite monitoring, inspection results, notifications of problematic conduct or the like mentionedin (1) above reveal a problem in the business operation or internal control environment of the designated parent
company group, supervisors shall require the submission of a report based on Article 57-23 of the FIEA, as necessary(excluding the items listed in (2)).
(4) In light of the reports mentioned in (2) and (3) above, in cases where it is deemed necessary for improvement,
supervisors shall also take such action as issuing an order for business improvement based on Article 57-19 andother provisions of the FIEA.

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IV-6 Treatment of Special Financial Instruments Business Operator Groups
IV-6-1 Basic Concept
From the perspective of making Financial Instruments Business Operator Groups, which are engaged in large
and complex businesses as a group, subject to regulation and supervision on a consolidated basis, it has been
stipulated that large Financial Instruments Business Operators shall be subject to the consolidated regulation andsupervision of the Financial Instruments Business Operator and of its subsidiary corporations, etc. (“downstream
consolidation”).
IV-2 shall be applied mutatis mutandis to the financial soundness of Special Financial Instruments Business
Operator Groups subject to this downstream consolidation.
A “Special Financial Instruments Business Operator Group” refers to a group comprised of a Special Financial
Instruments Business Operator and its subsidiary corporations, etc.
(Note) For the consolidated capital adequacy ratio that forms the basis for issuing a Special Financial Instruments
Business Operator Group with early corrective action, which stipulates the specific measures in a Notice
Stipulating the Category Pertaining to the Soundness of Management of a Special Financial Instruments
Business Operator and its Subsidiary Corporations, etc., and the Specification of Orders According to that
Category, refer to IV-5-3-4-2(1) as necessary.
IV-6-2 Supervisory Method and Actions(1) Supervisors shall, where necessary, conduct hearings on a periodic and ongoing basis on group-based financial
soundness.
(2) Supervisors shall require Special Financial Instruments Business Operators to submit reports on the following
items, for example, based on Article 56-2(1) of the FIEA, and they shall strive to identify the financial soundnessof the group.
In cases where it is found a group needs to make improvements regarding its financial soundness, supervisors
shall strive to understand the situation by holding in-depth hearings based on the submitted report, and they shallencourage the group to make voluntary improvements.
A report to the effect that the consolidated capital adequacy ratio of the Special Financial Instruments Business
Operator Group has fallen below 140%. (The report must be made immediately if the ratio falls below 140%.)(3) In cases where offsite monitoring, inspection results, the reporting of problematic conduct or the like mentionedin (1) above reveal a problem in the business operation or internal control environment of the Special Financial
Instruments Business Operator Group, supervisors shall, as necessary, require the submission of a report based on
Article 57-10 of the FIEA (excluding the items listed in (2)).

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(4) In light of the reports mentioned in (2) and (3) above, in cases where it is deemed necessary for improvement,
supervisors shall also take such action as issuing a business improvement order based on Article 51 of the FIEA.

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IV-7 Treatment of Type I Financial Instruments Business Operators which are the Japanese Base of a Foreign
Holding Company, etc. GroupAs far as Foreign Holding Company, etc. Groups (referring to financial groups the business of which is managed
by a foreign holding company, etc.; hereinafter the same shall apply in IV-7) are concerned, if a problem comes tolight concerning governance or the risk management conducted by group headquarters, etc. (referring to a company
which is in a position to manage and control the overall group or each of the group companies, including the businessbase in Japan; hereinafter the same shall apply in IV-7), then there is a chance that a Type I Financial Instruments
Business Operator which is the group’s business base in Japan will also be directly affected. There was a financial
institution group which had expanded business operations using excessive leverage while relying on the market fora considerable portion of its financing. Given that it had pursued inordinate short-term profits under a system of
inadequate risk management, it faced the prospect of financial soundness and liquidity problems, and hence had aserious impact on the business continuity of the group’s Type I Financial Instruments Business Operator based inJapan.
Therefore, with regard to Type I Financial Instruments Business Operators, which are the Japanese bases ofForeign Holding Company, etc. Groups, when conducting supervision in line with the items described in IV-1
through IV-4, supervisors shall also give due consideration to the following points.
The circumstances of Foreign Holding Company, etc. Groups vary widely, and reflecting the diversity of risk
profiles and the process by which they spread, the control environments for managing entire groups also havediffering characteristics. With regard to the roles played by business bases in Japan, while there are some whichhave reasonable staff and asset sizes, and others which have developed high-risk business models, there are others
that are small in terms of both staff and assets and that specialize primarily in services intended for their respective
home countries. Moreover, in cases where a Type I Financial Instruments Business Operator, which is a businessbase in Japan, assumes the form of a branch office of a foreign corporation, attention also needs to be given to suchcharacteristics as that the business operator may be directly subordinate to a foreign corporation to which Japan’s
Financial Instruments and Exchange Act and other relevant laws, regulations and rules may not directly apply. In
light of this, in performing actual supervision, supervisors shall pay due consideration to the managerial
characteristics of each group and the operational characteristics of their business bases in Japan, and they shall be
mindful of not applying these guidelines in a mechanical and uniform fashion.
IV-7-1 Governance
The following points shall also be taken into consideration with regard to the governance of Type I Financial
Instruments Business Operators which are the Japanese bases of Foreign Holding Company, etc. Groups:(i)Whether the significance of establishing the business base in Japan and its positioning within the group

have been made clear in the group-wide management policy, plans and so forth formulated by groupheadquarters, etc. Whether the business strategy and business plan for the base in Japan are consistent with thegroup-wide policy and plans, and whether they are sustainable.
(ii)

Whether the division of responsibility between the group headquarters, etc. and the management team at

the base in Japan can be clarified, and whether the authority given by group headquarters, etc. to the309management team at the base in Japan is needed for ensuring the appropriate operation of the base in Japan.
Also, whether authority and responsibility have been properly allocated within the base in Japan as well toenable the management team to conduct proper governance.
(iii)

Whether there is a control environment in place in which the internal audit division of the base in Japan

can conduct internal audits appropriately while taking into consideration the nature of business operations andthe risk profile of the base in Japan. Also, whether the management team of the base in Japan has implemented
appropriate measures in light of the results of the internal audits and so forth.
(iv)

Whether the internal control environment of the base in Japan is adequate in light of the positioning of

the Japanese base within the group and the relevant business strategy and business plan, and is also taking into
account the actual nature of business operations and the risk profile.
(v)

Whether the group headquarters, etc., having identified the operational and financial condition of the basein Japan, and having fully understood the profile of risks faced by the base in Japan, properly identify the statusof risks and take necessary actions.
(vi)

Whether the management team at the base in Japan checks whether there are any inadequacies in light of(i) through (v) above, and whether it responds appropriately in discussion with group headquarters, etc. asnecessary.
IV-7-2 Appropriateness of Business Operations
The following points shall also be taken into consideration with regard to the appropriateness of business
operations of Type I Financial Instruments Business Operators which are the Japanese bases of Foreign Holding
Company, etc. Groups:(Note) For the appropriateness of business operations and so forth in cases where, in addition to a Type I Financial
Instruments Business Operator, the business base in Japan has also established a bank, etc., and where
officers and employees concurrently hold positions at both, refer separately to IV-3-1-4.
(i)Whether the base in Japan has, in order to ensure thorough compliance with the FIEA and other relevantlaws, regulations and rules, established an appropriate control environment for legal compliance, for example,
ensuring necessary staffing and developing rules and regulations. In particular, in view of the possibility thatthe group headquarters, etc. may not be well acquainted with Japan’s FIEA and other relevant laws, regulations
and rules as well as trade practices in Japan, whether actions have been taken, such as allocating officers andemployees who are adept in these matters.
(ii)

Whether the business operator continuously checks how adept officers and employees at the base in Japan

are in the FIEA and other relevant laws, regulations and rules, and whether it has developed a control
environment for education and training to be appropriately conducted as necessary.
(iii)

From the viewpoint of preventing violations of the law and inappropriate business operations, whether

there is a control environment in place in which the division of roles between the group headquarters, etc. andthe base in Japan is clarified, and in which the base in Japan can properly exercise the functions of checking
and supervising the sales division, etc.
(iv)

Whether the business operator has developed a control environment wherein, in cases where a problem at310

the base in Japan has been identified, information is promptly shared between the group headquarters, etc. andthe base in Japan and necessary actions are taken swiftly, and reports are made immediately to the Japaneseand other relevant supervisory authorities.
IV-7-3 Appropriateness and Sufficiency of Equity Capital
The following points shall also be taken into consideration with regard to the appropriateness (quality) andsufficiency (quantity) of the equity capital of Type I Financial Instruments Business Operators which are theJapanese bases of Foreign Holding Company, etc. Groups:(i)Whether the necessary control environment has been developed at the group headquarters, etc. forproperly identifying the financial conditions of the base in Japan and for ensuring the appropriateness andsufficiency of equity capital.
(ii)

As for business bases in Japan where intra-group transactions have reached a considerable magnitude,

when ensuring the appropriateness and sufficiency of equity capital of the base in Japan, whether consideration
has also been given to the appropriateness and sufficiency of group-wide equity capital.
(iii)

When conducting a stress test or formulating a contingency plan on a group basis concerning theappropriateness and sufficiency of equity capital, whether the business operator appropriately reflects the risk
profile of the base in Japan as well as the Japanese market conditions.
(iv)

When examining the appropriateness and sufficiency of equity capital of the base in Japan, whether,among the risks relating to transactions that are conducted using the accounts of an overseas base, the business
operator has also appropriately reflected those risks that could potentially make it back to the base in Japan.
IV-7-4 Control Environment for Risk Management
With regard to the control environment for risk management of Type I Financial Instruments Business Operators
which are the Japanese bases of Foreign Holding Company, etc. Groups, in light of the size of the group and thecomplexity of its business operations, in addition to the evaluation points concerning the control environment forrisk management of individual Type I Financial Instruments Business Operators which are business bases in Japan(from IV-2-3 to IV-2-5), the following points shall also be taken into consideration:(i)

In cases where a group-wide framework is in place for the management of market risk, credit risk, liquidity

risk and other types of risk, whether the actual nature of business operations and the risk profile of the base inJapan have also been taken into account in the said framework, and whether appropriate consideration is given
to any risks that are unique to the base in Japan.
(ii)

In cases where a group-wide framework for risk management is applied, whether the role played by theJapanese base and the management framework applied to the Japanese base are appropriate in light of thepositioning of the Japanese base within the group as well as its actual nature of business operations and risk
profile.
(iii)

Even in cases where profit management and risk management vertically divided for each business line areconducted on a group basis, whether a control environment has been established by which the Japanese basecan secure profit rationally and can manage risks appropriately. (Whether the Japanese base is weak in nature,311

likely to record successive deficits.)(iv)

In cases where the transactions contracted at the base in Japan are managed on the accounts of an overseas

base, in particular, whether, having clarified the positioning of the Japanese base in the overall group, the basein Japan is playing an appropriate role in the group-based framework for risk management. Also, whether thetransfer prices pertaining to these transactions have been set in advance between the group headquarters, etc.
and the base in Japan, in an appropriate and rational manner.
(v)

In cases where the transactions contracted at overseas offices are managed on the accounts of the base inJapan, in addition to (iv) above, whether there is a control environment in place in which the content, risk andother aspects of the said transactions can be appropriately identified and appropriately managed at the base inJapan in particular.
IV-7-4-1 Control Environment for Managing Liquidity Risk
The following points shall also be taken into consideration with regard to control environments for managing
liquidity risk at Type I Financial Instruments Business Operators which are the Japanese bases of Foreign Holding
Company, etc. Groups:(i)Whether the necessary control environment has been developed at the group headquarters, etc. forproperly identifying the financial conditions of the base in Japan and for ensuring the appropriateness andsufficiency of liquidity.
(ii)

Whether a Type I Financial Instruments Business Operator, which is the Japanese base of a foreign group,

properly identifies the supply of liquidity from each of the group companies to the Japanese bases within thegroup, and undertakes necessary efforts in order that the appropriateness and sufficiency of the liquidity of thebases in Japan can be ensured.
(iii)

In particular, as for business bases in Japan where intra-group transactions have reached a considerable

magnitude, when ensuring the appropriateness and sufficiency of the liquidity of the base in Japan, whether
consideration has also been given to the appropriateness and sufficiency of group-wide liquidity. Also, in lightof the potential impacts on the liquidity of the overall group at times of stress, whether necessary actions havebeen taken, such as the formulation of a contingency plan, based on the assumed number of days that the basein Japan could continue business.
(iv)

When conducting a stress test or formulating a contingency plan on a group basis concerning theappropriateness and sufficiency of liquidity, whether the business operator appropriately reflects the risk profileof the base in Japan as well as the Japanese market conditions.
(v)

When examining the appropriateness and sufficiency of the liquidity of the base in Japan, whether, among

the risks relating to transactions that are conducted using the accounts of an overseas base, the business operator
has also appropriately reflected those risks that could potentially make it back to the base in Japan.
IV-7-5 Compensation StructureWith regard to the design and operation of the compensation structures of Foreign Holding Company, etc.
Groups, in the strictest sense, the authorities in the home-country should be conducting appropriate supervision on312

a group basis to prevent the incentives for officers and employees to take risks from becoming excessive.
On the other hand, from the perspective of cooperating appropriately with the supervision conducted by homecountry authorities, supervisors shall also monitor the design and operation of the compensation structures of TypeI Financial Instruments Business Operators which are business bases in Japan. In particular, in cases where there isan apparent risk of officers or employees at a base in Japan being provoked into taking excessive risks, supervisors
shall examine the risk management issues in greater depth, and shall take necessary actions, such as actively taking
up the issue with the home-country authorities.
(Note) For details of the supervisory viewpoints for conducting the said monitoring, refer to IV-5-6 above asnecessary.
IV-7-6 Supervisory Method and Actions(1) With regard to the governance, appropriateness of business operations, appropriateness and sufficiency of equity
capital, control environment for risk management, and the compensation structure of Type I Financial Instruments
Business Operators which are business bases in Japan, supervisors shall conduct hearings, as necessary, on aperiodic and ongoing basis, while also giving consideration to the characteristics of the business operation of therelevant base in Japan. Also, seizing the opportunity to talk directly with group headquarters, etc., supervisors shallstrive to share their perceptions of any issues affecting the entire group or the base in Japan. Furthermore,
supervisors shall actively utilize frameworks of cooperation with overseas authorities, and shall conduct in-depth
hearings pertaining to a group’s response to its base in Japan for any group-wide issues and so forth that areconsequently identified.
(2) In cases where offsite monitoring, inspection results, notifications of problematic conduct or the like mentionedin (1) above reveal a problem in the business operation or internal control environment of a Type I Financial
Instruments Business Operator which is a business base in Japan, supervisors shall require the submission of a reportbased on Article 56-2(1) or (2) of the FIEA, as necessary. Furthermore, in cases where it is deemed necessary for
improvement, supervisors shall also take such action as issuing an order for business improvement based on Article
51 and other provisions of the FIEA.

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IV-8 Ensuring Smooth Execution of Orderly Resolution
IV-8-1 SignificanceBased on the experience of the recent global financial crisis, international efforts have been made to develop aframework for a rapid and orderly resolution of global systemically important financial institutions.
The efforts are aimed at ending the so-called "too-big-to-fail" problem, which refers to the issue whereby
national authorities are not able to resolve globally active banks and have no option but to rescue them by injecting
public funds due to the concern that the unorderly failure of such financial institutions would have an extremely
serious adverse effect on financial and economic systems in a number of countries.
At the G20 Cannes Summit in November 2011, Key Attributes of Effective Resolution Regimes for Financial
Institutions (the "Key Attributes") submitted by the Financial Stability Board (FSB) was endorsed as a newinternational standard for resolution regimes. The Key Attributes requires that financial institutions that could be
systemically important or critical if they fail be subject to an effective resolution regime that meets certain conditions.
Furthermore, at the G20 Antalya Summit in November 2015, the Principles on Loss-absorbing and Recapitalisation
Capacity of G-SIBs in Resolution(hereinafter referred to as the “TLAC Term Sheet,” the general term for the
Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs, additionally announced by the
Financial Stability Board in July 2017) submitted by the FSB was endorsed.
Based on these international agreements, authorities in major jurisdictions have been taking necessary steps tobuild legal frameworks for orderly resolution of financial institutions. In Japan, the Deposit Insurance Act wasrevised in June 2013 and enforced in March 2014, introducing the Measures for Orderly Resolution of Assets andLiabilities of Financial Institutions for the Purpose of Ensuring Financial System Stability. In addition, the FSA’s
approach to introduce the TLAC framework subject to Japanese Global Systemically Important Financial
Institutions was announced (The FSA’s Approach to Introduce the TLAC Framework, first version announced in
April 2016, revised in April 2018), and TLAC regulations were adopted in March 2019 by newly developing theStandards for Disclosing Status of Soundness Regarding Total Loss-absorbing and Recapitalization Capacity
Determined as the Standard for a Final Designated Parent Company to Judge the Soundness of the Management of
the Final Designated Parent Company and its Subsidiary Corporations, etc., Based on the Stipulations of Article
57-17 (1) of the Financial Instruments and Exchange Act (hereinafter, “TLAC Pillar 1 Notice”). In addition, the
FSA also started to apply TLAC regulations as the host authority supervising Material Sub-groups of foreign GSIBs in March 2020 by newly providing for the Measures to Ensure Continuous Implementation of Business with
the Parent Company as Prescribed by the Commissioner of the Financial Services Agency as the Operational
Control System to Be Established by a Financial Instruments Business Operator, etc. Whose Parent Company Is a
Foreign Company Designated by the Commissioner of the Financial Services Agency Based on the Stipulations ofArticle 70-2(5) of the Cabinet Office Order on Financial Instruments Business, etc. (hereinafter, “Foreign Securities
Companies TLAC Notice”).
Nevertheless, efforts with the system are not sufficient to resolve the “too big to fail” issue. The efforts offinancial institutions during non-crisis times are necessary. In japan, in addition to formulating plans to defend
against arriving at failure from a crisis, this also requires financial institutions to have a capability to increase314resolvability (Note 1) in the event that an institution should reach failure (“crisis preparedness,” hereinafter).
The above-mentioned Key Attributes stipulates the authorities of each country to evaluate the resolvability offinancial institutions and to require the relevant financial institutions to improve their resolvability when necessary.
In Japan, the Deposit Insurance Act revision in June 2013 stipulates, “The Prime Minster (omission) may, when aneed for orderly resolution of assets and liabilities of the Financial Institution, etc. arises and they find that measuresnecessary for the smooth implementation thereof have not been taken, order the Financial Institution, etc. to takethe relevant measures to the extent necessary by a specified time (Article 137-4).”
In consideration of the above, the financial institutions are required to take actions to ensure the smooth
operation of orderly resolutions. (Note 2) The FSA will supervise the actions of the financial institution, whilebearing in mind that there are differences in the priority placed on the required crisis preparedness and time frame
for establishing the preparedness depending on the importance of the financial institution to the system. Also, where
it is necessary to ensure the smooth operation of orderly resolution, actions other than those listed below may berequired based on international discussions.
(Note 1) Resolvable financial institutions are identified as safeguarding business that is important to the financial
system while avoiding considerable disorder to the financial system, not carrying the risk of taxpayer losses,
and for which it is feasible and credible to carry out failure resolution for the financial institution.
(Note 2) Orderly resolutions in IV-8 include but are not limited to the failure resolutions used in the Specified
Measures Under Item (ii) stipulated in Article 126-2(1)(ii) of the Deposit Insurance Act.
IV-8-2 Development of Recovery and Resolution Plans
IV-8-2-1 Background
When a financial institution which conducts large and complex operations faces a crisis, not only the financial
institution itself but also the financial system as a whole is likely to face a severe disruption. It is therefore importantto prevent such crises to the greatest extent possible, as part of the crisis management through the supervisory
process.
In view of the above, at the international level, an agreement at the Financial Stability Board (see the followingnote) calls on jurisdictions to put in place a process to develop robust and credible “Recovery and Resolution Plans(RRPs)” for global systemically important financial institutions (G-SIFIs) and financial institutions whose failure
is assessed by its home authority to have a potential impact on financial stability.
Taking into account those developments at the international level, it is necessary to continue the ongoing process
to develop and maintain RRPs in Japan.
(Note) Financial Stability Board “Key Attributes of Effective Resolution Regimes for Financial Institutions”
November 2011.
IV-8-2-2 Supervisory Focus, Approaches, and Actions(1) Taking into account the agreement at the Financial Stability Board, the FSA expects to require, pursuant to315

Article 57-23 of the FIEA, financial institutions designated as G-SIFIs (including G-SIBs designated by the Capital
Adequacy Notice on Final Designated Parent Company) and where necessary other systemically importantfinancial institutions each to develop and submit a recovery plan once a year or when important changes have been
made to its business and group structure. Taking note that the contents of a recovery plan could vary depending on
the group structure or the business model of the financial institution, the FSA expects to examine, taking into
account the discussions at the Financial Stability Board, whether a recovery plan contains at least the items listed
below:(i) Outline of the recovery plan
A. Relevance of the recovery plan for the financial institution; and
B. Governance arrangements to develop the recovery plan;(ii) Preliminary information for developing the recovery plan
A. Overviews of the business and the group structure; andB. Risk management systems at normal times with respect to capital adequacy and liquidity;(iii) Triggers for the implementation of the recovery plan
A. Identification of trigger events that are expected to be hit at a stage sufficiently early enough for thefinancial institution to respond to the crisis preemptively (including quantitative and qualitative triggers
with respect to each of capital adequacy and liquidity);
B. Stress tests and reverse stress tests with severer stress than for usual stress testing (including system-wide
and firm specific stress scenarios);
C. Internal decision-making process concerning both a judgment of the trigger(s) being hit and actions to betaken thereafter; andD. Relationship between: risk management operations in business as usual depending on crisis stages; andthose at the time of the recovery plan being implemented;(iv) Overview of legal entities, overseas branches, and business units in the group
A. A profile of each of the legal entities and overseas branches
a. Business overview, financial information, and systemic importance (importance for the group andcriticality for the financial system, both of which are to be analyzed based on the market shares andother relevant information of the legal entities and overseas branches); andb. Strategic relevance of the legal entities and branches located in overseas;
B. Interconnectedness among main legal entities, overseas branches, and business units
Within-group capital relations, transactions, guarantee relations, and interdependency of IT systems;
identification of subsidiaries which provide services to business units that provide critical functions; andpersonnel relations;(v) Analysis of recovery options
A. Assessment of effectiveness, appropriateness and sufficiency (including quantitative assessment) ofrecovery options (measures to improve the capital situation and those to secure sufficient liquidity) for
each of the stress scenarios; andB. Points to be taken into account at the execution of the recovery options and feasibility analysis thereof;316

(vi) Other items
A. Management information systems
List of information necessary for development of the recovery plan and implementation of therecovery options; and the time needed to access to those information(2) Taking into account the agreement of the Financial Stability Board, the FSA will develop resolution plans forfinancial institutions designated as G-SIFIs (including G-SIBs designated by the Capital Adequacy Notice on Final
Designated Parent Company) and where necessary other systemically important financial institutions. The FSA
expects to update the resolution plans and assess the resolvability once a year or when important changes havebeen made to the business and the group structure of the financial institution.
IV-8-3 Measures to Ensure the Effectiveness of Stay Decision in Agreements Governed by Foreign Laws
IV-8-3-1 Background
The amendment of the Deposit Insurance Act (hereinafter referred to as the “DIA”) in June 2013 has provided
the Prime Minister with a power to make a decision that a “Clause on Specified Cancellation, etc.” in an agreement,
meaning a clause which provides Specified Cancellation (“Specified Cancellation, etc.” defined in Article 137-3(2)of the DIA) that is to be triggered by an application of “Related Measures, etc.” defined in Article 137-3(1) of the
DIA, is null and void for a period set out in Article 137-3 (1) of the DIA (such a decision is hereinafter referred toas a “Stay Decision”). In the above conjunction, the 2013 amendment revised the provisions in Article 131 of the
DIA with respect to special provisions for procedures of creditor protection. In order to avoid a severe disruption to
Japan’s financial system, Type I Financial Instruments Business Operators to which Specified Confirmation set out
in Article 126-2 (1) of the DIA is applicable and which conduct securities-related business (those listed in Section(2)(iii) of the DIA) are required to ensure that the effectiveness of Stay Decisions and special provisions forprocedures of creditor protection set out in Article 131 of the DIA (hereinafter collectively referred to as the“Effectiveness of Stay Decision”) extend to agreements governed by laws other than Japanese law.
IV-8-3-2 Main Supervisory Focus
In light of the development at the global level aimed at ensuring the effectiveness of temporary stay on earlytermination rights in agreements governed by foreign laws, the FSA expects to set the following items as its
supervisory focus in examining the firms’ controls on agreements governed by laws other than Japanese law (seeNote), taking into account the circumstances of individual transactions.
(Note) Designated Parent Companies and Special Financial Instruments Business Operators are required to take thenecessary measures at their group level.
(1) Supervisory Focus with respect to Conclusion of an Agreement
The FSA expects to examine whether a Financial Instruments Business Operator, etc. has taken necessary actions
to ensure, regardless of the counterparties’ jurisdictions, that the Effectiveness of Stay Decision applies to an317

agreement governed by laws other than Japanese law, where the Financial Instruments Business Operator, etc.
concludes or materially amends the agreement or enters into a transaction based on the existing agreement, provided
that the new or the existing agreement, as the case may be, contains a Clause on Specified Cancellation; is agreed
with any counterparty other than central counterparties (CCPs); and is with respect to “Subject Transactions” whichrefers to, among the transactions listed in Article 35-18 of Ordinance for Enforcement of the Deposit Insurance Act
as “transactions of instruments that have a market price at an exchange or other markets and their equivalenttransactions” over-the-counter derivative transactions, financial and other derivative transactions, the sale orpurchase of securities on condition of repurchase or resale, the lending and borrowing of securities, the trading ofbonds with options, forward foreign exchange transactions, over-the-counter commodity derivative transactions,and similar transactions, including transactions entered into for the purpose of collateralizing these transactions.
(Note) Actions to comply with the requirements above include:(i)

Adhering to an internationally common protocol aimed at ensuring the Effectiveness of Stay Decision onagreements governed by laws other than Japanese law and confirming that the counterparty has adhered tosuch a protocol; and(ii)

Indicating clearly in the agreement that the Effectiveness of Stay Decision applies to the Subject
Transactions.

(2) Supervisory Focus with respect to Existing Contracts
Firms that are required to take the actions set out in (1) are also expected to take those actions, as necessary,with respect to existing contracts of Subject Transactions which include a Clause on Specified Cancellation and aregoverned by laws other than Japanese law (excluding the cases where the firm enters into a new transaction basedon the existing agreement), taking into account the significance of the potential systemic impact that may be causedby the non-enforceability of the Effectiveness of Stay Decision to the agreement.
IV-8-3-3 Supervisory Approaches and Actions
Based on the supervisory focus above, the FSA expects to conduct in-depth reviews on the relevant management
and control of Type I Financial Instruments Business Operators that conduct securities-related businesses. Where
necessary, the FSA also expects to require Designated Parent Companies or Type I Financial Instruments Business
Operators engaged in securities-related business, to submit a report to the FSA, pursuant to Article 57-23 of the
FIEA and Article 136 of the DIA, or pursuant to Article 56-2 of the FIEA and Article 136 of the DIA, respectively.
If any material impediment to ensuring smooth execution of orderly resolution is identified as a sequel ofrequiring the submission of a report, the FSA expects to consider issuing, a business improvement order pursuant
to Article 57-19 of the FIEA and an order pursuant to Article 137-4 of the DIA to the Designated Parent Company;
and a business improvement order pursuant to Article 51 of the FIEA and an order pursuant to Article 137-4 of the
DIA to the Type I Financial Instruments Business Operator engaged in securities-related business.
IV-8-4 Measures to Ensure Operational Continuity of Critical Functions to Financial System in Orderly

318

Resolution
IV-8-4-1 SignificanceEnsuring operational continuity of critical functions provided by a financial institution in resolution is anecessary condition for executing orderly resolution of the financial institution without causing systemic risks.
Discussion at the global level has been placing a particular emphasis on this point. In the resolution regime in Japan,
the Specified Measures Under Item (ii), which was introduced by the amendment of the Deposit Insurance Act inJune 2013, has put in place measures that enable transfer of critical functions to a bridge institution and by doing so
continued provision of these functions, in view of preventing severe disruptions to the financial markets in Japan
which may be caused by discontinuation of critical functions to financial system.
However, given the current business environment in which financial institutions’ activities are largely integrated
with various services provided by intra-group or third party service providers, ensuring continuity of critical
functions in the process of resolution necessitates continuity of provisions of services (e.g. IT infrastructures) andaccess to financial market infrastructures (e.g. central counterparties) that are indispensable for provision of thecritical functions even in the process of orderly resolution.
Taking into account the above and relevant guidance (Note) issued by the FSB, financial institutions are required
to take measures to ensure operational continuity of critical functions to financial system in orderly resolution.
(Note) Financial Stability Board’s Guidance on Arrangements to Support Operational Continuity in Resolution(August 2016), Guidance on Continuity of Access to Financial Market Infrastructures (FMIs) for a Firm in
Resolution (July 2017), etc.
IV-8-4-2 Main Supervisory Focus, Approaches and Actions
JFSA requires financial institutions designated as G-SIFIs (including G-SIBs designated by the Capital
Adequacy Notice on Final Designated Parent Company) and where necessary other systemically important financial
institutions to take actions set out below that aim at ensuring operational continuity of critical functions to financial
system in orderly resolution, taking into consideration the firms’ systemic significance and other relevant factors
affecting their resolvability. The supervisory approaches to be taken are the same as those provided in IV-8-3-3.
(1) Identification of critical functions
Firms should identify critical functions (activities performed for third parties where failure would lead to severe
disruption of the financial system) that an entity or entities in the group of a firm provide, taking into account theguidance issued by the FSB and analyses on their subsidiaries – analyses that firms conduct as part of its recovery
planning pursuant to IV-8-2-2 (1) (iv) A.
(Note) Financial Stability Board’s Guidance on Identification of Critical Functions and Critical Shared Services(July 2013)(2) Ensuring continuity of critical shared services (CSS)
Firms should take measures set out below for ensuring operational continuity of critical functions via continuity319

of provision of services that support the critical functions.
(i)Firms should identify critical shared services (“CSS”: activities performed for a firm that provides a critical
function or an entity in the group of the firm where failure would lead to the inability to or the serious
impediments to the ability to perform the critical function; CSS may be performed within the group or
outsourced to third parties) associated with their critical functions. Identification is expected to be based on:
firms’ in-depth analyses on each of the critical functions identified pursuant to (1) above; and identificationof intra-group service providers that provide services to business units with critical functions – analyses thatfirms conduct as part of recovery planning pursuant to IV-8-2-2 (1) (iv) B.

(ii)

For each of the CSS identified pursuant to (i) above, if the agreement with a provider of the CSS is suchthat the provider possibly terminates provision of the CSS on the ground that the recipient of the CSS or anentity in the group of the recipient enters into orderly resolution or becomes subject to measures that
accompany orderly resolution e.g. change of controls, the firm should make contractual arrangements toensure that the provision of the service is continued even when resolution measures are taken with respect tothe firm.
An example of such contractual arrangements is to document in the maser agreement or a separate
memorandum of understanding that the provider shall not terminate the agreement pursuant to termination
clauses in the master agreement on the ground of application of those resolution measures with respect to therecipient, provided that there is no default in the payment obligations.
(iii)

Firms should make arrangements with respect to financial resources to ensure operational continuity of
CSS. This includes measures to financially ensure that:
A. Intra-group providers of CSS are capable of providing the CSS through the process of orderly resolution;
andB. The recipient of CSS is capable of satisfying the payment obligation associated with provision of CSS to
third-party providers through the process of Orderly Resolution.

(3) Ensuring Continuity of Access to Critical FMI Services
Firms should take measures set out below for ensuring operational continuity of critical functions via continuityof access to financial market infrastructures (FMIs) that support the provision of critical functions.
(i)Firms should identify critical FMI services (clearing, payment, securities settlement and custody services
provided by FMIs such as central counterparties, settlement service providers, central securities depositories
and custodians, the discontinuation of which is expected to lead to the inability to or the serious impediments
to the ability to perform the critical function; critical FMI services include services to which firms indirectly
participates via an intra-group or a third-party direct participant) associated with the critical functions, basedon in-depth analyses on each of the critical functions identified pursuant to (1) above.

(ii)

Firms should maintain information for each of the critical FMI services regarding: the expected financial

and non-financial requirements/conditions for continued access to the service, including those required by therelevant direct participant in cases where firms indirectly participate to critical FMIs; and the information on
the credit facilities that they may receive, if any, in association with the critical FMI services (e.g. credit
320facilities provided by direct participants in cases where a firm indirectly participate to critical FMIs).
(iii)

Firms should engage with providers of critical FMI services to understand how they are likely to respondto the firm at the time when the firm or an entity in the group of the firm enters into orderly resolution or
becomes subject to measures that accompany orderly resolution e.g. change of controls. Such responses may
include termination or continuation of the service and, if any, additional requirements e.g. additional margin
requirements.
(iv)

Firms should develop contingency plans for ensuring continued access to critical FMI services in orderly

resolution. A contingency plan should include, at a minimum:
A. Information obtained through the process set out in (i) to (iii). above;
B. How the firm would meet the additional requirements that the critical FMI service provider is likely torequire for continued access to the service, if any of such requirements are identified in (iii) above;
C. How the firm would meet the financial requirements for continued access;D. Governance arrangements to implement the contingency plan; andE. Impact analysis on the ability of the firm to continue performing its critical functions that may be causedby suspension of access to critical FMI services despite the countermeasures in B. and C. above, and, if
possible, alternative measures taken to mitigate the impact.
IV-8-5 Development of Liquidity Monitoring and Reporting Capabilities toward Smooth Execution of Orderly
Resolution

IV-8-5-1 SignificanceFor the purpose of smooth execution of orderly resolution, it is essential for a firm in resolution to be able tomonitor at a granular level their liquidity information such as liquidity needed through the process of a resolution
and the information on liquid assets that can be used to meet the needs. For example, continuation of critical functionin orderly resolution necessitates estimation of the location and the amount of liquid assets that can be used forsatisfying the payment obligation to providers of CSS and posting margin to critical FMI service providers. For
resolution authorities, in determining that a financial institution is at the point of non-viability, it is vital that thefinancial institution in resolution has capabilities to report to the authorities on their liquidity shortfalls within an
appropriate timeframe.
In view of the above, and towards ensuring smooth execution of orderly resolution, financial institutions are
required to enhance their capabilities to monitor and report liquidity information, while taking also into account theguidance developed by the FSB(Note).
(Note) The FSB “Guiding principles on the temporary funding needed to support the orderly resolution of a global
systemically important bank (“G-SIB”)” (August 2016)
IV-8-5-2 Main Supervisory Focus, Approaches and Actions
JFSA requires financial institutions designated as G-SIFIs(including G-SIBs designated by the Capital
Adequacy Notice on Final Designated Parent Company) and where necessary other systemically important financial
321

institutions to have in place liquidity monitoring and reporting capabilities to estimate the amount and the locationof liquid assets available at the time of resolution, taking into consideration the firms’ systemic significance.
Such capabilities include those that enable the firm to estimate and report timely to the authorities the amountof high-quality liquid assets (HQLA; meaning High Quality Liquid Assets in Article 1 (xiv) of Regulatory Noticeon the Consolidated Liquidity Coverage Ratio) that can be freely transferable among companies and jurisdictions,taking into account local regulatory requirements and restrictions of internal control, by material operating entities
and branches of the group and by major currencies.
The supervisory approaches to be taken are the same as those provided in IV-8-3-3.

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IV-8-6 Adequacy of Loss-absorbing Capacity
IV-8-6-1 Appropriateness, Sufficiency, and Preciseness of Loss-absorbing Capacity
IV-8-6-1-1 Significance
The TLAC Term Sheet requires global systemically important banks (G-SIBs) to have sufficient Total LossAbsorbing Capacity (TLAC). The purpose of the TLAC Term Sheet is to facilitate the orderly resolution of a G-SIB
when it fails in a manner that minimises impacts on financial stability without exposing taxpayers to loss and ensuresthe continuity of its critical functions by imposing the losses on shareholders and creditors, in addition to meeting
the recapitalisation needs of the G-SIB.
More concretely, under the resolution regime envisaged by the TLAC Term Sheet, an entity to which resolution
tools are assumed to be applied by the relevant authority ("Resolution Entity") is supposed to raise a loss-absorbing
and recapitalisation capacity from external sources and distribute it to its material sub-groups during normal times.
At the time of a stress, following the relevant authority's determination that one or more of the material sub-groups
have reached the point of non-viability (PONV), losses incurred to them would be passed to the Resolution Entity.
While this could lead to a resolution of the Resolution Entity, the material sub-groups are expected to continue theirbusiness as usual. Under this resolution regime, in cases where cross-border resolution plans are executed, close cooperation between the home and the host authorities would be essential.

IV-8-6-1-2 Major Supervisory Viewpoints and Supervisory Method and Actions(1) The FSA’s Response to TLAC Regulations as Home Authority(i)Financial Institutions Subject to TLAC Regulations
G-SIBs specified by the Notice are subject to TLAC requirements in Japan, in light of the TLAC Term Sheet.
In addition, for internationally active financial groups, entry into resolution of one or more of their foreignsubsidiaries could result in their losses passed to the parent entity, potentially leading to a resolution of thegroup as a whole. Provided that they have particular systemic significance to the Japanese financial system ifthey fail, a sufficient level of loss-absorbing capacity available at the time of resolution should be ensured, as
the need for addressing the so-called "too big to fail" problem is markedly high for such financial groups. In
such a case, the FSA considers it necessary to include certain non-G-SIBs in the scope of the requirements formaintaining sufficient loss-absorbing and recapitalisation capacity.
Accordingly, in Japan, in addition to G-SIBs specified by the Notice, among D-SIBs specified by the Notice,
the FSA applies the TLAC requirements to financial institutions (collectively referred to as "Covered SIBs")of particular need for a cross-border resolution arrangement and of particular systemic significance to Japanesefinancial system if they fail.
Regarding the financial institution groups selected as Covered SIBs, abiding by the desired resolution
strategies discussed below, groups in Japan subject to failure resolution (hereinafter, “Domestic Resolution
Groups”) as well as companies subject to failure resolution located in the country that must receive the323

aggregate loss when carrying out resolution (hereinafter, “Domestic Resolution Entities”) are designated basedon the TLAC Pillar 1 Notice, and are responsible for the arrangement and maintenance of external TLAC as
well as the distribution of internal TLAC.
When a financial institution group is newly selected or designated, sufficient time beforehand shall be taken
for consideration, taking into consideration the adequacy of said group’s equity capital and their fundraisingframework. Furthermore, in consideration of the time needed to arrange from the market the external TLAC
necessary to reach the required level, the intention to apply Japan’s TLAC requirements shall be announced
beforehand to the said financial institution group, together with the desired resolution strategies of said
financial institution group.
(Note) Concerning foreign G-SIB groups designated for resolution strategies where an MPE approach isdesirable, in a case where a Japanese Final Designated Parent Company is designated as a resolution
entity upon consulting with the relevant foreign authorities, it is conceivable that the above (i) shall apply
with the necessary modifications and that the domestic resolution entity as well as the domestic resolutiongroup may be considered for designation based on the TLAC Pillar 1 Notice.
(ii) Selection of Preferred Resolution Strategy
The resolution strategies for systemically important financial institutions are broadly based on two stylised
approaches: (i) SPE (Single Point of Entry) resolution, in which resolution tools are applied to the ultimate
holding company by a single national resolution authority, and (ii) MPE (Multiple Point of Entry) resolution,in which resolution tools are applied to different parts of the group by two or more resolution authorities acting
in a coordinated way.
*FSB, Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on
Developing Effective Resolution Strategies, July 2013
When determining preferred resolution strategies for Covered SIBs, either the SPE Approach or the MPE
Approach is selected to take into account resolvability based on their organizational structure as financialgroups, including interconnectedness and interdependency within the groups. If the SPE Approach is selected,
ordinarily, the domestic resolution entity shall be the ultimate holding company of said financial institutiongroup, and domestic resolution group shall conform to the said financial institution group.
Even when a preferred resolution strategy has been selected, it should be noted that in each case consideration
should be given to the actual circumstances of the Covered SIB when deciding what kind of resolution will
actually be performed.
(iii) Adequacy of External TLAC
To execute preferred strategy effectively in resolution, a Resolution Entity and its subsidiaries shallrestructure its flow of funding during business as usual for the purpose of ensuring the Resolution Entity's
loss-absorbing capacity and enable such losses ultimately to be absorbed by the Resolution Entity's
shareholders and creditors.
In consideration of the above, in the TLAC Pillar 1 Notice, domestic resolution entities of Covered SIBs
are required to satisfy a minimum required level of capital and liabilities recognized as having loss-absorbing
capacity as external TLAC.
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A. Required Levela. Timing of Application
If a domestic resolution entity of the said financial institution group has become a G-SIB specified
by the Notice on or after April first, 2019, they will be subject to application of the TLAC requirements
after three years from the time of being specified as a G-SIB in the Notice. In such a case, the minimum
required external TLAC ratio on a risk-weighted asset basis of the consolidated domestic resolutiongroup at the time of commencement of application shall be 18%, and the minimum required external
TLAC ratio on an overall exposure basis shall be 6.75% (complete TLAC application).
Also, if a D-SIB specified by the Notice on or after April first, 2019 newly becomes Covered SIBs,
for domestic resolution entities of the said financial institution group, the minimum required external
TLAC ratio on a risk-weighted asset basis of the consolidated domestic resolution group at the time ofcommencement of application shall be 16%, and the minimum required external TLAC ratio on an
overall exposure basis at the time of commencement of application shall be 6% (phased TLAC
application). After three years the minimum required external TLAC ratio on a risk-weighted asset
basis of the consolidated domestic resolution group shall be 18%, and a minimum required external
TLAC ratio on an overall exposure basis shall be 6.75% (complete TLAC application).
Meanwhile, if the FSA Commissioner separately designates a ratio as the minimum required external
TLAC ratio on an overall exposure basis pursuant to the proviso to Article 1(xi) of the TLAC Pillar 1
Notice, that ratio is to be adopted.
However, the application of the above is not to be carried out in a mechanical or uniform manner, butrather it is necessary to bear in mind the time period necessary for the said financial institution groupto respond to TLAC requirement and the specifics and effect of the countermeasures adopted bydomestic resolution entities in order to reach the minimum level of external TLAC ratio as well as theimpact those countermeasures will have on the financial system.
b. Evaluating External TLAC Adequacy(i) When evaluating external TLAC adequacy, Covered SIBs need to analyze not only external TLAC
quantity, but also external TLAC quality, at least with regard to the following points:
・ Other external TLAC-eligible instruments satisfy all the criteria prescribed in the TLAC Pillar 1
Notice, and adequately reflect the spirit of the TLAC Term Sheet.
・ Domestic resolution entities have not loaned the funds required for acquisition to the holders ofother external TLAC-eligible instruments either directly or indirectly, and said other external TLACeligible instruments have not been acquired by subsidiaries, etc. of said domestic resolution entity.
・ Until March 30, 2022, among Additional Tier 1 instruments and Tier 2 instruments, if they were
issued by a subsidiary, etc. established overseas or they were issued by Material Sub-group, and they
carry a provision for conversion into common stock under specified circumstances or other similar
provision, permission has been granted by the relevant authorities to include such capital-raising
instruments in external TLAC.
(ii) External TLAC is only intended to facilitate loss absorption and recapitalization in the case of325

failure. It is more important for a financial institution to maintain plenty of equity capital at normal
times in order to ensure soundness. Priority must not be placed on increasing external TLAC, assituations that deteriorate the quality and quantity of equity capital are essentially the same as failure,and must therefore be avoided.
However, if Covered SIBs fail, it is possible that Common Equity Tier 1 capital and Additional Tier
1 instruments (hereinafter “Going Concern capital”) will not be sufficient for loss absorption andrecapitalization, so Covered SIBs should not rely solely on this Going Concern capital. Rather, theyshould maintain adequate amounts of Tier 2 instruments and other external TLAC-eligible instruments(hereinafter collectively referred to as “Gone Concern capital, etc.”).
Furthermore, losses incurred by shareholders in the event of a financial institution failure are, basedon the principle of shareholders’ limited liability, limited to the amount they invested, and particularly
at times of crisis, there is a risk of moral hazard, so creditors need to influence decision making byfinancial institutions through supervision. Moreover, because the interest payments, etc. on liabilities
tend to rise as an issuer approaches a crisis, issuers can be expected to issue liabilities at normal times,
which will give them more of an incentive to prevent themselves falling into a crisis.
Therefore, external TLAC adequacy must be assessed based on the sufficiency of Gone Concern
capital, etc.
Specifically, the wording of the TLAC Term Sheet shall also be taken into account, and if, forexample, Gone Concern capital, etc. exceeds around 33% of the required level for external TLAC, an
incentive is maintained for the financial institution to reduce risk at normal times so as to avoid falling
into a crisis, and the financial institution would be regarded as having loss-absorbing andrecapitalization capacity in a time of crisis. If, however, it is lower than 33%, continuous monitoring
shall be performed to ensure that the financial institution is taking adequate steps to enhance its lossabsorbing and recapitalization capacity at times of crisis, such as by formulating and executing plans
to externally raise Gone Concern capital, etc. and establishing a corporate governance framework toprevent moral hazard from occurring.
c. Measures to Ensure Maintenance of Adequate External TLAC
・ Based on the aforementioned evaluation of external TLAC adequacy, domestic resolution entities
need to take appropriate measures to ensure the maintenance of adequate external TLAC, both
qualitatively and quantitatively.
・ Domestic resolution entities need to properly manage the composition of external TLAC instruments
to ensure that they can maintain adequate external TLAC even if their access to capital markets is
temporarily impeded, such as by ensuring that their maturities are not concentrated in specific periods.
・ Regarding other external TLAC-eligible instruments and the amount that can be arranged in the eventthat there is a shortage of other external TLAC, domestic resolution entities need to perform
evaluations and consideration in advance based on the possibility that during, for example, periods inwhich their valuation in the capital markets has deteriorated or their performance has worsened as aresult of unforeseen losses being incurred, they could find it more difficult than usual to raise funds.
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d. Supervisory Measures
If the external TLAC ratio drops below the minimum required external TLAC ratio on an overall
exposure basis, a demand shall be made to promptly report the reason for this and measures to improvethe external TLAC ratio pursuant to Article 57-23 of the FIEA. Furthermore, if specific improvements
are deemed to be necessary, a business improvement order pursuant to Article 57-19(1) of the FIEA shallbe issued.
Note that when calculating the minimum required external TLAC ratio on a risk-weighted asset basis,if external TLAC is inadequate, the capital buffer will first be allocated to external TLAC, so if theexternal TLAC ratio is lower than the minimum required external TLAC ratio on a risk-weighted asset
basis, the capital buffer will already be zero, and soundness can be expected to be restored in accordancewith external outflow restriction measures (which may, if equity capital has fallen below the required
level, be used in conjunction with an early corrective action order). Such supervisory responses must not
be implemented mechanically and uniformly. Instead, they need to take account of the period required
to comply with TLAC regulations, the action the Final Designated Parent Company is taking to maintainthe minimum level of external TLAC ratio and Gone Concern capital, etc., the effect of this action, theimpact of this action on the financial system, and so on.
B. Confirmation of Eligibility of External TLAC-eligible Instruments
In connection with the evaluation of external TLAC adequacy, with regard to other external TLACeligible instruments, if, for example, a report has been received concerning borrowing or bond issuancein accordance with a report demand order pursuant to Article 57-23 of the FIEA, it shall be confirmed, by
taking the following points into account and in light of the TLAC Pillar 1 Notice and the TLAC Term
Sheet, whether this is eligible as other external TLAC-eligible instruments from a regulatory point ofview:
a. The following points shall be taken into account with regard to other external TLAC-eligible
instruments in the form of unsecured senior debt as stipulated in the proviso to Article 4(3)(ii) of the
TLAC Pillar 1 Notice:・ In order to deem that a creditor of an issuing domestic resolution entity is structurally subordinate
to creditors of other companies in the group of said domestic resolution entity (hereinafter referred
to as “structurally subordinate”), the proportion of the total amount of unsecured senior debt andexcluded liabilities that are legally or economically equivalent or subordinate to this debt (hereinafterreferred to as the “excluded liability ratio”) to the total existing external TLAC of the issuer itself(the amount presented in the net assets section of the issuer’s balance sheet plus liabilities
constituting the issuer’s TLAC-eligible Additional Tier 1 instruments plus liabilities constituting
TLAC-eligible Additional Tier 2 instruments plus other external TLAC-eligible instruments) must
generally not exceed 5%.
・ The excluded liability ratio shall be based on the following excluded liability ratios:(i) Excluded liability ratio as reported in financial statements (interim financial statements if midterm)
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(ii) Excluded liability ratio as reported in business report(iii)

If an excluded liability ratio is published pursuant to the law or financial instruments
exchange rules, this reported excluded liability ratio(iv)

In periods other than those in which reports were made pursuant to (i) through (iii) above, theexcluded liability ratio as reported ad hoc by the domestic resolution entity concerned based on
the results of inspections by authorities, etc.

・ Once a domestic resolution entity has been deemed to be structurally subordinate, if there is a riskof the excluded liability ratio exceeding 5%, a demand shall be made to promptly report the reason
for this and measures to prevent decrease of the excluded liability ratio pursuant to Article 57-23 of
the FIEA. Furthermore, in the event of the excluded liability ratio exceeding 5%, after confirming
whether the domestic resolution entity needs to remain structurally subordinate, a business
improvement order pursuant to Article 57-19(1) of the FIEA shall be issued.
・ To ensure orderly resolution, even if the excluded liability ratio of a domestic resolution entity is
5% or under, the utmost care shall be taken to avoid the assumption of unsecured senior debt that
does not constitute an excluded liability and is not eligible as external TLAC. To that end, a demand
shall be made to the domestic resolution entity to report the total amount of non-TLAC-eligible
liabilities toward non-group third parties in its financial statements (interim financial statements if
mid-term).
・ As stated in IV-8-6-2-2(i)C, it may, during orderly resolution, be impossible to receive payment for
all or part other external TLAC-eligible instruments in the form of unsecured senior debt throughbankruptcy resolution proceedings. To ensure that the holders fully understand this risk before
purchasing the instruments, the contract, issuance summary, or other attached documents (prospectus,etc.) shall clearly state this risk. Furthermore, the seller shall provide adequate explanations toprospective purchasers as necessary in accordance with their level of understanding, etc.
b. If contract terms concerning redemption, etc. have been specified in accordance with Article 4(3)(viii)of the TLAC Pillar 1 Notice, regarding advance confirmation of the domestic resolution entity’s optionof redemption, etc., the provisions of the TLAC Pillar 1 Notice shall be taken into account. Furthermore,
the statements concerning equity capital in III-2-1-1-3(3) of the Comprehensive Guidelines forSupervision of Major Banks, Etc. shall be applied, with “other external TLAC” being substituted for“equity capital” when reading them.
c. If there are provisions for adherence to the laws of a foreign country in accordance with Article 4(3)(iX)of the TLAC Pillar 1 Notice, a demand shall be made, as necessary, to submit a written legal opinion
and related documents of a legal specialist concerning the ability of the issuing domestic resolution
entity to make effective use for loss absorption and recapitalization.
C. Judgment of Eligibility for Intentional Holdings of Other External TLAC-eligible Instruments of Other
Financial Institutions, etc.
The mutual and intentional holding of other external TLAC-eligible instruments (including cases
equivalent thereto; same hereinafter in C.) for the purpose of enhancing the external TLAC ratio within328

the financial system results in Ultimate Designated Parent Companies and other financial institutions, etc.
booking total loss-absorbing capacity, etc. that is devoid of substance, and this causes the financial system
to become fragile. Therefore, under the Basel Accord, in Article 8(6), etc. of the Consolidated Capital
Adequacy Ratio Notice, if Covered SIBs and other financial institutions, etc. are deemed to intentionallyhold other external TLAC-eligible instruments of said other financial institutions etc. in order to mutuallyenhance their external TLAC ratios, and if said other financial institutions, etc. are deemed to intentionallyhold other external TLAC-eligible instruments of said Covered SIBs (hereinafter referred to as “intentionalcrossholding”), the amount of the other external TLAC-eligible instruments must be deducted from equity
capital (Tier 2 capital) as an equity capital adjustment item. Based on IV-5-3-2-1(1), which concerns
intentional crossholding of capital instruments, intentional crossholding shall specifically refer to thefollowing cases:
・ Cases where Covered SIBs make a promise with other financial institutions, etc. (not limited to deposittaking institutions in Japan) to hold each other’s other external TLAC-eligible instruments with theprimary objective of cooperating with each other to mutually strengthen their total loss-absorbing capacity,
etc., and in conjunction with this, Covered SIBs hold other external TLAC-eligible instruments of otherfinancial institutions, etc. and said other financial institutions, etc. hold other external TLAC-eligible
instruments of Covered SIBs
(iv) Internal TLAC Adequacy
Domestic resolution entities are required to allocate as internal TLAC loss-absorbing capacity, etc. acquired
through external TLAC to Material Sub-groups within the domestic resolution entity’s group (including
subsidiaries’ groups) based on factors such as the sizes of the Material Sub-groups.
A. Selection of Material Sub-group for Internal TLAC Allocation
The purpose of internal TLAC is to concentrate losses suffered by Material Sub-groups (including
subsidiaries’ groups; same hereinafter in (iv))within the resolution entity’s group on the holding company,
etc. so as to ensure that systemically important operations performed by the said Material Sub-groups cancontinue even during failure resolution. In light of this, it is also necessary in Japan to require domestic
subsidiaries that are above a certain size, that could generate losses to a degree that could push thedomestic resolution entity’s group into a crisis, and that perform systemically important operations topossess capacity as Material Sub-groups to concentrate losses through internal TLAC.
Specifically, based on the TLAC Term Sheet, (i) below shall be used as the primary criterion and (ii)below shall be used as a supplementary criterion when selecting Material Sub-groups to be covered:
Criterion (i): Its risk-weighted assets, overall exposure, or operating income exceeds 5% of the total forthe group(Note) If no account called “operating income” exists under the accounting standards
applied, the account that presents total earnings under the accounting standards, etc.
applied shall be used instead.
Criterion (ii): In Japan’s financial system, the systemic importance of the operations the said subsidiary
performs and the likelihood that losses would be incurred to the degree that the329

continuation of systemically important operations would be impeded
Selected domestic Material Sub-groups are designated as internal TLAC allocation recipients from thedomestic resolution entity pursuant to the TLAC Pillar 1 Notice.
Selectees shall be reviewed once every year, and a demand shall be made for the submission of a reportdetailing data submitted as of March 31 each year, in principle. Furthermore, if there has been a change
in the group structure, a demand shall be made for the submission of the projected figures before thechange as early as possible.
Note that overseas Material Sub-groups will be selected by the authorities in the jurisdiction in which
they were established, so the FSA shall consult with relevant overseas authorities as necessary.
B. Required Levela. Timing of Application to Financial Institutions Designated as Covered SIBs on or after April 1, 2019
Regarding domestic Material Sub-groups of a financial institution group that has become a “G-SIB
specified by the Notice” or whose “D-SIB specified by the Notice” has newly become an Covered SIB
on or after April 1, 2019, application shall commence on the same date that application of the minimum
level of external TLAC for the domestic resolution entity of the said financial institution groupcommenced.
Furthermore, regarding domestic Material Sub-groups newly designated on or after April 1, 2019,
application of the required amount of internal TLAC shall commence approximately three years after
designation.
b. Internal TLAC Level Adjustment Coefficient
In the case of a domestic Material Sub-group, based on the capital adequacy requirement applied tothe said Material Sub-group, the required external TLAC level is calculated on the assumption that thesaid Material Sub-group was the domestic resolution entity. This figure is then multiplied by the internal
TLAC level adjustment coefficient determined by the FSA, which lies within the range of 75% to 90%,
to calculate the required amount of internal TLAC.
When determining the internal TLAC level adjustment coefficient, with regard to a domestic Material
Sub-group, because its resolution will generally be completed domestically and because it can becontinuously supervised as a group at normal times by Japanese authorities, there is little need foradvance allocation of its loss-absorbing capacity, etc. Therefore, the internal TLAC level adjustment
coefficient of a domestic Material Sub-group shall generally be set at 75%, and then adjustments shallbe made based on the need for advance allocation in light of (1) a preferred resolution strategy for thegroup and (2) the systemic importance, capital structure, business model, etc. of the said Material Subgroup.
Once determined, the internal TLAC level adjustment coefficient shall be reviewed as necessary after
being prescribed in the TLAC Pillar 1 Notice.
Regarding foreign Material Sub-groups, the authorities in the jurisdiction in which the said Material
Sub-group was established will take the lead in determining the internal TLAC level adjustment
coefficient, so the Japanese authorities will likely consult with the relevant overseas authorities as
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necessary. If an overseas authority has determined and applied a required amount of internal TLAC
without prior involvement by the Japanese authorities, until the crisis management group (CMG) of thefinancial institution has consulted with the relevant overseas authorities and agreement has been
established, the standard shall not constitute a “standard based on standards concerning minimum
required amount of internal TLAC” as prescribed in Article 2(3) of the TLAC Pillar 1 Notice.
c. Measures for Evaluating Internal TLAC Adequacy and Maintaining Sufficient Internal TLAC
・ Regarding measures for evaluating internal TLAC adequacy and maintaining sufficient internal TLAC,
statements in (1)(iii)A.b(i) and c (excluding the matters concerning the acquirer) shall be applied, with“internal TLAC” being substituted for “external TLAC” when reading them.
・ If there are Basel III-eligible and Additional Tier 1 instruments and Tier 2 instruments held by third
parties outside the group, it is possible that the conversion of the said instruments into equity would
lead to a change in the control structure of the Material Sub-group, which could affect its management,
administration, etc. Therefore, it would be preferable for such capital instruments to not be converted
into stock when triggered, but instead for the principal to be reduced.
・ If a domestic resolution entity does not directly allocate internal TLAC to Material Sub-group, butinstead allocates it indirectly through another subsidiary, it is essential that when the Material Subgroup has been recognized as effectively bankrupt and the internal TLAC principal has been reduced,
etc. (hereinafter referred to as “internal TLAC triggering”), the loss is ultimately transferred to thedomestic resolution entity. Allocation through an entity that is not the parent company, etc. of theMaterial Sub-group shall generally not be permitted unless, for example, there will be no change in thecontrol relationship as a result of internal TLAC triggering.
・ For hybrid debt capital instruments issued to a domestic resolution entity or its subsidiary corporation,etc. by Material Sub-group to qualify as internal TLAC-eligible capital, it shall be kept in mind that it
is essential that there be a special clause stipulating that if the Material Sub-group has been recognized
as effectively bankrupt, the principal be reduced, etc. Furthermore, for the purpose of maintaining thedebt hierarchy, it shall be kept in mind that with regard to hybrid debt capital instruments of Material
Sub-groups held by a domestic resolution entity since before the application of the TLAC regulations,contract terms shall be changed as necessary, and that with regard to the distribution of residual assetsof Material Sub-groups and the repayment of or changes in descriptions of debt when failure resolution
procedures are performed, it is essential that there be a provision for subordination of debt constituting
other internal TLAC-eligible instruments.
d. Surplus TLAC
Regarding external TLAC issued by a domestic resolution entity, the amount does not necessarily beallocated as internal TLAC, so a situation could arise in which a domestic resolution entity has a surplus.
The treatment of such surpluses (so-called “surplus TLAC”) shall be studied on an ongoing basis, taking
into account the progress of the international discussion and the approaches being adopted in eachcountry.
e. Supervisory Measures
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After taking into account whether the required amount of internal TLAC has been satisfied, if there isdeemed to be a risk that the loss-absorbing capacity etc. would be insufficient if Material Sub-group
was no longer able to continue as a going concern, a demand shall be made to promptly report this.
Furthermore, if further improvements are deemed to be necessary, a business improvement order, etc.
shall be issued to the domestic resolution entity, and additional allocation of internal TLAC shall be
demanded.
C. Confirmation of Eligibility of Internal TLAC Instruments
In connection with the evaluation of internal TLAC adequacy, it shall be confirmed, by taking thefollowing points into account and in light of the TLAC Pillar 1 Notice and the TLAC Term Sheet, whether
other internal TLAC-eligible instruments are eligible as other internal TLAC-eligible instruments from a
regulatory point of view:・ If contract terms concerning redemption, etc. have been specified in accordance with Article 7(3)(ix)
of the TLAC Pillar 1 Notice, regarding advance confirmation of redemption, etc. at the Material Subgroup’s option, the provisions of the TLAC Pillar 1 Notice shall be taken into account. Furthermore,
the statements concerning equity capital in III-2-1-1-3(3) of the Comprehensive Guidelines forSupervision of Major Banks, Etc. shall be applied, with “other internal TLAC” being substituted for“equity capital” when reading them.
(2) The FSA’s Response to TLAC Regulations as Host Authority
In order to ensure orderly execution of cross-border resolution, the TLAC Term Sheet provides that G-SIBs'
Material Sub-groups incorporated outside the home jurisdiction must have a mechanism in place to pass the Subgroup's losses to the resolution entity with legal certainty.
In light of this, the FSA, as host authority, applies internal TLAC regulations also to foreign G-SIBs’ Material
Sub-groups in Japan.
(i) Selection of Material Sub-groups Subject to Application of Internal TLAC Regulations(1) In light of the purpose of internal TLAC stated in (iv)A., it is also necessary in Japan to require foreign
G-SIBs' subsidiaries incorporated under Japanese laws and regulations that perform systemically important
operations, that are above a certain size, and that could generate losses to a degree that could push the entire
group into a crisis (hereinafter referred to as “foreign G-SIBs’ Material Sub-groups in Japan”) to possess
capacity as Material Sub-groups to concentrate losses through internal TLAC.
Specifically, based on the TLAC Term Sheet, (i) below shall be used as the primary criterion and (ii)below shall be used as a supplementary criterion when selecting Material Sub-groups to be covered:
Criterion (i): Its risk-weighted assets, overall exposure, or operating income exceeds 5% of the total forthe group
Criterion (ii): In Japan’s financial system, the systemic importance of the operations the said subsidiary
performs and the likelihood that losses would be incurred to the degree that the continuation ofsystemically important operations would be impeded
Financial Instruments Business Operators, etc. selected as foreign G-SIBs’ Material Sub-groups in Japan are332

designated to maintain the prescribed internal TLAC with their parent companies pursuant to the Foreign Securities
Companies TLAC Notice, after consulting with relevant overseas authorities, including the home authority, as
necessary.
Selectees shall be reviewed once every year, and, based on Article 56-2 of the FIEA, a demand shall be made forthe submission of a report detailing data submitted as of March 31 each year, in principle. Furthermore, if there has
been a change in the group structure, a demand shall be made for the submission of the projected figures before thechange as early as possible.
(ii) Adequacy of Internal TLAC
A. Required Levela. Timing of Application
Regarding foreign G-SIBs’ Material Sub-groups in Japan newly designated by the Foreign Securities
Companies TLAC Notice on or after April 1, 2020, application of the required amount of internal TLAC
shall commence approximately three years after designation. However, the period until thecommencement of application could be shortened as a result of consultation with the home authority, etc.
b. Internal TLAC Level Adjustment Coefficient
In the case of a foreign G-SIB’s Material Sub-group in Japan, based on the capital adequacy
requirement applied to said Material Sub-group, the required external TLAC level is calculated on theassumption that said Material Sub-group was the domestic resolution entity. This figure is then multipliedby the internal TLAC level adjustment coefficient determined by the FSA, which lies within the range of
75% to 90%, to calculate the required amount of internal TLAC.
In this regard, while development of the resolution system in each country has seen progress, the degreeof progress differs by jurisdiction, and the risks involved in implementation of resolution have not been
completely eliminated. Therefore, the internal TLAC level adjustment coefficient for foreign G-SIBs’
Material Sub-groups in Japan shall be determained in accordance with the need for advance allocation inconsideration of resolvability based on the reliability of the financial group’s preferred resolution strategy
and the state of each country’s development of a failure resolution system.
c. Measures for Evaluating Internal TLAC Adequacy and Maintaining Sufficient Internal TLAC
When evaluating internal TLAC adequacy, a Financial Instruments Business Operator, etc. which is aforeign G-SIB’s Material Sub-group in Japan needs to analyze not only internal TLAC quantity, but alsointernal TLAC quality, at least with regard to the following points. In addition, based on this evaluationof internal TLAC adequacy, it needs to take appropriate measures to ensure the maintenance of adequate
internal TLAC, both qualitatively and quantitatively.
- Other internal TLAC-eligible instruments satisfy all the criteria prescribed in the Foreign Securities
Companies TLAC Notice, and adequately reflect the spirit of the TLAC Term Sheet.
- The Material Sub-group has not loaned the funds required for acquisition to the parent company which
will be the holder of other internal TLAC-eligible instruments either directly or indirectly.
- If a resolution entity does not directly allocate internal TLAC to the Material Sub-group, but instead
allocates it indirectly through another subsidiary, it is essential that when internal TLAC triggering333occurs, the loss is ultimately transferred to the resolution entity. Allocation through an entity that is not
the parent company, etc. of the Material Sub-group shall generally not be permitted unless, for example,
there will be no change in the control relationship as a result of internal TLAC triggering.
- For hybrid debt capital instruments issued to a resolution entity or its subsidiary corporation, etc. by theMaterial Sub-group to qualify as internal TLAC-eligible capital, it shall be kept in mind that it isessential that there be a special clause stipulating that if the Material Sub-group has been recognized
as effectively bankrupt, the principal be reduced, etc. Furthermore, for the purpose of maintaining thedebt hierarchy, it shall be kept in mind that with regard to hybrid debt capital instruments of theMaterial Sub-groups held by a resolution entity since before the application of the TLAC regulations,contract terms shall be changed as necessary, and that with regard to the distribution of residual assetsof the Material Sub-groups and the repayment of or changes in descriptions of debt when failure
resolution procedures are performed, it is essential that there be a provision for subordination of debt
constituting other internal TLAC-eligible instruments.
d. Supervisory Measures
After taking into account whether the required amount of internal TLAC has been satisfied, if there isdeemed to be a risk that the loss-absorbing capacity, etc. would be insufficient if the foreign G-SIB’s
Material Sub-group in Japan was no longer able to continue as a going concern, a demand shall be madeto promptly report this. Furthermore, if further improvements are deemed to be necessary, a business
improvement order, etc. shall be issued to the Material Sub-group, and additional allocation of internal
TLAC shall be demanded.
B. Confirmation of Eligibility of Internal TLAC Instruments(1)(iv)C. shall be applied mutatis mutandis to whether, in connection with the evaluation of internal TLAC
adequacy, other internal TLAC-eligible instruments are eligible as other internal TLAC-eligible instrumentsfrom a regulatory point of view.

IV-8-6-2 Orderly Resolution Using TLAC

IV-8-6-2-1 SignificanceIf a Material Sub-group of a financial institution group subject to TLAC regulations is finding it difficult tocontinue to perform systemically important functions as a result, for example, of a deterioration in its financial
condition, and the authorities have determined that it cannot increase its capital by selling assets, receiving an
injection from its parent company, or other alternative means, as an ultimate means, it is expected to restore its
soundness by internal TLAC triggering regarding Material Sub-group.
As a result of losses being concentrated in the resolution entity due to internal TLAC triggering, if the authorities
have deemed that the financial institution group requires failure resolution, the Material Sub-group itself will beallowed to remain in business, with the shareholders and bondholders of the resolution entity bearing the losses.
Below are specific examples of orderly resolution procedures involving TLAC in Japan.

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IV-8-6-2-2 Specific Examples of Procedures(1) The FSA’s Response as Home Authority(i) Crisis at Domestic Material Sub-group of Covered SIBs
The following steps A-D could be envisaged as a possible means of resolution using TLAC based on the SPE
approach. A-C would be implemented rapidly over the weekend when operations are not being performed, inorder to avoid market turmoil, and the assumption is that the Material Sub-group will continue to operate as
normal.
(Note) While an announcement of a preferred resolution strategy by the relevant authority is expected to increasetransparency for market participants, credibility of resolution regime, and feasibility of timely resolution,
exact measures to be taken shall be determined by the relevant authorities on a case-by-case basis
considering the actual condition of the Covered SIB in its resolution phase. Accordingly, instead of
applying the Specified Measures Under Item (ii) to the Domestic Resolution Entity under the SPE
resolution strategy, for example, the Prime Minister may confirm the necessity to take "Specified Measures
Under Item (i)" as set forth in Article 126-2, paragraph (1), item (i) of the Deposit Insurance Act (DIA)
with respect to the Domestic Resolution Entity, or may confirm the necessity to take Specified Measures
Under Item (i) or "Measures Under Item (i)" as set forth in Article 102, paragraph (1), item (i) of the DIA
with respect to the Material Sub-groups in Japan.
A. Loss Absorption Using Internal TLAC of Domestic Material Sub-group
Given that internal TLAC triggering could have a substantial impact on the financial institution group, it
needs to be kept in mind that internal TLAC triggering with respect to a domestic Material Sub-group shall belimited to situations in which even if the supervisory authorities issues a business improvement order to thedomestic Material Sub-group, there is no prospect of improvement in its financial condition, and it would be
difficult or impossible for the Material Sub-group to restore its soundness through, for example, assistancefrom group companies and there are no appropriate alternatives, or the level of urgency is high as the Material
Sub-group’s financial condition has deteriorated suddenly and there is no time to issue a business improvement
order or employ alternative means.
If internal TLAC triggering is selected due to unavoidable circumstances, with regard to internal TLAC
allocated to a domestic Material Sub-group that has incurred losses, steps shall be taken to transfer said losses
at the domestic Material Sub-group to the domestic resolution entity.
Specifically, if the FSA has deemed that the domestic Material Sub-group has or may have liabilities in excess
of assets or be insolvent (including cases in which the resolution entity and Material Sub-group have informed
the FSA that the said Material Sub-group has or may have liabilities in excess of assets or be insolvent), factors
such as the availability of aforementioned alternative means, the level of urgency, etc. have been taken into
account, and among the orders prescribed in Article 57-19(1) of the FIEA, an order for the restoration ofsoundness, including increasing capital and restoring liquidity at the Material Sub-group through the use ofinternal TLAC, has been issued to the domestic resolution entity (when the Material Sub-group has beenrecognized as effectively bankrupt), the principal shall be reduced or converted to equity in accordance with335

the terms of the internal TLAC (loan agreement, etc.) (Note 1).
Before issuing an order, consideration shall be given to whether it would be difficult or impossible for thedomestic Material Sub-group to restore its soundness through, for example, assistance from group companies.
Furthermore, when an order has been issued, this shall be made public.
Even if internal TLAC triggering has occurred, it is possible, depending on the financial condition, etc. of theholding company and the group as a whole, that failure resolution for the group as a whole, as prescribed in B
onwards, will not be performed (Note 2). In such cases, care shall be taken to ensure adequate communication
with the markets so as to prevent any misconception that failure resolution for the group as a whole is to becommenced.
(Note 1) Regarding the meaning of “when the Material Sub-group has been recognized as effectively bankrupt,”
orders issued by the FSA pursuant to Article 57-19(1) of the FIEA shall state that a financial crisis has
been deemed to have occurred with the specified domestic Material Sub-group, and shall include thewording, “order for the restoration of soundness of Material Sub-group using internal TLAC”(therefore orders pursuant to Article 57-19(1) of the FIEA will not fall under “when the Material Subgroup has been recognized as effectively bankrupt” if they do not state that the FSA has deemed thata financial crisis has occurred with the specified domestic Material Sub-group, or if they do not include
the wording “order for the restoration of soundness of Material Sub-group using internal TLAC”).
(Note 2) For example, this could include cases where no more measures will be taken under the Deposit
Insurance Act with respect to the domestic resolution entity or the Material Sub-group, and cases
where the Prime Minister may confirm the necessity to take "Specified Measures Under Item (i)" as
set forth in Article 126-2, paragraph (1), item (i) of the DIA with respect to the Domestic Resolution
Entity, or may confirm the necessity to take Specified Measures Under Item (i) or "Measures Under
Item (i)" as set forth in Article 102, paragraph (1), item (i) of the DIA with respect to the Material Subgroups in Japan.
B. Specified Confirmation by the Prime MinisterIn the case of that internal TLAC triggering has occurred, when the Domestic Resolution Entity which absorbed
the losses from the Material Sub-group fulfils the requirements for the application of Specified Measures Under
Item (ii) as set forth in the DIA, the Prime Minister shall confirm the necessity to take Specified Measures Under
Item (ii) (Article 126-2(1)(ii) of the same Act) and issue an Injunction Ordering Specified Management (Article
126-5 of the same Act) following deliberation by the Financial Crisis Response Council with regard to theDomestic Resolution Entity (i.e. the Non-viable Holding Company).
In the case of specified confirmation, etc., Basel III-eligible Additional Tier 1 instruments and Tier 2
instruments issued by the Non-viable Holding Company will be written off or converted into equity under theterms and conditions of such instruments prior to other liabilities including the External TLAC eligible debt
liabilities.
In addition, a movable or claim pertaining to the business of the Non-viable Holding Company that shall be
succeeded to the Specified Bridge Financial Institution, etc. under C below (limited to those designated by thePrime Minister) may not be seized pursuant to Article 126-16 of the DIA.
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(Note) With regard to Covered SIBs, Additional Tier 1 instruments in the form of debt liabilities issued by
Domestic Resolution Entity on and after March 31, 2013 will also be fully or partially written down orconverted into equity when the consolidated Common Equity Tier 1 ratio that is calculated under the Pillar
1 Notices falls below 5.125%.
C. Transference of Business
The Non-viable Holding Company transfers its business (including shares of Material Sub-group held by theNon-viable Holding Company) related to systemically important transactions to the Specified Bridge Financial
Institution, etc. (Article 126-34(3) of the DIA) incorporated by the Deposit Insurance Corporation of Japan(DICJ) with the permission of the court in lieu of the extraordinary resolution of the shareholders' meeting
pursuant to Article 126-13, paragraph (1), item (iii) of the DIA, under a decision by the Prime Minister that theSpecified Bridge Financial Institution, etc. should carry out the Specified Assumption of Business, etc. in orderto succeed to the business of the Non-viable Holding Company pursuant to Article 126-34, paragraph (1), item(ii) of the DIA.
At this point, it is expected that the obligation (including those with under a year until maturity) of the External
TLAC eligible debt liabilities will not be transferred to the Specified Bridge Financial Institution, etc., and theNon-viable Holding Company continues to be the obligor of such liabilities.
(Note) The Specified Bridge Financial Institution, etc. will transfer its business to financial institution(s) within
two years in principle after the Specified Confirmation with regard to the Domestic Resolution Entity by
the Prime Minister (Article 126-37, Article 96, paragraph (1) and Article 126-3 of the DIA).
D. Court Insolvency Proceedings of the Non-viable Holding Company
After transferring its business under (iii) above, the DICJ files a petition for the commencement of bankruptcy
proceedings against the Non-viable Holding Company. It is expected that the Non-viable Holding Company willenter into "liquidation proceedings" (in particular, bankruptcy proceedings) through which the company will bedissolved, not into "reconstruction procedures" through which business continuity will be attempted.
In this case, creditors of the Non-viable Holding Company, including the holders of the External TLAC eligible
debt liabilities, will receive liquidating distributions within the scope of the Bankruptcy Estate under the
Bankruptcy Act or relevant laws, and thus will absorb the losses in the bankruptcy proceedings.
(ii) Crisis at Foreign Material Sub-group of Covered SIBs
In the case of a foreign Material Sub-group of Covered SIBs, the authorities in the jurisdiction in which theforeign Material Sub-group was established shall determine whether to perform internal TLAC triggering. When
this decision is being made, it is likely that in accordance with the TLAC Term Sheet, a certain period will beestablished, during which it will be necessary to ascertain whether the Japanese authorities approve. In such acase, it shall be decided whether approval will be given after taking into account whether with assistance, etc.
from group companies, it would be possible to restore the soundness of the Material Sub-groups.
Even if internal TLAC triggering regarding foreign Material Sub-groups has occurred, it is possible, dependingon the financial condition, etc. of the holding company and the group as a whole, that failure resolution for thegroup as a whole, as prescribed in (i)B onwards, will not be performed. In such cases, care shall be taken to
ensure adequate communication with the markets so as to prevent any misconception that failure resolution for337

the group as a whole is to be commenced.
(2) The FSA’s Response as Host Authority
As in (1) above, also with respect to a foreign G-SIB’s Material Sub-group in Japan, it needs to be kept inmind that internal TLAC triggering shall be limited to situations in which even if the supervisory authorities
issues a business improvement order to the domestic Material Sub-group, there is no prospect of improvement
in its financial condition, and it would be difficult or impossible for the Material Sub-group to restore its
soundness through, for example, assistance from group companies and there are no appropriate alternatives, orthe level of urgency is high as the Material Sub-group’s financial condition has deteriorated suddenly (including
a case where the entire financial group has fallen into a crisis) and there is no time to issue a business
improvement order or employ alternative means.
If internal TLAC triggering is selected due to unavoidable circumstances, with regard to internal TLAC
allocated to the Material Sub-group, steps shall be taken to concentrate said losses at the Material Sub-group to
the group’s resolution entity. In this case, the FSA will contact the relevant overseas authorities in advance insofar
as practically possible, and discuss the steps to be taken after providing related information.
Specifically, if the FSA has deemed that the Material Sub-group has or may have liabilities in excess of assets
or be insolvent (including cases in which the Material Sub-group has informed the FSA that the said Material
Sub-group has or may have liabilities in excess of assets or be insolvent), and among the orders prescribed in
Article 51 of the FIEA, an order for the restoration of soundness, including increasing capital and restoring
liquidity at the Material Sub-group through the use of internal TLAC, has been issued to the Material Sub-group(when the foreign G-SIB’s Material Sub-group in Japan has been recognized as effectively bankrupt), theprincipal shall be reduced or converted to equity in accordance with the terms of the internal TLAC (loanagreement, etc.) (Note).
In determining whether the Material Sub-group has or may have liabilities in excess of assets or be insolvent,the FSA shall also take into account factors such as the financial conditions of the entire group.
Before issuing an order, consideration shall be given to whether it would be difficult or impossible for the
Material Sub-group to restore its soundness through, for example, assistance from group companies. In making
the determination, the FSA shall give notice to the foreign home authority, and confirm whether they consent to
the internal TLAC triggering by setting a period of not less than 24 hours but not longer than 48 hours after thetime of the notice, in principle. If the home authority gives consent within the prescribed period or if theprescribed period passes after the time of the notice, the FSA determines that it would be difficult or impossible
for the Material Sub-group to restore its soundness through, for example, assistance from group companies.
However, if failure resolution proceedings have commenced in the home country or internal TLAC triggering
has occurred in another jurisdiction, and urgency is found in light of the status of the financial group and theimpact on the Japanese financial system, etc., the period for confirming the consent could be shortened or theprocedure for confirming the consent could be omitted as an exception.
When notifying the home authority of internal TLAC triggering, the FSA will also notify the relevant overseas
authorities participating in the crisis management group (CMG) of the financial institution insofar as practically338

possible.
(Note) Regarding the meaning of “when the foreign G-SIB’s Material Sub-group in Japan has been recognized as
effectively bankrupt,” orders issued by the FSA pursuant to Article 51 of the FIEA shall state that a financial
crisis has been deemed to have occurred with the specified foreign G-SIB’s Material Sub-group in Japan, andshall include the wording, “order for the restoration of soundness of Material Sub-group using internal TLAC”(therefore orders pursuant to Article 51 of the FIEA will not fall under “when the foreign G-SIB’s Material Subgroup in Japan has been recognized as effectively bankrupt” if they do not state that the FSA has deemed that afinancial crisis has occurred with the specified foreign G-SIB’s Material Sub-group in Japan, or if they do notinclude the wording “order for the restoration of soundness of Material Sub-group using internal TLAC”).

339

V. Supervisory Evaluation Points and Various Administrative Procedures (Type II Financial Instruments
Business)
V-1 Governance (Type II Financial Instruments Business)
Supervisors shall pay attention to the following points when examining the governance of Financial Instruments
Business Operators (limited to Type II Financial Instruments Business Operators; the same shall apply in V).
V-1-1 Officers of Financial Instruments Business Operators(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator properly takes account of the following eligibility
requirements in the decision-making process regarding proposals for the appointment of its officers:(i)

A person who does not meet any of the ineligibility criteria (Article 29-4(1)(ii)(a) to (i) of the FIEA) and

who did not meet any of them at the time of registration.
(ii)

A person who has not violated laws and regulations of the FIEA regarding financial instruments businessor related business operations, or a person who has not been subjected to administrative actions taken basedon laws and regulations.
(iii) A person who has not damaged the interests of investors in relation to the conduct of the investment
advisory and agency business and the investment management business.
(iv) A person who has not engaged in an illegal or markedly inappropriate act, under particularly grave
circumstances, regarding financial instruments business.
(2) Supervisory Method and Actions
In cases where an officer of a Financial Instruments Business Operator is deemed to meet the ineligibility criteria
specified under any of Article 29-4(1)(ii)(a) to (i) of the FIEA, or is found to have done so at the time when thebusiness operator obtained registration under Article 29 of the FIEA, or where an officer of a Financial Instruments
Business Operator is deemed to meet the ineligibility criteria specified under any of Article 52(1) (vii) and (ix)and (x) of the FIEA, supervisors shall consider taking actions such as ordering the dismissal of the said officer basedon Article 52(2) of the FIEA.
In addition, they shall hold an in-depth hearing regarding the decision-making process concerning the proposal
for the appointment of the said officer and, when necessary, require the submission of a report based on Article 562(1) of the FIEA. Furthermore, supervisors shall consider taking actions such as issuing an order for business
improvement, if the Financial Instruments Business Operator’s control environment for governance is deemed tohave a serious problem and the action is deemed to be necessary and appropriate from the viewpoint of protecting
public interests and investors.
V-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business340

(1) Major Supervisory Viewpoints
Supervisors shall examine whether Financial Instruments Business Operators are adequately staffed to properly
conduct financial instruments business (limited to Type II financial instruments business; the same shall apply toV), in light of V-3-1 and whether the operators have established the system/structure necessary for operating
financial instruments business appropriately.
(2) Supervisory Method and Actions
Provisions under V-3-1 are part of a comprehensive set of elements that should be taken into consideration whensupervisors examine whether a Financial Instruments Business Operator is adequately staffed to properly conduct
financial instruments business, etc. Even if an officer or an employee is deemed to not meet the requirements, it
should not automatically lead to the conclusion that the Financial Instruments Business Operator is not adequately
staffed, etc. The important thing is, first and foremost, that Financial Instruments Business Operators strive to ensure
on their own responsibility that they are adequately staffed, etc. in light of those requirements and other elements.
However, supervisors shall hold in-depth hearings regarding Financial Instruments Business Operators’ view on
their staffing, etc. and their decision-making process concerning the proposed appointments of officers andemployees, in cases where a Financial Instruments Business Operator is deemed to have failed to take those elements
into consideration sufficiently in the said decision-making process, and where it is deemed to be necessary andappropriate from the view point of protecting public interest and investors to hold such hearings. In addition, theyshall require the submission of reports based on Article 56-2(1) of the FIEA when necessary.
Supervisors shall consider taking actions such as issuing an order for business improvement under Article 51 of
the FIEA in cases where the Financial Instruments Business Operator’s control environment for governance isdeemed to have a serious problem as a result of the examination of the submitted report, and where the action isdeemed to be necessary and appropriate from the viewpoint of protecting public interests and investors.
Furthermore, when the Financial Instruments Business Operator is deemed to not be adequately staffed toproperly conduct financial instruments business, etc. as a result of the examination of the submitted report,
supervisors shall consider taking necessary measures, including issuing an order for business suspension based on
Article 52(1) of the FIEA.
It should be noted that if the Financial Instruments Business Operator is an individual person, supervisors shall
examine the qualifications of the person from the above viewpoints, and as with the case of a corporation, they shalljudge whether the person is sufficiently qualified, etc. to properly operate financial instruments business and takenecessary supervisory actions.

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V-2 Appropriateness of Business Operations (Type II Financial Instruments Business)
V-2-1 Appropriateness of Business Operations Related to Securities Equivalents Sales Business
V-2-1-1 Control Environment for Customer Solicitation and Explanations(1) Points of Attention Regarding Notification of Necessary Information Related to Delivery of Securities
Equivalents and Other Matters
When securities equivalents sellers, etc., (hereinafter referred to as “self-offering companies”), business
operators engaging in Article 28(1)(ii) of the FIEA (hereinafter referred to as “securities equivalent sellers”), or
business operators engaged in business regarded as Type II financial instruments business based on Article 29-5(2)of the FIEA (hereinafter referred to as “deemed Type II financial instruments business”; the same shall apply
hereinafter)) have failed to properly notify customers of the following items, the situation shall be deemed to fallunder the category of “situations in which information necessary for customers with regard to the status of delivery
and other matters regarding the customers’ securities transactions is deemed not to have been properly provided,”as specified under Article 123(1)(viii) of the FIB Cabinet Office Ordinance.
(i)

Items that must be specified in writing when a contract is signed under Article 37-4(1) of the FIEA must

be notified to customers.
(ii)

Items that must be specified in the report on the outstanding balance of transactions as specified undereach item of Article 108(1) of the FIB Cabinet Office Ordinance.
(iii) In addition to the items described in (i) and (ii) above, items related to the delivery of cash and securities(excluding cases where the transaction does not involve the direct delivery of cash and securities between thecustomer and the Financial Instruments Business Operator, such as when the delivery of cash is made througha financial institution and when the delivery of securities is made through a transfer settlement.) must be
notified to customers.
(2) Points of Attention Regarding Solicitation of Investment Trusts
Given that investment trusts are instruments that are solicited and sold to a broad range of customer groups,
including ordinary customers who do not have sufficient expert knowledge and experiences, it is important tocorrectly grasp customer needs taking into consideration their stages of life, status of their assets, purpose of theirinvestment, etc. and provide products that meet such needs, and conduct solicitation that is appropriate according
to the customer’s knowledge, experience and investment intention.
In addition, building an organizational structure for solicitation and sales that supports customers' stable asset
building while expanding investment trust assets under management is likely to help business operations related tosecurities equivalents sales business build a stable profit structure that is not vulnerable to market fluctuations.
Therefore, supervisors shall, regarding solicitation of investment trust products, conduct supervision by paying
particular attention to the following points, for example.
(i)Whether the following points are explained in an easy-to-understand manner at the time of solicitation of342

investment trust products in relation to costs incurred by customers (excluding specified investors; ;hereinafter the same shall apply in (ii)-(iii) ), such as commission on sales of investment trusts.
A. The rates of commission on sales, and the amounts of commission on sales that varies in accordance withthe amount being purchased, of the investment trusts to be solicited (a rough estimate shall be provided
if the exact figure is not available at the time of solicitation.).
B. Costs incurred by customers after purchasing the investment trusts under solicitation (including, forinstance, trust fees (real contribution rates including the asset management costs of the destination fundsof investment in cases of investment trusts using a fund-of-funds strategy), the value of assets retained in
the trust, etc.)(ii)

With respect to dividends on investment trusts, whether it is explained to customers in an easily

understandable manner, that all or part of the dividends may correspond to a partial repayment of principal.
(iii) Given that multi-currency funds involve not only a risk that the price of the invested asset will fluctuate
but also the complex risk of currency fluctuation, when entering a contract with a customer that has noexperience in investing in multi-currency funds, whether the securities company, etc. takes measures, such asreceiving a written confirmation from the customer to the effect that he/she has understood the productcharacteristics and risk profile, and keeping it.
(iv)

IV-3-1-2(3) shall be applied mutatis mutandis to points of attention regarding sales through solicitation

targeting elderly customers.
(v)

IV-3-1-2(8) shall be applied mutatis mutandis to points of attention regarding the solicitation oftransactions that use the NISA Program.

(vi)

IV-3-1-2(9) shall be applied mutatis mutandis to points of attention regarding sale of investment trusts,

etc. which invest in assets other than specified assets.
(3) Points of Attention Regarding Explanation of Important Items Related to Investment Trust Switching
Solicitation of frequent switches to other investment trusts may not necessarily lead to the customer's stable andeffective asset building due to such factors as increased costs arising from additional commissions on sales and, in
terms of asset management, and potential declines in investment results arising from an increase in cancellations
shortly after establishing a new fund that lead to failure to efficiently manage the assets. In light of this, it isnecessary to provide detailed explanations to customers on the characteristics of investment trusts related toswitching between them and the advantages and disadvantages associated with the relevant switching even when
there is a rationale for switching in light of customers’ investment goals, market trends, etc., to enable customers tojudge whether there is a need to make such switching after they have fully understood these points.
Reflecting these considerations, in cases where a securities equivalents seller, etc., has failed to provide
explanations regarding the information necessary for customers to make a judgment as to whether there is a rationale
for the switching of investment trusts or investment corporations (hereinafter referred to as "investment trusts, etc."),including the consistency of the switching and customers' investment purposes, in accordance with each customer's
depth of understanding, and when it is found that it has failed to establish an internal control system for conducting
effective verification, the situation shall be deemed to fall under the category of "situations in which explanations343

regarding important items related to switching have not been provided to customers in the solicitation for switchingof investment trust beneficiary certificates, etc.," as specified under Article 123(1)(ix) of the FIB Cabinet Office
Ordinance. The information necessary for customers to make a judgment as to whether there is a rationale forswitching may include roughly calculated profit and loss of the investment trust, etc. to be cancelled and comparisonsof merchantability and expenses between the investment trust, etc. to be cancelled and that to be newly acquired, in
addition to general items to be explained in relation to sale of investment trusts, etc., but it shall be noted that
explanations may vary by case depending on each customer's knowledge, experience, status of assets, investment
purposes, and the characteristics of relevant investment trusts, etc.
(4) Points of Attention Regarding Sale of Funds(i)

Points of Attention Regarding Responsibility for Providing Explanations Concerning Funds
Article 2(2)(v) and (vi) comprehensively define collective investment schemes (funds) and the rights tointerests therein. Business operators which conduct sales, solicitation, offering and private placement
activities related to such rights may include those which were not subject to supervision by the authorities
before the enforcement of the FIEA, and those which handle funds that lack sufficient transparency andliquidity to enable investors to identify and evaluate their actual state.
In light of this, in cases where a securities equivalents seller or a self-offering company handles suchrights, supervisors shall pay attention to whether it provides investors with sufficient explanations regarding
the key points of association contracts, businesses in which relevant funds are involved and risks regarding
rights based on the contracts.
In particular, when the actual state of a securities equivalents seller’s business fits the description of theMultilevel Marketing activities as specified under Article 33(1) of the Act on Specified Commercial
Transactions, supervisors shall pay attention to whether appropriate explanations based on the same act andthe FIEA are provided and, when necessary, take appropriate actions in cooperation with the Ministry of
Economy, Trade and Industry and other relevant organizations. In addition, the supervisors shall pay
attention to whether the case constitutes a violation of the Act on Prevention of Pyramid Schemes, and whena violation is suspected, take appropriate actions, such as providing information to police and other relevantorganizations.

(ii)

Points of Attention Regarding Provision of Documents Prior to Signing Contracts
With regard to "Characteristics of contracts regarding buy or sell, or other transactions on holdings inbusinesses eligible for business-style investment" prescribed in Article 92-2(1)(iii) of the FIB Cabinet Office
Ordinance, specifically, (1) Overview of businesses eligible for investment to which funds invested bycustomers are assigned, (2) that customers themselves need to make judgment on the actual use of the funds
they invested and the status of account balance based on information obtained from the individuals operating
the business to which the investment is made, and (3) that documents shall show that there is no guarantee on
the profitability of the business to which the investment is made.
(5) Points of Attention Regarding Sale of Securitization Products (Assurance of Traceability of Securitization344

Products)
Securities equivalents sellers include business operators engaging in the activities specified under Article
28(2)(ii) of the FIEA with regard to the trust beneficiary rights as specified under Article 2(2)(i) and (ii) of the FIEA
(hereinafter referred to as “trust beneficiary rights sellers). It is important that regarding trust beneficiary rights
handled by trust beneficiary rights sellers, which have the same nature as securitization products, information related
to the underlying assets is also properly communicated to investors. With this in mind, in the case of trust beneficiaryrights sellers who handle the sale, etc. of trust beneficiary rights, supervisors shall pay attention to the following
points, in accordance with the self-regulatory regulations of the Japan Securities Dealers Association, entitled“Regulations Concerning the Distribution, etc. of Securitized Products.”
It should be noted that even if trust beneficiary rights sellers play only a limited role in transactions, such as
acting as a sales agent, it is desirable that they provide support where possible as long as they deal with investors.
(i)Whether before selling securitization products, the trust beneficiary rights seller collects information

regarding the contents of the underlying assets, the status of originators’ continuous retention of the risks andthe risks involved therein and conducts sufficient analysis to provide appropriate explanations.
(ii)

Whether the trust beneficiary rights seller has established the internal procedures and rules necessary forproviding information regarding the risks involved in the underlying assets and liquidity risks not reflected in
credit ratings, rather than relying exclusively on credit ratings, when they sell securitization products.
(iii) Whether the trust beneficiary rights seller has established the internal procedures and rules necessary forproviding information in ways that enable customers investing in securitization products to trace information
regarding the contents of the underlying assets and the risks involved therein, if requested to do so by theinvestors.
(iv)

Whether the trust beneficiary rights seller has developed a control environment for evaluating andcalculating theoretical prices and quickly informing customers of them, even when it is difficult to determine
market prices. Whether trust beneficiary rights sellers avoid evaluating and calculating theoretical prices inan arbitrary manner, so as to refrain from giving priority to promoting the arbitrary use of the information for
specific purposes.
(6) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the control environment forcustomer solicitation and explanations of a securities equivalents seller, etc., through daily supervisoryadministration and the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the securities equivalents seller etc., by requiring the submission of reports based on Article
56-2(1) of the FIEA. When the securities equivalents seller, etc., is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing an orderfor business improvement based on Article 51 of the FIEA. When the securities equivalents seller etc., is deemed tohave committed a serious and malicious violation of law, the supervisors shall consider necessary actions, including
the issuance of an order for business suspension based on Article 52 (1) of the FIEA.

345

V-2-1-2 Discretionary Trading Contracts, etc.
(1) Points of Attention Regarding Discretionary Trading Contracts with Foreign Securities Companies
When supervisors have received a notification for the signing of a contract based on Article 16(1)(viii)(b) of the
Cabinet Office Ordinance Regarding Definitions, they shall pay attention to the following points:(i)

Whether the division that executes transactions regarding the said agreement is clearly separated from thedivisions that receive and execute orders for other brokerage transactions.
(ii)

Whether it is ensured that account documents are compiled in ways to enable the identification oftransactions related to the said agreement.
(2) Scope of Specified Agreements by Securities Equivalents Sellers, etc.
Specified agreements as prescribed under Article 123(1)(xiii)(b) and (c) of the FIB Cabinet Office Ordinanceinclude the following agreements:(i)

Agreements regarding prices higher (in the case of sell orders) or lower (in the case of buy orders) than

the specified prices (including prices determined with a prescribed method).
(ii)

An appropriate range determined with a specified price as a base point.

(iii)

Agreements regarding the determination of prices at the discretion of securities equivalents sellers, etc.,

on the condition that they follow the best execution practice (so-called CD order) in daily trading.
(iv)

Targeting of prices determined through a prescribed method such as volume weighted averaging (so-called VWAP target order).
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the transactions, as specified under
Article 123(1)(xiii)(a) to (e) of the FIB Cabinet Office Ordinance of a securities equivalents seller, etc., throughdaily supervisory administration and the reporting of problematic conduct, they shall identify and keep track of thestatus of voluntary improvement made by the securities equivalents seller, etc., by holding in-depth hearings and,
when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When the securities
equivalents seller, etc., is deemed to have a serious problem from the viewpoint of protecting public interests andinvestors, the supervisors shall take actions, including issuing an order for business improvement based on Article
51 of the FIEA. When the securities equivalents seller. etc., is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider taking necessary actions, including issuing an order for businesssuspension based on Article 52(1) of the FIEA.
V-2-1-3 Measures to Prevent Misrecognition(1) Points of Attention Regarding Measures to Prevent Securities Equivalents Sellers, etc., from Being
Misrecognized as Other Financial Institutions
In cases where the securities equivalent seller, etc. conducts business operations, with its headquarters or sales346

branches located in a building also occupied by another financial institution, supervisors shall examine whether the
securities equivalents seller, etc. provides sufficient explanations regarding the following matters to customers, fromthe viewpoint of preventing customers from misrecognizing the said securities equivalents seller, etc. as the said
financial institution.
(i)

The securities equivalents seller, etc. and the financial institution sharing the building are different

corporations.
(ii)

Products and services provided by the securities equivalents seller, etc. are different from those provided

by the said financial institution.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding misrecognition prevention
measures taken by a securities equivalents seller, etc., through daily supervisory administration and the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by the
securities equivalents seller, etc., by holding in-depth hearings and, when necessary, requiring the submission ofreports based on Article 56-2 (1) of the FIEA. When the securities equivalents seller, etc., is deemed to have aserious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the securities
equivalents seller, etc., is deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including issuing an order for business suspension based on Article 52 (1) of the FIEA.
V-2-1-4 Segregated Management of Investments Through Crypto-and Other Assets, etc.
When a securities equivalents seller, etc. conducts purchase and sale, etc. of rights pertaining to equity in acollective investment scheme (fund), the invested or contributed money needs to be managed separately from own
property of the person conducting business by using the invested or contributed money, based on Article 40-3 of the
FIEA and Article 125 of the FIB Cabinet Office Ordinance.
In addition, when crypto-and other assets are invested or contributed, the securities equivalents seller, etc.
needs to appropriately manage the crypto-and other assets by entrusting the management to a crypto-asset exchange
service provider or a trust company, etc. Therefore, supervisors shall oversee whether the securities equivalents
seller, etc. appropriately confirms the control environment, etc. for reducing the risk of leakage developed by theoutsourced crypto-asset exchange service providers or trust company, etc.
V-2-2 Appropriateness of Business Operations Related to Market Derivatives Business Operators
V-2-2-1 Control Environment for Legal Compliance
If market derivatives business operators (business operators which engage in the activities specified under
Article 28(2)(iii) of the FIEA; the same shall apply hereinafter) are to gain the trust of investors, thereby building
trust in the derivatives trading market, it is important that they strive to manage their business operations in an
appropriate manner while strictly complying with laws, regulations and various business rules, and fully recognizing
347

their roles as derivatives market players.
Market derivatives business operators’ control environments for legal compliance shall basically be examinedbased on the supervisory viewpoints and method specified in III-2-1. However, they shall also be examined inrelation to a broad range of matters, including the status of compliance with voluntary regulatory rules establishedby self-regulatory organizations.
In cases where a market derivatives business operator receives a deposit of money from a customer for currencyrelated market derivatives transactions, etc. (referring to the activities specified in Article 143(3)(i) and (iii) of the
FIB Cabinet Office Ordinance; the same shall apply hereafter), since such an action constitutes securities, etc.
management business, it should be kept in mind that the business operator needs to register as a Type I financial
instruments business. IV-3-3-1 shall be applied mutatis mutandis to the points of attention and supervisory methods
regarding the control environment for legal compliance in cases where the market derivatives business operator
manages currency-related market derivatives transactions, etc. without depositing the money deposited bycustomers in an exchange.
V-2-2-2 Control Environment for Customer Solicitation and Explanations(1) Points of Attention Regarding Advertisements, etc.
(i) Whether the market derivatives business operator uses descriptions that could cause misunderstandings
regarding domestic derivatives markets, for which it can act as a broker, and overseas derivatives markets.
(ii)

In cases where losses exceeding the amount of cash margin and other deposits may arise due to rapid

market movements despite the Loss-Cutting Rule, whether the market derivatives business operator properly
indicates this risk in the advertisement.
(iii) Whether the market derivatives business operator has forced customers to continue attending seminars
and similar events despite their expression of unwillingness to do so (including cases where it has effectively
forced them to do so). It should be kept in mind that this kind of practice shall be deemed to meet the provisionof Article 38(vi) of the FIEA (known as “prohibition of re-solicitation”).
(2) Points of Attention Regarding Explanation Documents“The Key Points of the Status of Internal Control” shall describe specific arrangements and procedures forhandling complaints and inquiries from customers and for conducting internal audits.
(3) Points of Attention Regarding the Distribution of Notices of Warning Concerning the Solicitation Methods, etc.
for Market Derivatives Transactions
IV-3-3-2(3) shall be applied mutatis mutandis to the points of attention regarding market derivatives business
operators issuing alerts to customers when conducting market derivatives transactions.
(4) Points of Attention Regarding Provision of Pre-Contract Documents(i)

The “reasons for the possibility of a loss exceeding the principal amount,” as specified under Article348

82(iv)(b) of the FIB Cabinet Office Ordinance shall include a rapid market movement that could cause a loss
exceeding the principal amount despite the Loss-Cutting Rule.
(ii)

The “reasons for the termination of the relevant financial instruments transaction contract,” as specified

under Article 82(viii) of the FIB Cabinet Office Ordinance shall include items related to the Loss-Cutting Rule.
(iii) The “types and calculation methods of cash margin and other deposits to be made by customers withregard to the relevant derivatives transactions, etc.,” as specified under Article 93(1)(iv) of the FIB Cabinet
Office Ordinance shall include items related to minimum margin deposits.
(iv) Regarding currency-related transactions, the “major terms and other basic items regarding derivatives
trading,” as specified under Article 93(1)(vii) of the FIB Cabinet Office Ordinance shall include items related
to the method of determining prices of financial instruments, etc., and the Swap Point. In cases where theSwap Point may be either received or paid by customers and where a loss may arise, these possibilities shallbe properly indicated.
(5) Points of Attention Regarding the Accountability of Currency-Related Market Derivatives Business Operators
IV-3-3-2(4)(vi) shall be applied mutatis mutandis to points of attention regarding matters to be explained incases where a currency-related market derivatives business operator manages the money deposited by customers
without depositing it in an exchange. Also, IV-3-3-2(4)(vii) shall be applied mutatis mutandis to points of attention
regarding explanations on loss-cut transactions that are conducted by currency-related market derivatives business
operators.
(6) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a market derivatives business
operator’s control environment for customer solicitation and explanations, through daily supervisory administrationor the reporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement
made by the market derivatives business operator by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2(1) of the FIEA. When the market derivatives business operator isdeemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When themarket derivatives business operator is deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including the issuance of an order for business suspension based on
Article 52(1) of the FIEA.
V-2-2-3 Exercise of Checking Function against Investors
Provisions in IV-3-2-3 (4) shall apply mutatis mutandis to market derivatives operators.
V-2-2-4 Discretionary Trading Contracts, etc.
(1) Points of Attention Regarding Discretionary Trading Contracts with Foreign Financial Futures Companies
349

When supervisors receive a notification from a market derivatives business operator for the signing of a contract
based on Article 16(1)(viii)(b) of the Cabinet Office Ordinance Regarding Definitions, they shall pay attention to
the following points:(i)

Whether the division that executes transactions regarding the said contract is clearly separated from thedivisions that receive and execute orders for other brokerage transactions.
(ii)

Whether it is ensured that account documents are compiled in ways to enable the identification oftransactions related to the said contract.
(2) Scope of Specified Agreements by Market Derivatives Business Operators
Specified agreements under Article 123(1)(xiii)(b) and (c) of the FIB Cabinet Office Ordinance include thefollowing agreements:(i)

Agreements regarding rewards and contracted values higher or lower than the specified rewards andcontracted values (including rewards and contracted values determined with a prescribed method)(ii)

Agreements regarding an appropriate range determined with a specified reward or a contracted value as abase point.
(iii)

Agreements regarding the determination of rewards and contracted values at the discretion of market

derivatives business operators on the condition that they follow the best execution practice in daily trading.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a market

derivatives business

operator’s practices, as specified under Article 123(1)(xiii)(a) to (e) of the FIB Cabinet Office Ordinance throughdaily supervisory administration and the reporting of problematic conduct, they shall identify and keep track of thestatus of voluntary improvement made by the market derivatives business operator by holding in-depth hearings
and, when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA, while paying
consideration to the above viewpoints. When the market derivatives business operator is deemed to have a serious
problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions, including
issuing an order for business improvement based on Article 51 of the FIEA. When the market derivatives business
operator is deemed to have committed a serious and malicious violation of law, the supervisors shall consider
necessary actions, including the issuance of an order for business suspension based on Article 52(1) of the FIEA.
V-2-2-5 Control Environment for Managing Risk Related to Currency-Related Market Derivative Transactions,etc.
Regarding currency-related market derivatives transactions (referring to currency-related market derivatives
transactions prescribed in Article 123(3) of the FIB Cabinet Office Ordinance) and currency-related foreign market
derivatives transactions (referring to currency-related foreign market derivatives transactions prescribed in Article
123(5)) made with customers, managing one’s own risks is important, and therefore the provisions of IV-3-3-5(4)and (8)(ii) shall be applied mutatis mutandis to the establishment of control environments for risk management andto the execution of business.
350V-2-3 Appropriateness of Business Operations Related to Deemed Type II Financial Instruments Business
Deemed Type II financial instruments business is defined as the handling of private placements made withqualified investors, with little risk of the securities being transferred from the acquirer to a person other than aqualified investor. Therefore, the management of customer attributes and so forth is important.
To this end, supervisors shall check, with due consideration of the following points, whether customer attributes
and so forth are being managed with respect to deemed Type II financial instruments business.
(1) Case of handling private placement of electronically recorded transferable rights that must be indicated on
securities, etc.
(i) Whether the business operator confirms that the customer is a qualified investor.
(ii) Whether the business operator confirms that the solicitation for acquisition is confined to private
placements.
(iii) Whether the business operator compiles and stores internal records on the confirmed details.
(iv) Whether the business operator takes technical measures that make it impossible to transfer, to a person
other than a qualified investor, property value on which the electronically recorded transferable rights thatmust be indicated on securities, etc. that are subject to private placement are indicated.
(Note) Measures that make it impossible to transfer to a person other than a qualified investor could include,for example, a measure where transfer of property value on which electronically recorded transferable
rights that must be indicated on securities, etc. are indicated requires advance approval of the issuer orthe Financial Instruments Business Operator handling private placement, and the transfer does not takeeffect unless the person giving the approval appropriately confirms in advance that the transferee is aqualified investor.
(v) Whether the business operator confirms the effectiveness of the measures referred to in (iv) above.
(vi) Whether the business operator examines the implementation status of (i) through (v) above by means ofinternal audits and so forth.
(vii) Whether the business operator has established internal rules on the procedures involved in (i) through (vi)above.
(2) Cases other than (1)(i) Whether the business operator confirms that the customer is a qualified investor.
(ii) Whether the business operator confirms that the solicitation for acquisition is confined to private
placements.
(iii)Whether the business operator compiles and stores internal records on the confirmed details.
(iv) Whether the business operator confirms that the matters listed in each item of Article 16-5 of the FIB
Cabinet Office Ordinance have been stipulated in any contracts for the transfer of securities.
(v) Whether the business operator confirms the fulfillment of the contract details set forth in (iv) above.
(vi) Whether the business operator examines the implementation status of (i) through (v) above by means of351

internal audits and so forth.
(vii) Whether the business operator has established internal rules the procedures involved in (i) through (vi)above.
V-2-4 Appropriateness of Business Operations Related to Financial Instruments Business Operators Who Provide
Service of Handling Electronic Public Offerings
V-2-4-1 Basic View on Financial Instruments Business Operators Who Provide Service of Handling Electronic
Public Offerings
Financial instruments business operators who provide service of handling electronic public offerings are
required to provide appropriate information through the Internet in order to protect investors, as information on theInternet is expected to influence investment decisions of investors. Supervisors shall oversee such business operators
by paying attention to the following points.
V-2-4-2 Appropriateness of Service of Handling Electronic Public Offerings
When a Financial Instruments Business Operator handles public offering, secondary distribution or private
placement, or solicit sales transactions for specified investors, involving securities that are prescribed in each itemof Article 3 of the FIEA or those that are not listed on a financial instruments exchange, by a method using aelectronic data processing system or that using communications technology, such an act constitutes a service ofhandling electronic public offerings. Verification of the appropriateness of business operations by Financial
Instruments Business Operators that provide services of handling electronic public offerings shall be conducted bypaying attention to the following points.
V-2-4-2-1 Control Environment for Legal Compliance
The control environment for legal compliance by Financial Instruments Business Operators that provide servicesof handling electronic public offerings shall basically be examined based on the supervisory viewpoints and methods
specified in III-2-1. However, they shall also be examined in relation to a broad range of matters, including thestatus of compliance with voluntary regulatory rules established by self-regulatory organizations.
V-2-4-2-2 Control Environment for Customer Solicitation and Explanations
Financial Instruments Business Operators who provide service of handling electronic public offerings shall pay
attention to whether they are providing investors with sufficient explanation regarding the key points of association
contracts, the businesses in which relevant funds are involved and the risks regarding rights based on the contracts.
V-2-4-2-3 Provision of Information Intended to Protect Investors
In providing services of handling electronic public offerings, Financial Instruments Business Operators thatprovide such services are required to put information that may have material impact on investors' investment
decisions on a website such operators set up, and maintain such information accessible to investors during the period352

in which electronic public offerings are being made. As such, the following points shall be taken in consideration
regarding services of handling electronic public offerings.
(1) Posting of trade names, etc.
In providing services of handling electronic public offerings, whether items required to be included in a sign as
specified in Article 36-2(1) of the FIEA are posted in a noticeable location on the website. In cases of Type 2 SmallAmount Electronic Public Offering Services Operator (as specified in Article 29-4-3(2) of the FIEA; the same shallapply herein after), whether such an operator posts items prescribed in Article 29-4-3(3) of the FIEA in a noticeable
location on the website.
(2) Representation of Items That Can Have Material Impact on Investors' Judgment
Providers of services handling electronic offerings are required to maintain information prescribed in Article
146-2(3) of the FIB Cabinet Office Ordinance in a form accessible to investors on their website. Posting of therelevant information shall be examined by paying attention to the following points.
(i) Whether the relevant information is displayed clearly and accurately in locations that are easy to see on thewebsite. Also whether appropriate and easy-to-understand descriptions are made, from the viewpoint ofprotecting investors.
(ii) Whether the operator is making efforts not to impair the ability of investors to understand by, for example,
first displaying important information that has material impact on their judgment, in light of purposes of
posting relevant information on the website as well as aims of provisions regarding method of indicating
relevant information(iii) Whether relevant information is displayed on the website in ways in which investors can access its
location easily during the period in which the service of handling electronic public offerings is being
provided
V-2-4-3 Appropriateness of Electronic-Application-Style Services of Handling Electronic Public Offerings
Financial Instruments Business Operators providing a service of handling electronic public offerings under theelectronic application style are required to maintain a system to ensure appropriate screening of the issuer's businessplan and appropriate provision of information, as well as provide information regarding the Financial Instruments
Business Operators themselves. The appropriateness of services handing electronic public offerings in electronic
application style shall be checked by paying attention to V-2-4-2 and the following points.
V-2-4-3-1 System to Control Operations(1) Appropriate Screening Regarding Business Plan, Etc., of Issuer
Whether appropriate rules are introduced regarding screening of items specified in Article 70-2(2)(iii) of the
FIB Cabinet Office Ordinance, and meaningful screening is accurately conducted. Also whether a system toaccurately verify the results of such screening is in place. In addition, whether a system is in place to ensure353

appropriate screening can be conducted to make sure the business plan is based on rational reasoning and that areasonable target amount is set for the offering in view of the said business plan and the issuer's financial status(2) Points of Attention Regarding Level of Offer Target and Handling of Subscribed Amount(i) Whether representations are made to avoid misunderstanding by investors on the "method to handle
subscribed amount when the target of amount of offer is not reached or such a target is exceeded" prescribedin Article 70-2(2)(iv) of the FIB Cabinet Office Ordinance. Examinations, for example, shall be conductedby paying attention to the following points.
A. When securities are issued even though the subscribed amount failed to reach the target, whether thereason is clearly presented that issuance of the said securities is deemed rational in view of the issuer's
business plan and the purpose of the funds being raised so as to prevent misunderstanding on the part ofinvestors
B. When the subscribed amount exceeds the target of the offer and the securities are issued for the higher
amount, whether the purpose of the funds being raised to the amount exceeding the amount of offeringtarget and the possible impact the amount exceeding the amount of offering target may have on the detailsof the issuer's business plan are clearly explained in ways that prevents misunderstanding on the part ofinvestors.
(ii) In cases where the securities are issued only when subscription reaches the target subscription amount,whether "measures have been taken to ensure that the issuer will not receive the payment of subscription
price (including an amount similar thereto; the same applies in item (vii) and Article 83(1)(vi)(d)) before thetarget subscription amount is achieved" as prescribed in Article 70-2(2)(v) of the FIB Cabinet Office
Ordinance, for example, by providing notice of the account into which subscribed amounts are paid when
the total subscribed amount reaches the target subscription amount.
(3) Points of Attention Regarding Cancellation of Application
Whether there are measures in place to ensure investors can retract their application or cancel the contract with
the issuer with regard to public offering or private placement of securities handled in services handling electronic
public offerings in an electronic application style, etc.
When judging whether the above-mentioned measures are employed to a satisfactory degree, the following
points, for example, shall be considered.
(i) Whether applicants can retract their application unconditionally during the application cancellation period.
For example, whether the Financial Instruments Business Operator providing a service of handlingelectronic public offerings in the electronic application style, in facing a retraction of application, may beable to claim payment of a penalty (regardless of what this is called, for example, damages, fees, etc.) for
the said retraction(ii) Whether clear representation is made that investors can retract their application during a specified period
as well as about necessary information for retracting an application (such as the method for retraction,
procedure, contact information and how to get refunded on the payment of subscription amount that have354

already been paid, etc.)(4) Ensuring Provision of Information About Status of Business Operation
Whether measures are taken to ensure that the issuer periodically provide the customer with information about
the former's operational status (such a measure can be, for example, a scheme in which the Financial Instruments
Business Operator providing a service of handling electronic public offerings in the electronic application style
receives reports on the issuer's operational status, and disclose them to investors by posting them on the said
Financial Instruments Business Operator’s website or sending them by email.
V-2-4-4 Appropriateness of Type 2 Small-Amount Electronic Public Offering Services
Part of the registration requirements for Type 2 Small-Amount Electronic Public Offering Services (prescribedunder Article 29-4-3(4) of the FIEA; the same shall apply hereinafter) has been relaxed for the Type II Financial
Instruments Business for Financial Instruments Business Operators who handle Electronic Public Offering Services
that meet requirements including that the issued amount of the securities (referring to securities specified under
Article 29-4-3(4) of the FIEA; the same shall apply in V-2-4-4) issued is small. The appropriateness of Type 2 SmallAmount Electronic Public Offering Services shall be checked in accordance with V-2-4-2 and V-2-4-3, as well as
by paying attention to the following points.
V-2-4-4-1 Control Environment for Customer Solicitation and Explanations(1) Supervisory viewpoints
As services by Type 2 Small-Amount Electronic Public Offering Services Operators for public offerings or
private placement of securities are provided only through the method utilizing communications technology as
specified in each item of Article 6-2 of FIB Cabinet Office Ordinance, such operators are banned from soliciting
acquisition of securities using methods other than the specified one. (For example, they cannot use solicitation usingphone calls or visits customers individually.) It should be noted, therefore, that Type 2 Small-Amount Electronic
Public Offering Services Operators soliciting acquisition using methods other than the specified one do not qualify
for the special clause of Article 29-4-3 of the FIEA, resulting in such operators operating Type II Financial
Instruments Business without registration under the FIEA.
(2) Supervisory Method and Actions
If a Type 2 Small-Amount Electronic Public Offering Services Operator is found to be handling public offeringor private placement of securities using methods other than that utilizing the communications technology specifiedin each item in Article 6-2 of the FIB Cabinet Office Ordinance, supervisors shall conduct in-depth hearing and, if
necessary, instruct submission of a report in accordance with provisions of Aricle 56-2(1) of FIEA to look into statusof spontaneous efforts to improve the situation at such operator. When the operator is deemed to have a serious
problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the operator is deemed355

to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
V-2-4-4-2 Points of Attention Regarding Total Issued Amount of Securities(1) Basic Points to Consider
Whether the Type 2 Small-Amount Electronic Public Offering Services Operator has taken necessary andappropriate measures to prevent the total issued amount of securities of which it handles public offering or private
placement from exceeding 100 million yen and investors acquiring relevant securities (excluding specified
investors; same(2)and(3)) from paying in excess of 500,000 yen
When judging whether the above-mentioned measures are employed to a satisfactory degree, the following
points, for example, shall be considered.
(i) Whether the operator has checked to see if the issuer of securities for public offering or private placement,in relation to calculation method based on provisions of Article 16-3(1) of the FIB Cabinet Office Ordinance,
issued the same type of instrument through a different Financial Instruments Business Operator in the past
one-year period before the day the said public offering or private placement is started or using a method
specified in Article 2(8)(vii) of FIEA (along with the specific amount of issuance if the issuer is found tohave done so) by means of an appropriate method before starting to solicit acquisition of the securities, suchas by examining documents showing calculations and, if necessary, questioning the issuer.
(ii) Whether the operator has checked to see if the investor in securities for public offering or private
placement, in relation to calculation methods based on provisions of Article16-3(2) of the FIB Cabinet Office
Ordinance, has acquired the same type of securities issued by the same issuer in the past one-year period
before the day the said public offering or private placement is started (and that the operator has confirmed
the specific acquisition value of such securities if it is possible to obtain the figure), using an appropriate
method.
(2) Points of Attention When Service Becomes Disqualified for Type 2 Small-Amount Electronic Public Offering
Services Operators
It should be noted that if the total amount of issued securities for public offering or private placement that arehandled by a Type 2 Small-Amount Electronic Public Offering Services Operator exceeds 100 million yen or the
person acquiring the said securities pay more than 500,000 yen, such a service becomes disqualified from the special
clause of Article 29-4-2 of FIEA, resulting in the said Type 2 Small-Amount Electronic Public Offering Services
Operator providing services under the Type II Financial Instruments Business.
(3) Supervisory Method and Actions
If a Type 2 Small-Amount Electronic Public Offering Services Operator is found to be handling public offeringor private placement of securities whose issuance totals 100 million yen or more or the amount paid by the person
acquiring the said securities exceeds 500,000 yen, supervisors shall conduct in-depth hearing and, if necessary,356request submission of reports based on provisions of Article 56-2(1) of FIEA to look into status of spontaneous
efforts to improve the situation at such an operator. When the operator is deemed to have a serious problem fromthe viewpoint of protecting the public interest and investors, the supervisors shall take actions, including issuing anorder for business improvement based on Article 51 of the FIEA. When the operator is deemed to have committed
a serious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52 (1) of the FIEA.

V-2-5 Appropriateness of Business Operations Related to Financial Instruments Business Operators That Handle
Electronically Recorded Transferable Rights That Must Be Indicated on Securities, etc.
(1) Financial instruments business operators that handle electronically recorded transferable rights that must be
indicated on securities, etc. are required to appropriately develop a control environment from the viewpoint ofinvestor protection in light of the high degree of freedom in the design of electronically recorded transferable rightsthat must be indicated on securities, etc. and their transferability. Supervisors shall oversee such business operators
by applying mutatis mutandis V-2-1 or V-2-3, as well as IV-3-6.
(Note) In the case where the Financial Instruments Business Operator provides electronic public offering
services, supervisors shall also refer to V-2-4.
(2) A person needs to satisfy the requirements prescribed in Article 9-2 of the Cabinet Office Ordinance Regarding
Definitions in order to be a holder of electronically recorded transferable rights that must be indicated on securities,
etc. that are excluded from electronically recorded transferable rights based on Article 9-2 of the Cabinet Office
Ordinance Regarding Definitions (hereinafter referred to as "electronically recorded transferable rights excluded
from application"), for which public offering can be conducted by a Financial Instruments Business Operator.
Therefore, management of attributes of the customer that is to become a holder and the scheme of transfer of therights, etc. are important. In particular, supervisors shall confirm whether the Financial Instruments Business
Operator conducts management of customer attributes, etc. by paying attention to the following points:(i) In issuing or transferring electronically recorded transferable rights excluded from application, whether theissuer or the Financial Instruments Business Operator handling the rights, etc. confirms in advance that theperson who is to hold the rights, etc. satisfies the requirements prescribed in Article 9-2(1)(i) of the Cabinet
Office Ordinance Regarding Definitions.
(ii) In transferring property value pertaining to electronically recorded transferable rights excluded fromapplication, whether the business operator confirms each time that the technical measures for which a requestfrom the person holding the rights and the approval of the issuer of the rights are required have been taken.
In addition, it should be kept in mind that those requirements are not regarded to be satisfied if it is provided
in a contract, etc. that when a request for transfer of rights, etc. reaches the issuer, it is deemed that the issuer
has given the approval, or if a scheme is used to treat that the issuer's approval is automatically deemed to357

have been given when a transfer contract is concluded.
(iii) Whether the business operator compiles and stores internal records on the confirmed details.
(iv) Whether the business operator confirms the effectiveness of the measures referred to in (i) and (ii) above.
(v) Whether the business operator examines the implementation status of (i) through (iv) above by means ofinternal audits and so forth.
(vi) Whether the business operator has established internal rules on the procedures involved in (i) through (v)above.
V-2-6 Actions to Take When Acquiring Information Regarding Continuity of BusinessNot only a juridical person but also an individual may operate a financial instruments business. In addition, since
there are no financial requirements for engaging in this business, other than the minimum capital requirement (orthe deposit for operation required for an individual), financial instruments business operators are excluded from themonitoring in terms of the net assets requirement or capital adequacy requirement. Therefore, it should be notedthat there is a likelihood that a financial instruments business operator will file a petition for commencement ofbankruptcy proceedings, rehabilitation proceedings or reorganization proceedings (hereinafter referred to as a“petition for commencement of bankruptcy proceedings, etc.”) before the supervisory authorities properly identify
the business operator’s financial conditions. Furthermore, in cases where it has been identified that, for example, aFinancial Instruments Business Operator is insolvent and it could end up being unable to make payments,
supervisors must strive to confirm facts in order to fully examine the need for action from the perspective ofprotecting investors.
With this in mind, where the supervisory authorities have identified that a Financial Instruments Business
Operator could fall into insolvency, or where they have received a notification regarding the filing of a petition forcommencement of bankruptcy proceedings, etc. or identified the likelihood of the filing of such petition, they shalltake the following measures in addition to those mentioned in III-3-2, so as to ensure the protection of investors.
Local Finance Bureaus shall take actions that are suitable for the circumstances of each case, and shallimmediately inform the FSA of the facts regarding the case as well as what actions should be taken, thereby
coordinating such actions.
(1) Response to Cases where a Financial Instruments Business Operator is Identified as Having Financial Problems(i)Supervisors shall confirm facts by conducting hearings on the financial conditions of the subject business

operator and on the status of their contracts with customers (in the case of a securities equivalents seller, etc.,
including the condition of businesses in which the funds it handles are involved; and, in the case of a trust
beneficiary rights seller, including the condition of the underlying assets of the trust beneficiary rights it
handles), and they shall encourage the business operator to formulate policies to eliminate the risk of it falling
into insolvency.
(ii)

In cases where it becomes clear, as a result of a hearing, that a problem has arisen related to the protectionof investors, supervisors shall promptly issue an order for the production of a report based on Article 56-2(1)of the FIEA regarding all the facts of the case and measures for resolving the situation.
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(iii) After receiving the report, supervisors shall follow up on the progress of the resolution measures, and incases where no improvements are apparent, they shall examine other actions, including issuing an order forbusiness improvement based on Article 51 of the FIEA.
(2) When Recognizing Information on the Filing of Petition for Commencement of Bankruptcy Proceedings, etc.
(i)

Supervisors shall confirm whether the financial instruments business operator has made a notification

under Article 50(1)(vii) of the FIEA, and request the business operator to quickly take actions as necessary.
(ii)

By issuing an order for production of a report under Article 56-2(1) of the FIEA, supervisors shall quickly

identify the facts regarding the case, as well as the financial instruments business operator’s financial
conditions, the status of contracts with customers (if the business operator has received deposits from customers,
the specific content thereof), how the business operator responds to customers and the business operator’s
policy for continuing the business.
(iii)

Supervisors shall follow up the status of fulfillment of the actions reported as mentioned in (ii) above, andshall request the financial instruments business operator to brush up its policy for continuing the business. In
such case, supervisors shall also consider issuing an order for business improvement under Article 51 of the
FIEA.
(3) When Recognizing Information on the Filing of Petition for Commencement of Bankruptcy Proceedings, etc.
by Parent Company, etc.
In cases where the party who is likely to have a material impact on the business management of a financial
instruments business operator by filing a petition for commencement of bankruptcy proceedings, etc. (hereinafterreferred to as the “parent company, etc.” in V-2-6) has actually filed a petition for commencement of bankruptcy
proceedings, etc. against the financial instruments business operator, supervisors shall, by issuing an order for
production of a report under Article 56-2(1) of the FIEA, quickly identify the financial instruments business
operator’s financial conditions in combination with the most recent conditions of the parent company, etc., thebusiness relationships with the parent company, etc., the status of contracts with customers (if the business operator
has received deposits from customers, the specific content thereof), and the business operator’s policy for continuing
the business.
(4) When an Order of Commencement of Bankruptcy Proceedings, etc. Is Made(i)Supervisors shall confirm whether the financial instruments business operator has made a notification

under Article 50-2(1)(iv) of the FIEA, and request the business operator to quickly take actions as necessary.
(ii)

Supervisors shall try to ensure cooperation with the bankrupt trustee if it is necessary to do so from theperspective of protecting investors.
(5) When the Financial Instruments Business Operator’s Business Place Cannot Be Ascertained
In accordance with Article 52(4) of the FIEA, if the financial instruments business operator fails to make a
notification after 30 days have passed since public notice was given regarding the fact that the business operator’s359

business place cannot be ascertained, the registration of the financial instruments business operator shall be
rescinded.
(6) When Acquiring Other Information Implying the Possibility of Raising the Issue of the Continuity of Businessof a Financial Instruments Business Operator or Parent Company, etc.
(i)

Supervisors shall, through a voluntary hearing, quickly identify the facts regarding such information, as

well as the financial instruments business operator’s financial conditions, the status of contracts with customers(if the business operator has received deposits from customers, the specific content thereof), and the business
operator’s policy for continuing the business.
(ii)

In cases where the business instruments business operator does not respond to a hearing mentioned in (i)or it is found as a result of such hearing that there is a concern over the continuity of the business of the financial
instruments business operator, supervisors shall quickly identify the facts concerned by issuing an order for
production of a report under Article 56-2(1) of the FIEA. Supervisors shall also consider issuing an order forbusiness improvement under Article 51 of the FIEA when it is necessary to do so from the perspective ofprotecting investors.
V-2-7 Points of Attention Regarding Supervision of Non-Affiliated Business Operators(1) Major Supervisory Viewpoints(i)

In the case of a Financial Instruments Business Operator who does not have membership in any Financial
Instruments Firms’ Association (excluding individuals; referred to as “Non-Affiliated Business Operators”
in V-2-7), whether it has developed internal rules that are in line with Rules Set by Associations, etc.

(ii) Whether the Financial Instruments Business Operator has developed a control environment that ensuresappropriate compliance with internal rules (e.g., information sharing among officers, information sessions
for employees and examination of status of compliance).
(iii) When Rules Set by Associations, etc. have been revised, whether the Financial Instruments Business
Operator makes sure to quickly review and revise internal rules accordingly.
(2) Supervisory Method and Actions
If a problem is found regarding the creation and revision of internal rules at a Non-Affiliated Business Operator
and the status of compliance, supervisors shall conduct an in-depth inquiry and, if necessary, have the operator
submit a report based on provisions of Article 56-2(1) of the FIEA to look into the status of spontaneous efforts toimprove the situation at the said Financial Instruments Business Operator. When the operator is deemed to have aserious problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. Further, if, after requesting areport, an operator is not confirmed to have introduced internal rules that are in line with Rules Set by Associations,etc., or that it has failed to introduce a system to ensure compliance with the relevant internal rules, supervisors shallconsider necessary responses, including issuance of a Business Improvement Order based on provisions of Article360

52(1) of the FIEA.

V-3 Various Administrative Procedures (Type II Financial Instruments Business Operator)
V-3-1 Registration(1) Items Regarding Examination of Staffing Level
When examining whether or not a market derivatives business operator is sufficiently staffed to properly conduct
the financial instruments business, as specified under Article 29-4(1)(i)(e) of the FIEA, supervisors shall check thefollowing points based on its application and attachments thereto as well as hearings. Note that the examination as
to whether the operator has the structure/system necessary to operate financial instruments business appropriately,
thereby falling under Article 29-4(1)(i)(f) of the FIEA, shall also be based on the following points.
(i)

Whether it can be deemed that officers and employees with sufficient knowledge and experience havebeen secured, and a sufficient organization has been established to conduct the relevant financial instruments
business, in light of the following requirements:
A. Top-level managers must be sufficiently qualified to conduct financial instruments business in a fair andappropriate manner, in terms of their backgrounds and capabilities.
B. Managing directors must understand the viewpoints regarding governance indicated in the FIEA andvarious other laws and regulations, and have sufficient knowledge and experience to conduct governance,and sufficient knowledge and experience regarding compliance and risk management to conduct
financial instruments business in a fair and appropriate manner.
C. The market derivatives business operator must be staffed and organized so that personnel necessary for
conducting business in an appropriate manner are allocated to individual divisions, and managers incharge of internal control are appropriately allocated.
D. The compliance division (staff in charge of compliance) should be independent from the sales divisionand staffed with personnel with necessary knowledge and experience.
E. Staff capable of conducting the following processes should be secured, with regard to the relevantbusiness.
a. Compilation and management of account documents, reports and other documents.
b. Disclosurec. Risk Managementd. Computer system management
e. Trading management, customer management
f. Advertisement screening
g. Customer information managementh. Processing of complaints and resolution of disputes361

i. Internal audits(ii)

When the qualifications of employees and officers are examined in a comprehensive manner in relation

to the following criteria regarding organized crime groups, their members and financial crimes, whether thereis the risk that public confidence in the financial instruments business could be damaged because of the
inclusion of officers and employees with inappropriate qualifications among its staff.
A. Officers and employees should not be current or former members of organized crime groups.
B. Officers and employees should not have close relationships with organized crime groups.
C. Officers and employees should not have the experience of being sentenced to a fine for violation of the
FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
D. Officers and employees should not have the experience of being sentenced to a fine (including similar
punishments imposed under foreign laws and regulations equivalent thereto) for violation of the Act on
Prevention of Unjust Acts by Organized Crime Group Members (excluding the provisions of Article 322(7) of the same act) or other foreign laws and regulations equivalent thereto, or for committing a crimeprescribed under the Penal Code or under the Act on Punishment of Physical Violence and Others.
E. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion as well as attempts at these crimes).)(Note) If the Financial Instruments Business Operator is an individual, the qualifications of the individual
shall be examined in light of the items specified in (i) and (ii) above(2) Points of Attention Regarding Business Operators That Do Not Have Plans to Join Any Financial Instruments
Firms’ Association
Supervisors shall notify the following points and request appropriate responses to business operators who do
not have plan to join any Financial Instruments Firms' Association at the time of submission of a registration request.
(i) That supervisory responses in accordance with V-2-7 shall be taken if the operator fails to introduce internal
rules that are in line with Rules Set by Associations, etc. or a system to ensure compliance with such rules
after registration(ii) That failure to revise internal rules in accordance with revisions in Rule Set by Associations, etc., mayconstitute a situation that corresponds to (i).
V-3-2 Registration of Sales Representatives(1) Scope of Registered Sales Representatives
Of Financial Instruments Business Operators’ (limited to market derivatives business operators; the same shallapply in V-3-2) officers and employees engaging in in-branch business operations, (including over-the-counter
services), those who are in charge of any of the following operations need to be registered in the Registry of Sales
362

Representatives specified under Article 64(1) of the FIEA.
(i)

Explanations of the contents of financial instruments transactions for solicitation purposes(ii)

Solicitation for financial instruments transactions(iii)

Order-taking(iv)

Provision of information for solicitation purposes (excluding the provision of information regarding back-office operations and objective information requested by customers)(v)

Activities specified under Article 64(1)(iii) of the FIEA(2) Items to be Notified
It should be kept in mind that the case of a sales representative who has ceased to engage in the specified sales
representative operations temporarily, due to an intra-company personnel transfer, shall not be deemed to fall under
the provision of Article 64-4(iii) of the FIEA.
V-3-3 Points of Attention Regarding Depositing of Deposits for Operation(1) When supervisors have received the original of a statement of deposit submitted by a Financial Instruments
Business Operator after it has deposited a new deposit for operation in order to replace the existing deposit, theyshall implement the procedures for the certification of the return of the original of the statement of deposit in theircustody, in accordance with the format specified in the Attached List of Formats V-I and return it the Financial
Instruments Business Operator.
(2) When supervisors have received the original of a certificate of receipt submitted by a Financial Instruments
Business Operator after it has submitted a request for substitute deposit/additional deposit in order to substituteredemption funds for deposited securities, they shall provide a certificate of custody in accordance with (5) below
and return the original of the statement of deposit already in their custody to the Financial Instruments Business
Operator.
(3) When supervisors have received an application for a revision of the contents of a substitute contract for a deposit
for operation or for the cancellation of such a contract, they shall grant approval in the approval form regarding
deposit contract revision, as specified in the Attached List of Formats V-2, and in the approval form regarding
deposit contract cancellation, as specified in the Attached List of Formats V-3, if it is deemed that therevision/cancellation does not lead to insufficient protection of investors.
(4) The public notification of the retrieval of deposits for operation shall be made in the format specified in the
Attached List of Formats V-4.
(5) When supervisors have received the original of a statement of deposit, they shall provide a certificate of custodyin the format specified in the Attached List of Formats V-5.
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(6) Supervisors shall ensure that all applicants for registration are aware of the possibility that in cases where
government bonds are deposited as deposits for operation based on Article 31-2(9) of the FIEA, deposits could
become invalid after a certain period of time, due to the statute of limitations under the Act Concerning Government
Bonds.
V-3-4 Books and Documents Related to Service of Handling Electronic Public Offerings
The "records of information displayed on computer screens as specified in Article 146-2(1)" prescribed in Article
181(1)(v)(b) shall include printouts of web pages showing relevant information, and, when such documents arebeing created using electromagnetic records, electromagnetic records of the relevant web pages.

364

VI. Supervisory Evaluation Points and Various Administrative Procedures (Investment Management
Business)
VI-1 Governance (Investment Management Business)
Supervisors shall pay attention to the following points when examining the governance of Financial Instruments
Business Operators (limited to business operators engaging in investment management business; the same shallapply in VI).
VI-1-1 Officers of Financial Instruments Business Operators(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator properly takes account of the following eligibility
requirements in the decision-making process regarding proposals for the appointment of its officers.
(i)

A person who does not meet any of the ineligibility criteria (Article 29-4(1)(ii)(a) to (i) of the FIEA) and

who did not meet any of them at the time of registration.
(ii)

A person who has not violated laws and regulations regarding financial instruments business or related

business operations, or a person who has not been subjected to administrative actions taken based on laws andregulations.
(iii) A person who has not damaged the interests of investors in relation to the conduct of the investment
advisory and agency business and the investment management business.
(iv)

A person who has not engaged in an illegal or markedly inappropriate act regarding financial instruments

business under particularly grave circumstances.
(2) Supervisory Method and Actions
In cases where an officer of a Financial Instruments Business Operator is deemed to meet the ineligibility criteria
specified under any of Article 29-4(1)(ii)(a) to (i) of the FIEA or is found to have done so at the time when thebusiness operator obtained registration under Article 29 of the FIEA, or where an officer of a Financial Instruments
Business Operator is deemed to meet the ineligibility criteria specified under any of Article 52(1)(vii) and (ix) and(x) of the FIEA, supervisors shall consider taking actions such as ordering the dismissal of the said officer based on
Article 52(2) of the FIEA.
In addition, they shall hold an in-depth hearing regarding the decision-making process concerning the proposal
for the appointment of the said officer and, when necessary, require the submission of a report based on Article 562(1) of the FIEA. Furthermore, supervisors shall consider taking actions such as issuing an order for business
improvement, if the Financial Instruments Business Operator’s control environment for governance is deemed tohave a serious problem and the action is deemed to be necessary and appropriate from the viewpoint of protecting
public interests and investors.

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VI-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business(1) Major Supervisory Viewpoints
Supervisors shall examine whether Financial Instruments Business Operators are adequately staffed to properly
conduct financial instruments business (limited to investment management business; the same shall apply to VI) in
light of IV-3-1, and whether the operators have established structure/system required for operating financial
instruments business appropriately.
(2) Supervisory Method and Actions
The provisions under IV-3-1 are part of a comprehensive set of elements that supervisors should take into
consideration when examining whether a Financial Instruments Business Operator is adequately staffed to properly
conduct financial instruments business, etc. Even if an officer or an employee is deemed to not meet therequirements, it should not automatically lead to the conclusion that the Financial Instruments Business Operator is
not adequately staffed. The important thing is, first and foremost, that Financial Instruments Business Operators
strive to ensure on their own responsibility that they are adequately staffed, etc. in light of these requirements andother elements.
However, supervisors shall hold in-depth hearings regarding Financial Instruments Business Operators’ view on
their staffing, etc. and their decision-making process concerning the proposed appointments of officers andemployees, in cases where a Financial Instruments Business Operator is deemed to have failed to take those elements
into consideration sufficiently in the said decision-making process and where it is deemed to be necessary andappropriate from the viewpoint of protecting the public interest and investors to hold such hearings. In addition,
they shall require the submission of reports based on Article 56-2(1) of the FIEA when necessary.
Supervisors shall consider taking actions such as issuing an order for business improvement under Article 51 of
the FIEA, in cases where the Financial Instruments Business Operator’s control environment for governance isdeemed to have a serious problem as a result of the examination of the submitted report, and where the action isdeemed to be necessary and appropriate from the viewpoint of protecting public interests and investors.
Furthermore, when the Financial Instruments Business Operator is deemed to be not adequately staffed toproperly conduct financial instruments business, etc. as a result of the examination of the submitted report,
supervisors shall consider taking necessary measures, including issuing an order for business suspension based on
Article 52(1) of the FIEA.

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VI-2 Appropriateness of Business Operations (Investment Management Business)
VI-2-1 Control Environment for Legal Compliance
Financial instruments business operators, which play an important role in investors’ investment management,
have fiduciary duty to the investors who entrust investment to them, and are required to fulfill the duty of loyalty,
the duty of due care, and the responsibility for ensuring segregated management under the FIEA. In addition, they
are required to conduct their business operations as market players in a sound and appropriate manner.
Their control environments for legal compliance shall basically be examined based on the supervisory
viewpoints and method specified in III-2-1. However, they shall also be examined in relation to a broad range ofmatters, including the status of compliance with voluntary regulatory rules.
VI-2-2 Appropriateness of Business Operations Related to Discretionary Investment BusinessSupervisors shall examine the appropriateness of the business operations of discretionary investment business
operators (business operators engaging in the activities specified under Article 2(8)(xii)(b) of the FIEA under
discretional investment contracts (as specified under the same provision; the same shall apply hereinafter); the same
shall apply hereinafter) by paying attention to the following points.
VI-2-2-1 Control Environment for Business Execution(1) Investment and Administration of Investment Assets
Supervisors shall examine whether a discretionary investment business operator is properly investing andadministering investment assets, by paying attention to the following points. It should be noted that the following
points should be taken into consideration in a comprehensive manner in light of the nature and size of the business
operator’s business, and that failure to meet some of the criteria should not automatically be deemed to mean thatthe investment of investment assets is inappropriate.
(i)

Whether the discretionary investment business operator has properly specified the matters regarding

internal organization that decide its investment policy (including a specific decision-making process).
(ii)

Whether the discretionary investment business operator has prescribed a specific investment method forinvestment of investment assets (as specified under Article 35(1)(xv) of the FIEA; the same shall apply
hereinafter) by the investment division.
(iii)

Whether the discretionary investment business operator has developed an appropriate control environment

for the management of securities transactions between various investment assets and between investment assets
and its own assets or third-party assets.
(iv)

In cases where the discretionary investment business operator entrusts all or part of the authority over theinvestment made on behalf of rights holders (as specified under Article 42(1) of the FIEA; the same shall apply
hereinafter) to another entity under Article 42-3 of the FIEA (including cases where the entrusted entity entrusts
part of the authority to yet another entity), whether the discretionary investment business operator has properly
established the criteria for selecting the entity to which the authority is entrusted and the method of367

communications therewith. Whether the discretionary investment business operator has developed a control
environment for continuously examining the entrusted entity’s business execution capability and its
compliance with contract provisions. Whether it has specified measures to be taken when a problem is foundin the entrusted entity’s business execution capability (e.g., providing guidance for business improvement andrefusing to renew the entrustment contract).
(v)

Regarding the selection of the entities to which orders are placed and business operations are entrusted,

whether the discretionary investment business operator has properly specified the matters concerning theentities’ transaction execution capability, the control environment for legal compliance, credit risk and trading
costs as items that should be taken into consideration.
(vi)

Whether the discretionary investment business operator has arrangements and procedures for a divisionindependent from the investment division to periodically examine whether investment assets are properly
managed, including whether the investment decision process is appropriate, in accordance with thediscretionary investment contract and the investment guideline (including whether records on the investment
status are stored).

(vii) Whether the discretionary investment business operator has developed internal arrangements andprocedures for accurately assessing investment assets. In particular, whether it has developedarrangements and procedures for identifying the fair market values if non-listed shares, securities, etc. are
included in the investment assets.
(viii) In cases where rights holders (excluding specified investors; the same shall apply to (vii) through (x))
entrust investment assets to a trust company, etc., and investment is made in subject securities (as specified
under Article 130(3) of the FIB Cabinet Office Ordinance; the same shall apply to (vii) through (x)), whether
the discretionary investment business operator has developed an appropriate control environment to ensurethat (i) an arrangement to enable the trust company, etc., to directly receive a notice on the value of the subject
securities from a person who computes the value, or (ii) an arrangement to enable the trust company, etc., todirectly ask a person who computes the value to assess the value of subject securities, is taken as thearrangement necessary for the trust company, etc., to know the true value of the subject securities. Whether thediscretionary investment business operator has periodically checked, even after having invested in the subject
securities, that the above-mentioned arrangements are in place.
(ix) In cases where rights holders entrust investment assets to a trust company, etc., and investment is made in
subject securities, whether the discretionary investment business operator has developed an appropriate control
environment to ensure that a fund audit (as specified under Article 130(4) of the FIB Cabinet Office Ordinance;
the same shall apply hereinafter) is conducted for the assets invested or contributed from a person having rights
to the subject securities. Whether the discretionary investment business operator has periodically checked, evenafter having invested in the subject securities, that the above-mentioned fund audit is conducted. In a casewhere the discretionary investment business operator is involved in the appointment of an external auditor in
charge of the fund audit, whether the discretionary investment business operator has made efforts to ensurethat the fund audit is independent and effective.
(x) In cases where rights holders entrust investment assets to a trust company, etc., and investment is made in368

subject securities, whether the discretionary investment business operator has developed an appropriate control
environment to ensure that necessary arrangements are made to enable the trust company, etc., to receive a true
audit report, etc., on the fund audit. Whether the discretionary investment business operator has periodicallychecked, even after having invested in the subject securities, that the above-mentioned arrangements are inplace.
(2) Execution of Transactions
When discretionary investment business operators execute transactions, they are required to select thetransaction form that benefits customers most, by taking into consideration the transaction price and other execution
costs in a comprehensive manner. In light of the increasing diversification of the transaction forms due to theadvance of financial techniques, supervisors shall examine the status of a discretional investment business operator’stransaction execution by paying attention to the following points, for example:(i)

At-Average-Price Transaction (transaction made at the average of prices of various orders of the sametransaction and delivery dates, aggregated by issue and order category (sell or purchase))
A. Separation of Divisions
Whether the discretionary investment business operator has separate divisions for making investment
divisions and for taking orders. In cases where organizational separation is difficult, whether, at theminimum, different persons are responsible for these two tasks.
B. Examination of Transactions
Whether the discretionary investment business operator has a control environment for ensuring thata relevant management division, for example, examines the whole range of business processes related
to at-average-price transactions.
C. Disclosure to Customers and Consent Thereof
Whether the discretionary investment business operator makes at-average-price transactions after
making prior disclosure to customers and obtaining their consent. In cases where the discretionary
investment business operator places orders involving the proportional allocation of executed transactions
with regard to two or more investment asset accounts, whether it provides customers with appropriate
explanations regarding the criteria for allocation in the case of the total executed transaction volume
falling short of the total order volume.
(ii)

Transactions Made via Bulk Orders
In cases where the discretionary investment business operator places a bulk sell or buy order for the same

issue on behalf of two or more investment asset accounts, and allocates executed transactions to each asset
account based on the allocation criteria prescribed by the business operator after aggregating the transactions
by issue and by buy/sell order, whether it has developed a control environment similar to the one describedin (i) above, from the viewpoint of ensuring fairness among customers.
(iii)

Transactions Made between Investment Asset Accounts
Transactions made between investment asset accounts are in principle prohibited because there is a riskthat investors in one of the funds involved in the transactions may receive unfavorable treatment and that369

such transactions may be utilized in acts that go against investor protection such as transfers of profits
between funds.
On the other hand, of transactions specified under Article 129(1)(i) of the FIB Cabinet Office Ordinance,
if a transaction between investment assets accounts falls under a case where the prohibition of transactions
between investment assets accounts does not apply, the relevant management division is required to beadequately prepared to verify that the transactions meet the requirements in (a) and (b) of Article 129(1)(i).
The “case where it is deemed to be necessary and rational,” as specified by Article 129(1)(i)(a)(4) of the
FIB Cabinet Office Ordinance, is a case in which transactions between investment assets accounts executedby fund management companies meet the need to ensure fairness among customers and to fulfill its duties
of best execution and loyalty to customers, and this applies to transactions in which relevant "sell" or "buy"decisions by each of the funds are deemed necessary and rational, and that are executed in the best possible
manner for the investment decisions made thus (or the each of transactions executed to follow the best
execution practice results in transactions between investment assets accounts).
In determining whether there is necessity and rationality, factors such as the investment policy of the funds
involved (including in-house investment limits introduced (for the purpose of risk management, etc.) by theinvestment business operators, inflow or outflow of money associated with cancellation/formation of funds(including whether there is a need to sell or buy assets in order to maintain the portfolios of each funds, etc.),
etc. are considered.
On the other hand, from the viewpoint of best execution practice, factors such as transaction costs,
mitigation of market impact, etc. are considered in addition to transaction prices.
From the above viewpoints, such transactions as listed below are considered as ones in which fairness
among funds and fair price formation are ensured and as constituting a "case where it is deemed to benecessary and rational." (It must be noted, however, that these are shown only as examples and not the only
ones that qualify.)
A. To have traders execute transactions based on investment decisions made by several fund managers(limited to transactions regarding which there is not the risk of the price formation process being distorted
in light of liquidity and other factors related to the relevant issue and, in cases where the transactions are
executed by the same trader, transactions of which the trader has no discretion over execution).
B. To place both market buy and sell orders before the market’s opening (limited to orders which have norisk of distorting the price formation process in light of liquidity and other factors related to the relevant
issue).
C. To place both buy and sell orders in intraday trading at a reasonable intervals (limited to orders whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
D. To make transactions related to index funds executed through program trading based on contracts andtrust contract provisions (limited to transactions which have no risk of distorting the price formation
process in light of liquidity and other factors related to the relevant issue).
E. To make VWAP transactions and discretionary transactions, regarding which the decision on the timing370

of order placement, price and other execution terms related to individual issues are entrusted by the fundmanagement company to a third-party entity (limited to transactions which have no risk of distorting theprice formation process in light of liquidity and other factors related to the relevant issue).
F. To make futures transactions, regarding which it is difficult to avoid the placement of orders for the same
issue because of the small number of issues available for futures trading (limited to transactions whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a discretionary investment
business operator’s control environment for business execution, through daily supervisory administration and thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the discretionary investment business operator by requiring the submission of reports based on Article 56-2(1)of the FIEA. When the discretionary investment business operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing an orderfor business improvement based on Article 51 of the FIEA. When the discretionary investment business operator isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including the issuance of an order for business suspension based on Article 52 (1) of the FIEA.
VI-2-2-2 Control Environment for Customer Solicitation and Explanations(1) Prohibition of Advertisements Using Exaggerated Descriptions(i)

Whether the Financial Instruments Business Operator includes in its advertisements descriptions

indicating that the performance, contents and method of its investment are markedly superior to those of other
Financial Instruments Business Operators without providing the basis therefor.
(ii)

When including investment performance data in its advertisement, whether the Financial Instruments

Business Operator uses descriptions that could cause misunderstanding by investors, by putting excessiveemphasis on specific parts of the performance. (When investment performance data is included in an
advertisement, appropriate and easy-to-understand descriptions must be made, from the viewpoint ofprotecting investors. For example, it is necessary to examine whether the advertisement specifies the methodof investment evaluation and the basis for the use of benchmarks and properly expresses that the investment
performance data is an indicator that concerns past results but does not promise future performance.)(iii)

When including investment simulation in its advertisement, whether the Financial Instruments Business

Operator uses descriptions that could cause misunderstanding by investors, by setting arbitrary assumptions,for example. (When investment simulation is included in an advertisement, appropriate and easy-to-understanddescriptions must be used, from the viewpoint of protecting investors. For example, it is necessary to examine
whether the advertisement specifies the basis for the use of assumptions in the simulation and properly indicatesthat the simulation is based on prescribed assumptions and does not promise future investment performance.)371

(2) Points of Attention Regarding Provision of Pre-Contract Documents(i)

In cases where a discretionary investment business operator concurrently undertakes services unrelated

to discretionary investment business and where it receives remuneration related to discretionary investment
business and fees related to other services collectively under the same contract, the business operator must
separately specify the remuneration related to discretionary investment business and the fees related to otherservices with regard to the “matters concerning fees, remuneration or any other consideration payable by thecustomer with regard to said Contract for Financial Instruments Transaction,” as specified under Article 373(1)(iv) of the FIEA.
(ii)

The “methods of investment and types of transactions,” as specified under Article 96(1)(i) of the FIB

Cabinet Office Ordinance, include specific investment methods (including the individual investment method,
the common investment method (under which several customers’ assets are invested in the same way withregard to specific securities and the timing of sales and purchases and are administered on a customer-bycustomer basis by the same asset administration organization; the same shall apply hereinafter) and the joint
investment method (under which several customers’ assets are jointly invested and jointly administered; thesame shall apply hereinafter)) and also include the following items in the case of common investment and joint
investment:
A. In the case of common investment
a. Items regarding the asset administration organization in charge of common investment assets.
b. Items regarding the criteria for the allocation of assets acquired through the common investment
B. In the case of joint investment
a. Customers’ attributes and types of customer assets and items regarding the criteria for joint
investmentb. Items regarding the asset administration organization in charge of joint investment assets
c. Items regarding the criteria for the allocation of assets acquired through the joint investment
d. Items regarding the evaluation method of joint investment assets and the calculation method of eachcustomer’s interests in the assets (including cases where assets are withdrawn from the joint
investment prematurely).
(iii)

The “items regarding the scope of discretionary investment decisions and the implementation of

investment,” as specified under Article 96(1)(iii) of the FIB Cabinet Office Ordinance, include the trade
names, addresses, the names of the representative of the business operators specified under each item of
Article 16-12 of the FIEA Enforcement Order (hereinafter referred to as “re-entrusted entity”) as well as thescope of re-entrustment.
(iv) The “external audit of business operations related to financing or discretionary investment contracts” asspecified under Article 96(1)(vi) of the FIB Cabinet Office Ordinance includes the following (including theequivalent thereof):- Audit certification pursuant to Article 193-2 (1) of the FIEA (“audit of financial statements” in VI-3-2-3 (1)(iv)) and audit certification pursuant to Article 193-2 (2) of the FIEA (“audit of internal control” in VI-3372

2-3 (1) (iv));- Audit by an accounting auditor under the Companies Act;
- Assurance engagements on internal controls of outsources (assurance engagements on internal controls in
VI-3-2-3 (1) (iv)) in accordance with the standards, including the Audit and Assurance Practice Committee
Practical Guidelines No.86, the “assurance report on internal control of entrusted business” (JICPA), theStatement on Standards for Attestation Engagements (SSAE) No.16 “Reporting on Controls at a Service
Organization” (AICPA), the International Standard on Assurance Engagements (ISAE) No.3402“Assurance Reports on Controls at a Service Organization” (IAASB); and- Examination of whether the performance disclosure information of asset management companies conforms
to the Global Investment Performance Standards (GIPS).
(v) As for the “capital relationship between the financial instruments business operator, etc., and the fund-related
persons” as specified under Article 96(2)(iii) of the FIB Cabinet Office Ordinance, if the fund-related personis the parent corporation, etc., (as specified under Article 1(3)(xiv) of the FIB Cabinet Office Ordinance) of
the financial instruments business operator, etc., a subsidiary corporation, etc., (as specified under Article
1(3)(xvi) of the FIB Cabinet Office Ordinance) of the financial instruments business operator, etc., or a related
foreign corporation, etc., (as specified under Article 126 (iii) of the FIB Cabinet Office Ordinance) of thefinancial instruments business operator, etc., such fact must be entered.
(vi) As for the “personal relationship between the financial instruments business operator, etc., and the fundrelated persons” as specified under Article 96(2)(iii) of the FIB Cabinet Office Ordinance, the conditions ofconcurrent holding of positions by officers or employees at a specific time which is deemed to be reasonablemust be entered.
(vii)

Regarding the matters set forth in Article 96(1)(iii) of the FIB Cabinet Office Ordinance, when the nameof the department that makes investment decisions or conducts investments is entered in lieu of the name ofthe person who makes investment decisions based on a discretionary investment contract or the name of theperson who makes such investment decisions and conducts investments based thereon, as “a system whichenables prompt responses to the customer’s inquiries,” a discretionary investment business operator may beconsidered to have developed a system under which records on names of the persons who make investment
decisions or conduct investments are appropriately created and stored and prompt responses can be made tocustomers’ inquiries by checking relevant records.
(3) Points of Attention Regarding the Provision of Documents at Contract Signing(i)

In the case of joint investment, the “contents and amounts of customers’ assets related to discretionary

investment contracts,” as specified under Article 107(1)(vi) of the FIB Cabinet Office Ordinance, include thetotal amount of joint investment assets at the time of the start of the joint investment and the shares of therelevant customers’ assets in the joint investment assets.
(ii)

The “methods of investment and types of transactions,” as specified under Article 107(1)(viii) of the FIB

Cabinet Office Ordinance, include specific investment methods (including the individual investment method,
the common investment method and the joint investment method) and also include the following items in the373case of common investment and joint investment:
A. In the case of common investment
a. Items regarding the asset administration organization in charge of common investment assets
b. Items regarding the criteria for the allocation of assets acquired through the common investment
B. In the case of joint investment
a. Items regarding the size of joint investment assets
b. Customers’ attributes and types of customer assets and items regarding the criteria for joint
investmentc. Items regarding the asset administration organization in charge of joint investment assets
d. Items regarding the criteria for the allocation of assets acquired through the joint investmente. Items regarding the evaluation method of join investment assets and the calculation method of eachcustomer’s interests in the assets (including cases where assets are withdrawn from the joint
investment prematurely).
(iii)

The “methods of investment and types of transactions,” as specified under Article 107(1)(viii) of the FIB

Cabinet Office Ordinance, include re-entrusted entities’ methods of investment and types of transaction.
(iv) Regarding the matters set forth in Article 107(1)(vii) of the FIB Cabinet Office Ordinance, when the nameof the department that makes investment decisions or conducts investments is entered in lieu of the name ofthe person who makes investment decisions based on a discretionary investment contract or the name of theperson who makes such investment decisions and conducts investments based thereon, as “a system whichenables prompt responses to the customer’s inquiries,” a discretionary investment business operator may beconsidered to have developed a system under which records on names of the persons who make investment
decisions or conduct investments are appropriately created and stored and prompt responses can be made tocustomers’ inquiries by checking relevant records.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a discretionary investment
business operator’s control environment for customer solicitation and explanations, through daily supervisoryadministration or the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the discretionary investment business operator by holding in-depth hearings and, whennecessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When the discretionary
investment business operator is deemed to have a serious problem from the viewpoint of protecting public interestsand investors, the supervisors shall take actions, including issuing an order for business improvement based on
Article 51 of the FIEA. When the discretionary investment business operator is deemed to have committed a serious
and malicious violation of law, the supervisors shall consider necessary actions, including the issuance of an orderfor business suspension based on Article 52(1) of the FIEA.
VI-2-2-3 Duty of Loyalty and Measures to Prevent Internal Collusion374

(1) Points of Attention Regarding Discretionary Investment Business Operators Engaging in Two or More Types ofBusiness
When supervisors examine the appropriateness of measures taken by a discretionary investment business
operator engaging in two or more types of business (as specified under Article 29-2(1)(v) of the FIEA) to prevent
internal collusion, they shall pay attention to the following points, for example, depending on the nature of its
business, from the viewpoint of preventing conflicts of interests and ensuring the appropriateness of business
operations in other ways.
(i)Whether the discretionary investment business operator has taken appropriate measures to prevent

collusion between its different types of business, such as establishing an internal control system and proceduresfor the prevention of such collusion in a manner suited to the nature of its business.
(ii)

Regarding the “non-disclosure information,” as specified under Article 147(ii) of the FIB Cabinet Office

Ordinance, whether the discretionary investment business operator has put in place information management
measures, such as the appointment of the relevant manager and the establishment of management rules, andensures the effectiveness of information management by, for example, properly identifying and examining thestatus of the usage of the non-disclosure information and revising the management method as necessary.
(2) Points of Attention Regarding Prevention of Conflicts of Interests in Investment Management Business
Whether appropriate measures have been taken to prevent practices that could promote the interests of specificrights holders at the expense of other rights holders, such as establishing an internal control system and proceduresfor the prevention of collusion between different types of business in a manner suited to the nature of the business.
(3) Duty of Loyalty to Rights Holders
It should be kept in mind that if a discretionary investment business operator causes financial damage to abeneficiary due to a clerical error involved in the investment of investment assets and fails to compensate for thedamage, it could constitute a violation of the duty of loyalty. The same shall apply to cases where the clerical error
occurs at an entity to which business operations are entrusted and where the discretionary investment business
operator which has the obligation of duty to the beneficiary fails to compensate for the damage.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a discretionary investment
business operator’s measures to prevent internal collusion between different types of business, through daily
supervisory administration or the reporting of problematic conduct, they shall identify and keep track of the status
of voluntary improvement made by the discretionary investment business operator by holding in-depth hearings and,
when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA, since such an issue could
directly undermine the interests of rights holders and, in some cases, lead to legal violations, such as a violation of
the duty of loyalty and duty of due care. When the discretionary investment business operator is deemed to have aserious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the discretionary375

investment business operator is deemed to have committed a serious and malicious violation of law, the supervisors
shall consider necessary actions, including the issuance of an order for business suspension based on Article 52(1)of the FIEA.
VI-2-2-4 Measures to Prevent Legal Violations by Agency/Brokerage Service Providers
When discretionary investment business operators entrust business operations to agency/brokerage service
providers (business operators engaging in agency/brokerage services (as specified under Article 2(8)(xiii); the same
shall apply hereinafter); the same shall apply hereinafter), it is important that they provide the service providers withguidance regarding the establishment of a control environment for customer management, from the viewpoint of
ensuring the implementation of appropriate investment solicitation suited to the customers’ attributes, and requirethem to ensure thorough legal compliance based on the examination of the actual status of their investment
solicitation. Supervisors shall examine the control environment for the prevention of legal violations byagency/brokerage service providers by paying attention to the following points in particular.
VI-2-2-4-1 Selection of Agency/Brokerage Service Providers(1) Points of Attention Regarding Selection of Agency/Brokerage Service Providers(i)When signing contracts for entrusting agency/brokerage services, whether the discretionary investment

business operator specifies the significance of the entrustment in relation to governance, identifies the various
risks involved therein and conducts sufficient deliberations on the method of risk management.
(ii)

Whether the discretionary investment business operator conducts sufficient deliberations on whether theagency/brokerage service providers have sufficient qualifications to conduct the entrusted business operations
in a sound and appropriate manner. In cases where the agency/brokerage service providers concurrently engage
in other services in particular, whether the discretionary investment business operator not only examines thepossibility of the nature of the other services damaging public confidence in the service providers, but also
conducts sufficient deliberations in consideration of the primary business operator’s reputational risk. (The“primary business operator” refers to discretionary investment business operators which sign discretionary
investment contracts through agency/brokerage services provided by agency/brokerage service providers; thesame shall apply in VI.)
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the primary business operator’s
selection of agency/brokerage service providers, through daily supervisory administration or the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by the primarybusiness operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on
Article 56-2(1) of the FIEA. When the primary business operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing an orderfor business improvement based on Article 51 of the FIEA. When the primary business operator is deemed to have376committed a serious and malicious violation of law, the supervisors shall consider necessary actions, including theissuance of an order for business suspension based on Article 52(1) of the FIEA.
VI-2-2-4-2 Measures Taken by Primary Business Operator to Ensure the Appropriateness of Agency/Brokerage
Service Providers(1) Development of Internal Control Environment for Supervising Agency/Brokerage Service Providers(i)Whether the primary business operator has developed a control environment for ensuring appropriate

supervision of agency/brokerage service providers, through actions such as establishing a division responsible
for the implementation of measures to ensure the sound and appropriate conduct of business operations related
to agency/brokerage services, or appointing a person responsible therefor (including a control environment
regarding audits of the business operations of agency/brokerage service providers).
(ii)

Whether the primary business operator has developed an internal control environment for examining

whether the said division or person has taken proper measures to ensure the appropriateness of the business
operations related to the agency/brokerage services.
(2) Points of Attention Regarding Measures to Ensure Necessary and Appropriate Supervision of Agency/Brokerage
Service Providers(i)Whether the primary business operator has taken the following measures in order to ensure the sound andappropriate conduct of business operations related to agency/brokerage services and monitors the status of the
conduct of the business operations:A. To provide guidance regarding business operations related to agency/brokerage services to brokerage
service providers and their employees and implement training programs intended to ensure theircompliance with laws and regulations regarding the agency/brokerage services.
B. To implement measures to ensure the necessary and appropriate supervision of agency/brokerage service
providers, such as examining periodically or as necessary whether the service providers properly conduct
the services, including investment solicitation and requiring them to make improvement when necessary.
(ii)

Whether the primary business operator has developed a control environment that ensures the results of

the above monitoring are examined by the primary business operator’s division in charge and reported to the
management team when necessary, so that they are reflected in the provision of appropriate guidance by the
primary business operator and in the conduct of business operations by agency/brokerage service providers.
(3) Measures to Cancel Contracts for Entrusting Agency/Brokerage Services
Whether the primary business operator has developed a control environment for implementing appropriate
measures, such as providing guidance to agency/brokerage service providers and canceling contracts for entrusting
agency/brokerage services, when a problem has been found as a result of the monitoring of agency/brokerage service
providers. In addition, whether it has developed a control environment for properly protecting customers whencanceling the entrustment contracts.
377

(4) Measures to Process Complaints
Whether the primary business operator has established arrangements and procedures for responding tocomplaints, such as specifying the contact point for customer complaints regarding agency/brokerage services,establishing a division in charge of processing complaints and prescribing procedures for processing complaints.
(5) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding measures taken by the primarybusiness operator to ensure the appropriateness of agency/brokerage services, through daily supervisoryadministration or the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the primary business operator etc., by holding in-depth hearings and, when necessary,
requiring the submission of reports based on Article 56-2(1) of the FIEA. When the primary business operator isdeemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When the
primary business operator is deemed to have committed a serious and malicious violation of law, the supervisors
shall consider necessary actions, including the issuance of an order for business suspension based on Article 52(1)of the FIEA.
VI-2-2-5 Other Points of Attention(1) Accounts for Settlement of Transactions(i)

It should be kept in mind that regarding transactions made on their own account, discretionary investment

business operators must not use an account intended for the settlement of transactions that was made throughthe activities specified under the proviso of Article 42-5 of the FIEA.
(ii)

It should be kept in mind that discretionary investment business operators’ use of the said account for

placing orders covering both transactions related to investment based on investment decisions commissioned
by customers and transactions made on their own account is equivalent to the “use of the relevant account for
purposes other than the settlement of the relevant transaction” specified under Article 130(1)(xi) of the FIB
Cabinet Office Ordinance.
(2) Points of Attention Regarding Cash Collateral Reinvestment
In cases where a discretionary investment business operator that is a securities lender (and/or its agent) reinvests
cash collateral it has received in secured securities lending transactions, only if the investment is found to beleveraged, supervisors shall pay attention to the following points, based on Recommendation 6 in the Financial
Stability Board, “Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing
Shadow Banking Risks in Securities Lending and Repos” (August 2013):(i) High-Level Principles
A. In developing its cash collateral reinvestment strategy and investment guidelines, whether the378

discretionary investment business operator takes into account the possibility that the cash collateral could
be recalled at any time by the party that borrowed securities, considers whether the discretionary
investment business operator holds assets that are sufficiently liquid to meet reasonably foreseeable
recalls of cash collateral, and takes measures to manage the associated liquidity risk.
B. Whether the discretionary investment business operator conducts cash collateral reinvestment with oneof the primary objectives being capital preservation. In particular, in formulating cash collateralreinvestment guidelines, whether the discretionary investment business operator takes into account
whether unexpectedly large requests for returning cash collateral could be met if the market for the assets
in which the cash collateral has been reinvested became illiquid and liquidating the assets would result ina loss.
C. Cash collateral reinvestment should be consistent with the investment policy stated and approved by thediscretionary investment business operator that is a securities lender, so as not to add substantial
incremental risk to the discretionary investment business operator’s risk profile. In developing andapproving cash collateral reinvestment guidelines, whether the discretionary investment business
operator takes into account the size of this activity relative to the firm overall.
D. Whether investment guidelines for cash collateral reinvestment are formally documented andcommunicated to beneficial owners.
E. Whether the discretionary investment business operator explicitly approves, formally documents andregularly reviews investment guidelines that govern cash collateral reinvestment. Whether the guidelines
comply with the high-level principles set forth in (i). Whether a discretionary investment business
operator that is a lending agent ensures that all its clients have such investment guidelines for cash
collateral reinvestment in place.
F. Whether assets the discretionary investment business operator holds to meet cash collateral calls are highly
liquid with transparent pricing so that they can be valued at least on a daily basis and sold, if needed, at a
price close to their pre-sale valuation.
(ii) Liquidity, Credit, and Other Risks
A. In reinvesting cash collateral, whether the discretionary investment business operator pays attention to
the following points:
a. Whether it takes measures to limit the potential for maturity mismatch.
b. Whether it holds assets that are sufficiently liquid and low risk to meet reasonably foreseeable demands
for cash collateral redemption (together with a buffer to guard against stress scenario).
c. Whether it has developed an appropriate risk management structure consistent with the cash collateralreinvestment guidelines.
B. Whether the discretionary investment business operator has set specific requirements including thefollowing for the cash collateral reinvestment portfolio and/or liquidity pool maintained to meet cash
collateral recalls, and complies with them on an ongoing basis:a. Whether the discretionary investment business operator invests a minimum portion of the cash
collateral in a portfolio such as the following as a reinvestment portfolio that can be readily converted379

to cash over short time horizons (such as one day and one week) to meet potential recalls of cash
collateral:- Short-term deposits (with high-quality financial institutions)- Highly liquid short-term assets (such as high quality government treasury bills and bonds)- Short tenor transactions (such as overnight or open reverse repos backed by highly liquid assets)b. Whether the discretionary investment business operator sets specific limits for the weighted average
maturity (WAM) and/or weighted average life (WAL) of the portfolio in which the cash collateral isreinvested.
c. Whether the discretionary investment business operator sets a maximum remaining term to maturity forany single investment in which the cash collateral is reinvested, which could vary by asset class basedon the liquidity of the instruments.
(iii) Stress Tests
A. Whether the discretionary investment business operator stress tests its ability to meet foreseeable andunexpected calls for the return of cash collateral on an ongoing basis.
B. Whether the stress tests in A. above include an assessment of the discretionary investment business
operator’s ability to liquidate part or the entire reinvestment portfolio under a range of stressed market
scenarios, including the following:a. Interest rate changes
b. Higher cash collateral recalls
c. Higher redemptions by investors in the funds including securities on loand. Changes in the credit quality of the cash collateral reinvestment portfolio(iv) Disclosure
A. Whether a discretionary investment business operator that is a lending agent frequently discloses to its
clients (the beneficial owners of securities) the composition and valuation of its portfolio of securities on
loan and its cash collateral reinvestment portfolio.
B. Whether the items disclosed in A. above include the following at the minimum:
a. The percentage of assets held in cash or cash equivalents over a one day and one week liquidation
horizonb. The weighted average maturity (WAM) and/or weighted average life (WAL) of the cash collateralreinvestment portfolioc. The maximum remaining term to maturity of any individual investment
d. The percentage of assets that are held in illiquid securities (and how these are defined)
e. The maximum exposure of the fund, including securities on loan, to the following items:- Individual security- Issuer- Asset typef. The split between secured and unsecured exposuresg. The distribution of collateral received in reverse repo380

h. The average yield of the cash collateral reinvestment portfolio
i. Results from liquidity stress tests(3) Points of Attention Regarding Repo Transactions
In cases where a discretionary investment business operator engages in secured securities lending transactions
and purchase and sale of securities on condition of repurchase or resale (hereinafter referred to as “repotransactions”) (including the case where it is an agent of such business operator), whether it formulates internal
provisions, etc. concerning collateral valuation and management, based on Recommendation 9 in the Financial
Stability Board, “Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing
Shadow Banking Risks in Securities Lending and Repos” (August 2013):(i) Type of Collateral
Whether the discretionary investment business operator only takes collateral relating to repo transactions
which satisfies the following requirements even at the time of a counterparty failure:
A. Possible to hold for a period without breaching laws or regulations.
B. Possible to valuate.
C. Possible to appropriately manage risks.
(ii) Contingency Plan
A. Whether the discretionary investment business operator has formulated contingency plans for the failureof its largest market counterparties (including in times of market stress).
B. Whether the abovementioned contingency plans include the following items:a. How they would manage the collateral following default
b. Capabilities to liquidate the collateral in an orderly way(iii) Margin Call
A. Whether collateral and lent securities are marked to market at least daily
B. Whether margin calls (meaning the right to demand an excess or shortage of collateral resulting frommark-to-market at any time within the period) are made at least daily.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a discretionary investment
business operator’s accounts for the settlement of transactions, through daily supervisory administration or thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the discretionary investment business operator by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2(1) of the FIEA. When the discretionary investment business operator
is deemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When thediscretionary investment business operator is deemed to have committed a serious and malicious violation of law,
the supervisors shall consider necessary actions, including the issuance of an order for business suspension basedon Article 52(1) of the FIEA.
381

(5) Interpretation of Article 2(8)(xii)(b)
The contracts specified under Article 123(1)(xiii)(b) to (e) of the FIB Cabinet Office Ordinance shall not be
deemed to fall under the category of discretionary investment contracts specified under Article 2(8)(xii)(b).
(6) Points of Attention for Discretionary Investment Contracts under the Provisions of the Employees' Pension
Insurance Act(i)

Considering that a surviving employees’ pension fund (refers to the surviving employees’ pension fund asprescribed in Article 3, item (xi) of the Supplementary Provisions of the Act for Partial Revision of the
Employees' Pension Insurance Act to Ensure the Soundness and Reliability of the Public Pension System(Cabinet Order No. 63 of 2013); the same shall apply hereinafter) as a customer is obligated to make an effort
to invest reserves for pension benefits, etc., using methods which are not concentrated on a specific means inaccordance with the provisions of Article 39-15 (1) of the Cabinet Order for Employees’ Pension Fund prior toabolition pursuant to the provisions of Article 1 of the Cabinet Order Concerning the Coordination, etc. of theRelevant Cabinet Orders Related to the Enforcement of the Act for Partial Revision of the Employees' Pension
Insurance Act to Ensure the Soundness and Reliability of the Public Pension System (Cabinet Order No. 73 of2014) that is deemed to be still in effect in accordance with the provisions of Article 3(2) of the Cabinet Order
Concerning Transitional Measures due to the Enforcement of the Act for Partial Revision of the Employees'
Pension Insurance Act to Ensure the Soundness and Reliability of the Public Pension System (Cabinet OrderNo. 74 of 2014) (hereinafter the “duty of investment diversification”), if it is recognized that the surviving
employees’ pension fund could have not fulfilled their duty of investment diversification, whether thediscretionary investment business operator has established an appropriate control environment to give a noticeto the surviving employees’ pension fund. In the case that the notice is given but there is still a risk of violationof the duty of investment diversification, whether the discretionary investment business operator has had aconsultation with the surviving employees’ pension fund to ask the fund to examine the change of theirinvestment management guideline, for example. Furthermore, if there is still a risk of violation of the duty ofinvestment diversification even after the consultation, whether the discretionary investment business operator
has taken measures, including the examination of cancellation of the discretionary investment contract in theworst case, for example, in order to ensure that the surviving employees’ pension fund will fulfill their duty ofinvestment diversification.
(ii)

Whether the discretionary investment business operator understands the knowledge, experience, state ofassets of the surviving employees’ pension fund, and their purpose of concluding a discretionary investment
contract. In a case where an investment management guideline is indicated by the surviving employees’ pension
fund and it is found necessary, whether the discretionary investment business operator has established an
appropriate control environment in which the discretionary investment business operator explains to thesurviving employees’ pension fund about risks which might occur if investment is made according to theinvestment management guideline.
(iii)

In a case where a surviving employees’ pension fund gives instructions about the management of382

investment assets (hereinafter the “specific instructions”), such as the acquisition or disposition of specificbonds, stocks, beneficiary securities, etc., in violation of the provision of Article 30(3) of the Cabinet Order for
Employees’ Pension Fund prior to abolition, whether the discretionary investment business operator has
established an appropriate control environment to ensure compliance with Article 130(1)(xiii) of the FIB
Cabinet Office Ordinance and informs the surviving employees’ pension fund of the inability to follow such
instructions, for example. Whether the discretionary investment business operator has established an
appropriate control environment to avoid such solicitation of products or explanations which encourage asurviving employees’ pension fund to give specific instructions.
The following acts don’t violate Article 130(1)(xiii) of the FIB Cabinet Office Ordinance:- Accept and follow the following instructions from a surviving employees’ pension fund: (i) instructions
on the acquisition, etc., of an affiliated fund of the discretionary investment business operator (a founderor manager of the fund is the discretionary investment business operator, a parent corporation, etc., as
specified under Article 1(3)(xiv) of the FIB Cabinet Office Ordinance, subsidiary corporation, etc., as
specified under item xvi of the same paragraph, or a related foreign corporation, etc., as specified under
Article 126(iii) of the same ordinance) (including the case where instructions are clarified in theinvestment management guideline, contracts, etc.); (ii) instructions to prohibit the acquisition of
securities of certain descriptions; and (iii) instructions on the investment management policy, such as
limitations of investment ratios for each description of securities or for each industry.
- In a case where the discretionary investment business operator intends to invest in securities of certain
descriptions (subject securities as specified under Article 96(4) of the FIB Cabinet Office Ordinance)
based on a discretionary investment contract after having concluded the contract, make a description andan explanation of the securities in pre-contract documents which are delivered to a surviving employees’
pension fund when conducting solicitation for a discretionary investment contract.
(iv)

In a case where the discretionary investment business operator visits a surviving employees’ pension fundas customer together with a financial instruments business operator for the purpose of explaining about
investment performance, whether the discretionary investment business operator has established an appropriate
control environment to ensure that such explanations, etc., at the time of visit will not include solicitation of
products, etc., which are structured by the financial instruments business operator and will not encourage thesurviving employees’ pension fund to give specific instructions.
(v)

With respect to the investment management of reserves for pension benefits, etc., whether thediscretionary investment business operator has established an appropriate control environment to ensure that
conclusive judgment with respect to an uncertain matter will not be provided to a surviving employees’ pension
fund, or information which is likely to have a surviving employees’ pension fund mistakenly believe an
uncertain matter as being certain will not be provided to the surviving employees’ pension fund.
(vi)

For the purpose of making persons in charge of important operations concerning fund assets andmanagement thereof comply with requirements for due diligence and continuous monitoring as specified under
Article 96(2)(ii) of the FIB Cabinet Office Ordinance, whether the discretionary investment business operator
has established, as necessary, an appropriate control environment by which internal rules, operation manuals,383

etc., incorporating detailed standards or methods are established, and the status of due diligence and theconditions of monitoring are examined by the compliance division and the risk management division.
(Note) Discretionary investment business operators are required to make an explanation of risks to surviving
employees’ pension funds as customers. However, it must be noted that discretionary investment business
operators cannot be exempted from a good manager’s duty of care simply because they have explained
about risks involved.
VI-2-3 Appropriateness of Business Operations Related to Investment Trust Management Business, etc.
Supervisors shall examine the appropriateness of the business operations of investment trust managementcompanies, etc. (Financial Instruments Business Operators engaging in the activities specified under Article2(8)(xii)(a) of the FIEA and based on contracts specified under the same provision and the activities specified in
Article 2(8)(xiv) (excluding acts to establish or instruct foreign investment funds directly from Japan); the same
shall apply hereinafter) by paying attention to the following points.
VI-2-3-1 Control Environment for Business Execution(1) Investment and Administration of Investment Assets
For the purpose of encouraging medium- to long-term asset building by households in accordance with theirstages of life and raising the flow of financial assets from household into growing businesses through financial
markets, investment assets, which mediates between them, can play a significant role. As such, it is hoped thatinvestment trust management companies, etc., actively develop and provide products that support stable asset
building based on customer needs.
With such hopes in mind, supervisors shall examine whether an investment trust management company, etc., isproperly managing and administering investment assets, by paying attention to the following points. It should be
noted that the following points should be taken into consideration in a comprehensive manner in light of the natureand size of the company’s business and that failure to meet some of the criteria should not automatically be deemed
to mean that the investment and administration of investment assets are inappropriate.
(i) Whether the investment trust management company, etc., has properly specified the matters regarding
internal organization that decide its investment policy (including a specific decision-making process).
(ii) Whether the investment trust management company, etc., has prescribed a specific investment method
for investment of investment assets by the investment division. Whether the investment managementcompany is making efforts to clearly present information regarding the status of asset management of therelevant investment trust, such as listed below, to beneficiaries, etc., in a manner appropriate to thecharacteristics of individual investment trust products. Whether the investment management company ismaking efforts to clearly present information on investment trust products that use a fund-of-funds
strategy to beneficiaries, etc.,, such as providing an overview of the destination funds (e.g. key invested
assets) and the net contribution rate that incorporates the asset-management costs of the destination funds,
as well as providing financial instruments business operators that sell the investment trust products withinformation about asset management costs.
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A. Information about fund managers (e.g. years of experience in managing investment funds, personal
history, etc. of the chief fund manager, overview of management team, etc.)
B. Process of investment decision making in putting the basic investment policy into actual operation(iii)

Whether the investment trust management company, etc., has developed an appropriate control

environment regarding the management of securities transactions between various investment assets andbetween investment assets and its own assets or third-party assets.
(iv)

In cases where the investment trust management company entrusts all or part of the authority over theinvestment made on behalf of rights holders to another entity under Article 42-3 of the FIEA (including cases
where the entrusted entity entrusts part of the authority to yet another entity), whether the investment trust
management company has properly established the criteria for selecting the entity to which the authority is
entrusted and the method of communications therewith. Whether the investment trust management company
has established arrangements and procedures for continuously examining the entrusted entity’s businessexecution capability and its compliance with contract provisions. Whether it has specified measures to be taken
when a problem is found in the entrusted entity’s business execution capability (e.g., providing guidance forbusiness improvement and refusing to renew the entrustment contract).
(v)

Regarding the selection of the entities to which orders are placed and business operations are entrusted,

whether the investment trust management company, etc., has properly specified the matters concerning theentities’ transaction execution capability, control environment for legal compliance, credit risk and trading
costs as items that should be taken into consideration.
(vi)

Whether the investment trust management company, etc., has arrangements and procedures for a divisionindependent from the investment division to periodically examine whether investment assets are properly
invested (including whether records on the investment status are stored), including whether the investment
decision process is appropriate, in accordance with investment trust contracts and asset investment contracts
and the investment guideline.
(vii) With respect to MRFs (referring to bond investment trusts prescribed in Article 25(ii) of the Ordinancefor Enforcement of the Investment Trust Act; the same shall apply in (vii) and (viii) below), while compensating
part or all of losses incurred on the principal for the purpose of avoiding a sudden and unexpected fall in thevalue of bond holdings, etc. where the constant value falls below 1 yen per unit and affects individual investors'
securities transactions, is exceptionally permitted (as provided in Article 42-2(vi) of the FIEA and Article 1292 of the FIB Cabinet Office Ordinance), whether the investment trust management company, etc. complies
with the "Rules for Operations of MMF, etc.," the Investment Trusts Association's self-regulatory rules, inmanaging MRFs, in an effort to avoid a situation where stable management of MRF, soundness of investment
trust management companies, etc. are impaired. With respect to a contingency plan to be submitted to the FSA
based on the Rules, in particular, whether the investment trust management company, etc. sufficiently envisages
possible situations where stable management of MRFs would be impaired and puts in place effective
countermeasures against such situations, periodically verifies the effectiveness of the contingency plan andreviews it as necessary.
(viii) With respect to MMFs (referring to bond investment trusts prescribed in Article 59(1)(ii) of the Regulation
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on Accounting for Investment Trust Property and bond investment trusts (excluding MRFs) that are managed
so that the constant value becomes 1 yen per unit; the same shall apply in (viii)), there is a possibility that theconstant value falls or is highly likely to fall below 1 yen per unit due to a sudden and unexpected fall in thevalue of bond holdings, etc. and this may lead to a deluge of cancellation requests from investors, resulting ina confusion. Whether the investment trust management company, etc. complies with the "Rules for Operationsof MMF, etc.," the Investment Trusts Association's self-regulatory rules, in managing MMFs, in an effort toavoid a situation where stable management of MMFs and the soundness of the financial system are impaired.
With respect to a contingency plan to be submitted to the FSA based on the Rules, in particular, whether theinvestment trust management company, etc. sufficiently envisages possible situations where stable
management of MMFs would be impaired, in consideration of the characteristics, etc. of MMFs, and puts inplace effective countermeasures against such situations. In addition, whether the investment trust managementcompany, etc. periodically verifies the effectiveness of the contingency plan and reviews the plan and thecharacteristics of the relevant MMFs as necessary.

(ix) Whether the investment trust management company, etc. has developed internal arrangements andprocedures for accurately assessing investment assets. In particular, whether it has developedarrangements and procedures for identifying the fair market values if non-listed shares, securities, etc. are
included in the investment assets.
(x) Whether the investment trust management company, etc. appropriately manages the calculation process
in order to ensure accurate calculation of the net asset value. In addition, when there is a notable fluctuationin the net asset value, whether the investment trust management company, etc. identifies the cause of thefluctuation, and if a serious problem is found, reports it to the internal control division or the board of
directors.
(2) Execution of Transactions
When investment trust management companies, etc., execute transactions, they are required to select thetransaction form that benefits rights holders most by taking into consideration the transaction price and otherexecution costs in a comprehensive manner. In light of the increasing diversification of the transaction forms due tothe advance of financial techniques, supervisors shall examine the status of the transaction execution of aninvestment trust management company, etc., by paying attention to the following points, for example:(i)

At-Average-Price Transaction (transaction made at the average of prices of various orders of the sametransaction and delivery dates, aggregated by issue and order category (sell or buy))
A. Separation of Divisions
Whether the investment trust management company, etc., has separate divisions for making
investment divisions and for taking orders. In cases where organizational separation is difficult, whether,at the minimum, different persons are responsible for these two tasks.
B. Examination of Transactions
Whether the investment trust management company, etc., has a control environment for ensuring thata relevant management division, for example, examines the whole range of business processes related386

to at-average-price transactions.
C. Disclosure to Rights Holders and Consent thereof (Limited to Transactions Related to Asset Investment
Contracts with Investment Corporations)
Whether the investment trust management company, etc., makes at-average-price transactions after
making prior disclosure to rights holders and obtaining their consent. In cases where the investment trust
management company, etc., places orders involving proportional allocation of the executed transactions
with regard to two or more investment asset accounts, whether it provides rights holders with appropriate
explanations regarding the criteria for allocation in the case of the total executed transaction volume
falling short of the total order volume.
(ii)

Transactions Made via Bulk Orders
In cases where the investment trust management company, etc., places a bulk sell or buy order for thesame issue on behalf of two or more investment asset accounts, and allocates the executed transactions toeach asset account based on the allocation criteria prescribed by the business operator after aggregating thetransactions by issue and by buy/sell order, whether it has developed a control environment similar to theone described in (i) above from the viewpoint of ensuring fairness among various investment assets.

(iii)

Transactions Made between Investment Assets Accounts
Transactions made between investment asset accounts are in principle prohibited because there is a riskthat investors in one of the funds involved in the transactions may receive unfavorable treatment and thatsuch transactions may be utilized in acts that go against investor protection such as transfers of profits
between the funds.
On the other hand, of transactions specified under Article 129(1)(i) of the FIB Cabinet Office Ordinance,
if a transaction between investment assets accounts falls under a case where the prohibition of transactions
between investment assets accounts does not apply, the relevant management division is required to beadequately prepared to verify that the transactions meet the requirements in (a) and (b) of Article 129(1)(i).
The “case where it is deemed to be necessary and rational,” as specified by Article 129(1)(i)(a)(4) of the
FIB Cabinet Office Ordinance, is a case in which transactions between investment assets accounts executedby investment trust management companies meet the need to ensure fairness among customers and fulfill its
duties of best execution and loyalty to customers, and this applies to transactions in which relevant "sell" or"buy" decisions by both of the funds executing the transactions between investment assets accounts are
deemed necessary and rational, and that such transactions are executed in the best possible manner for theinvestment decisions made thus (or the transactions executed to follow the best execution practice results inoffsetting possible losses involved in such transactions).
In determining whether there is necessity and rationality, factors such as the investment policy andinvestment plans of the funds involved (including in-house investment limits introduced by the investment
trust management companies for the purpose of risk management, etc.), inflow or outflow of money
associated with cancellation/formation of funds (including whether there is the need to sell or buy assets inorder to maintain portfolios of individual funds, etc.), etc. are considered.
On the other hand, from the viewpoint of best execution practice, factors such as transaction costs,
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mitigation of market impact, etc. are considered in addition to transaction prices.
From the above viewpoints, such transactions as listed below are considered as ones in which fairness
among funds and fair price formation are ensured and as constituting a "case where it is deemed to benecessary and rational." (It must be noted, however, that these are shown only as examples and not the only
ones that qualify.)
A. To have traders execute transactions based on investment decisions made by several fund managers(limited to transactions regarding which there is not the risk of the price formation process being distorted
in light of liquidity and other factors related to the relevant issue and, in cases where the transactions are
executed by the same trader, the trader has no discretion over execution).
B. To place both market buy and sell orders before the market’s opening (limited to orders which have norisk of distorting the price formation process in light of liquidity and other factors related to the relevant
issue).
C. To place both buy and sell orders in intraday trading at a reasonable interval (limited to orders whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
D. To make transactions related to index funds executed through program trading based on contracts andtrust contract provisions (limited to transactions which have no risk of distorting the price formation
process in light of liquidity and other factors related to the relevant issue).
E. To make VWAP transactions and discretionary transactions, regarding which the decision on the timingof order placement, price and other execution terms related to individual issues are entrusted by theinvestment trust management company, etc., to a third-party entity (limited to transactions which haveno risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
F. To make futures transactions, regarding which it is difficult to avoid the placement of orders for the same
issue because of the small number of issues available for futures trading (limited to transactions whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).

(3) Points of Attention Regarding Origination of Investment Trusts, etc. Whose Investment Targets Include Assets
Other Than Specified Assets

Under the Act on Investment Trusts and Investment Corporations, investment trusts and investment
corporations are used for the purpose of investing mainly in specified assets, and are given special institutional
positions as the people's long-term and stable asset formation means. As it is inappropriate to originate thefollowing products in light of such purpose of the investment trust and investment corporation systems,
supervisors shall conduct supervision by paying attention to whether those products are being originated:(i) Products whose investment targets include assets other than specified assets (hereinafter referred to as“non-specified assets ” in this paragraph (3)) and specified assets that practically have the same nature
as non-specified assets, such as equity in investment in a fund388

for which non-specified assets areinvestment targets, (hereinafter referred to as “non-specified assets, etc.” in this paragraph (3)) (however,this shall not apply if the non-specified assets, etc. have a public nature, such as the “public facility, etc.”
prescribed in the Act on Promotion of Private Finance Initiative)(ii) Products which, when investing in assets other than the fund’s investment targets, invest in nonspecified assets, etc. with higher risk of price fluctuation, liquidity, etc. compared to the specified assetsthat are the original investment targets
Even for products which, when investing in assets other than the fund’s investment targets, invest in
non-specified assets, etc. with low risk of price fluctuation, liquidity, etc., particular attention shall be
paid to whether the following acts of origination are conducted, in light of the purpose of the investment

trust and investment corporation systems:
A. Act of originating a product that is given a name that evokes non-specified assets(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the control environment forbusiness execution of an investment trust management company, etc., through daily supervisory administration or
the reporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the investment trust management company, etc., by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2(1) of the FIEA. When the investment trust management company, etc.,
is deemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When theinvestment trust management company, etc., is deemed to have committed a serious and malicious violation of law,
the supervisors shall consider necessary actions, including the issuance of an order for business suspension basedon Article 52(1) of the FIEA.
VI-2-3-2 Control Environment for Customer Solicitation and Explanations for Beneficiaries, etc.
(1) Prohibition of Advertisements Using Exaggerated Descriptions(i)

Whether the investment trust management company, etc., includes in its advertisements descriptions

indicating that the performance, contents and method of its investment are markedly superior to those of other
Financial Instruments Business Operators without providing the basis therefor.
(ii)

When including investment performance data in its advertisement, whether the investment trust

management company, etc., uses descriptions that could cause misunderstanding by investors, by putting
excessive emphasis on specific parts of the performance. (When investment performance data is included in
an advertisement, appropriate and easy-to-understand descriptions must be used, from the viewpoint ofprotecting investors. For example, it is necessary to examine whether the advertisement specifies the methodof investment evaluation and the basis for the use of benchmarks and properly expresses that the investment
performance data is an indicator that concerns past results but does not promise future performance.)(iii)

When including investment simulation in its advertisement, whether the investment trust management389

company, etc., uses descriptions that could cause misunderstandings by investors by, for example, setting
arbitrary assumptions. (When investment simulation is included in an advertisement, appropriate and easy-tounderstand descriptions must be made, from the viewpoint of protecting investors. For example, it is necessary
to examine whether the advertisement specifies the basis for the use of assumptions in the simulation andproperly indicates that the simulation is based on prescribed assumptions and does not promise future
investment performance.)(2) Provision of Documents to Beneficiaries, etc., in Potential Cases of Conflicts of Interests
The following are terminology interpretations regarding the provision of documents as specified under Article
13(1) of the Investment Trust Act, and an appropriate response to inquiries shall be made in accordance therewith.
(i)Interpretation of “Same Type of Asset”
The “same type of asset,” as specified under Article 13(1)(i) and (ii) of the Investment Trust Act and Article

19(1) of the Order for Enforcement of the Investment Trust Act (hereinafter referred to as the “Enforcement
Order of the Investment Trust Act”), does not apply to cases where, because of limits imposed by a relevant
investment trust contract or the internal rules of a relevant investment corporation, the contents of a specified
asset targeted for investment are different from the contents of a specified asset targeted for investment byanother investment trust fund with settlor instructions or by an investment corporation.
(ii)

Interpretation of “entrustment of management”
The “entrustment of management,” as specified under Article 19(3)(i) of the Enforcement Order of theInvestment Trust Act, refers to the entrustment of tenant management operations, such as the renewal of realestate-related rental contracts with tenants and receipts of rents, but does not include the entrustment of thebuilding security and maintenance operations to outside specialist business operators.
(3) Provision of Documents to Investment Corporations, etc., in Potential Cases of Conflicts of Interest
The points of attention described in (2) above shall be applied mutatis mutandis to the provision of documents
to investment corporations, etc., as specified under Article 203(2) of the Investment Trust Act.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the control environment forcustomer solicitation and explanations to beneficiaries of an investment trust management company, etc., throughdaily supervisory administration or the reporting of problematic conduct, they shall identify and keep track of thestatus of voluntary improvement made by the investment trust management company, etc., by holding in-depth
hearings and, when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When theinvestment trust management company, etc., is deemed to have a serious problem from the viewpoint of protecting
public interests and investors, the supervisors shall take actions, including issuing an order for business
improvement based on Article 51 of the FIEA. When the investment trust management company, etc., is deemed tohave committed a serious and malicious violation of law, the supervisors shall consider necessary actions, including
the issuance of an order for business suspension based on Article 52(1) of the FIEA.
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VI-2-3-3 Duty of Loyalty and Measures to Prevent Internal Collusion(1) Points of Attention Regarding Investment Trust Management Companies, etc., Engaging in Two or More Typesof Business
When supervisors examine the appropriateness of measures taken by an investment trust management company,
etc., which is engaging in two or more types of business (as specified under Article 29-2(1)(v) of the FIEA), toprevent internal collusion, they shall pay attention to the following points, for example, depending on the nature ofits business, from the viewpoint of preventing conflicts of interests and ensuring the appropriateness of business
operations in other ways.
(i)Whether the investment trust management company, etc., has taken appropriate measures to prevent

collusion between its different types of business, such as establishing an internal control system and proceduresfor the prevention of such collusion in a manner suited to the nature of its business.
(ii)

Regarding the “non-disclosure information,” as specified under Article 147(ii) of the FIB Cabinet Office

Ordinance, whether the investment trust management company, etc., has put in place information management
measures, such as the appointment of the relevant manager and the establishment of management rules, andensures the effectiveness of information management by, for example, properly identifying and examining thestatus of the usage of the non-disclosure information and revising the management method as necessary.
(2) Points of Attention Regarding Prevention of Conflicts of Interest in Investment Management Business
Whether appropriate measures have been taken to prevent practices that could promote the interests of specificrights holders at the expense of other rights holders, such as establishing an internal control system and proceduresfor the prevention of internal collusion between different types of business in a manner suited to the nature of thebusiness.
(3) Duty of Loyalty to Rights Holders
It should be kept in mind that if an investment trust investment company, etc., causes financial damage to arights holder due to a clerical error involved in the investment of investment assets and fails to compensate for thedamage, it could constitute a violation of the duty of loyalty. The same shall apply to cases where the clerical error
occurs at an entity to which business operations are entrusted and where the investment trust management company,
etc., which has the obligation of duty to the rights holder fails to compensate for the damage.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding measures taken by an investment
trust investment company, etc., to prevent internal collusion between different types of business, through daily
supervisory administration or the reporting of problematic conduct, they shall identify and keep track of the status
of voluntary improvement made by the investment trust investment company, etc., by holding in-depth hearings and,
when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA, since such an issue could
391

directly undermine the interests of rights holders and, in some cases, lead to legal violations, such as a violation of
the duty of loyalty and duty of due care. When the investment trust investment company, etc., is deemed to have aserious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the investment trust
investment company, etc., is deemed to have committed a serious and malicious violation of law, the supervisors
shall consider necessary actions, including the issuance of an order for business suspension based on Article 52(1)of the FIEA.
VI-2-3-4 Business Continuity Management (BCM) of Investment Trust Management Companies(1) Significance and Response
As investment trust management companies play an important role as intermediaries in the financial instruments
market, it is extremely important for the people’s lives and the economy that they act in an appropriate manner inthe event of an emergency, by, for example, taking recovery measures quickly and ensuring that the minimum
necessary operations and services are maintained. Therefore, securities companies, etc., need to make appropriate
preparations in normal times, such as establishing business continuity management (BCM) systems and creatingcrisis management manuals. From this viewpoint, supervisors shall examine the appropriateness of the BCMs ofinvestment trust management companies, in light of the characteristics of their business, by paying attention to thefollowing points, for example.
(2) Major Supervisory Viewpoints
Whether the business continuity plan (BCP) ensures quick recovery from damage caused by acts of terrorism,
large-scale disasters, etc., as well as continuance of the minimum necessary business operations and services for the
maintenance of the functions of the financial system. Whether arrangements and procedures are in place for ensuring
a response coordinated with Financial Instruments Firms Associations, securities companies, etc., and relevantorganizations. Whether the BCP enables international disruptions of business operations to be dealt with in a mannersuited to the actual state of business operations.
For example, attention shall be paid to:(i)Whether measures to secure the safety of customer data in the event of disasters, etc., have been taken(storing information printed on paper in electronic media, creating back-ups of electronic data files andprograms, etc.).
(ii)

Whether measures to secure the safety of computer system centers, etc., have been taken (allocating

suitable back-up centers, securing staff and communication lines, etc.).
(iii)

Whether the above back-up measures have been taken in ways to avoid geographic concentration.

(iv)

Whether a specific target period has been set for the recovery of operations vital for the maintenance ofthe lives of customers, economic activities and the functions of the financial instruments markets (as aconsequence of an order cancellation request regarding an investment trust (including MMFs and MRFs):
aggregation of the number of cancelled units, communications business (such as the receipt of notification392

from a sales company regarding cancellation, aggregation, and notification to the entrusted bank), calculationof the base value, announcements, identification of the existing position, minimum investment instructions,and cancellation operations related to direct customers (point-of-contact services such as receiving
cancellations from direct customers); and, for executing these business operations: legal responses (including
the preparation and submission of a securities registration statement), organizational management, systems
management, and crisis management (including the business of providing explanations to customers) throughprovisional measures such as manual operations and processing by back-up centers).
(v)

Whether the investment trust management company obtains the approval of the board of directors whenit adopts the BCM and makes important revisions. Whether the BCM is subjected to examination by
independent entities, such as internal and external audits.
(Reference)“Development of BCM at Financial Institutions” (BOJ, July 2003)“Basic Principles on Business Continuity” (Joint Forum, August 2006)
In addition, examination of the BCM and BCP shall basically be conducted with reference given to III-2-9.
VI-2-3-5 Points of Attention with respect to consideration of ESG(1)BackgroundThe number of investment products which incorporate Environmental Social and Governance (ESG) factors intheir names and investment strategies has been increasing both in Japan and overseas, and at the same time, concerns
over “greenwashing” that their actual investments may not be commensurate with their ESG claims are attracting
attention globally.
Given this background, regarding publicly offered investment trusts in Japan with ESG factors included in theirnames and investment strategies, it is necessary to ensure their credibility in the market and to promote ESG
investment, which will help build sustainable society.
In order to help retail investors make informed investment decisions, supervisors will check if the disclosures ofpublicly offered investment trusts and organizational resources and due diligence of investment trust managementcompanies regarding ESG are appropriate by paying attention to the following points.
(2)Scope of ESG investment trusts
In this Supervisory Guidelines, an ESG investment trust is defined as a publicly offered investment trust which(i) considers ESG as a key factor in the selection of investment assets, and(ii)

describes the content of (i) in the "Objective and Characteristics of the Fund" section of its delivery
prospectus.

Where its investment management is delegated to a third party (including the case of “Funds of Funds”), theclassification of the investment trust into ESG investment trusts should be decided appropriately by its entrusting
investment trust management company in accordance with the investment strategy and portfolio composition of its
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invested funds.
(3)Disclosure(i) Prevention of customer misunderstanding
Where an investment trust does not fall under the category of ESG investment trust, supervisors will checkthe following.
•

The name or nickname of the investment trust excludes ESG-related terms such as ESG, SDGs
(Sustainable Development Goals), green, decarbonization, impact, sustainable, etc. in order to avoid
misleading investors.

• Where an ESG factor is considered along with other factors such as financial indicators in the selectionof investment assets,

ESG-related initiatives described in the "Objective and Characteristics of theFund" of its delivery prospectus, sales materials, advertisement, etc. would not mislead customers into
thinking that ESG is a key factor in its selection of investment assets.
• Where an investment trust which has been set up before the end of March, 2023 includes ESG-related
terms in its name or nickname although it is not categorized as ESG investment trusts, that its delivery
prospectus clearly states that it is not an ESG investment trust.
Please note that if an investment trust applies to the third case above, it is recommended that its investment
management trust company excludes ESG-related terms from its name or nickname as soon as possible.
(ii)

Investment Strategy
Supervisors will check the following items are described in the "Objective and Characteristics of the Fund"

section of the delivery prospectus of an ESG investment trust. It is also accepted for point C below to be
described in the “Investment Risk” section.
A details of key ESG factors (e.g. comprehensive ESG rating or specific environmental or social issues) in
the selection of investment assets
B

how key ESG factors are considered in the investment process (e.g. explanation of relevant criteria andindicators, evaluation methods, etc.)

Crisk and limitation in consideration of key ESG factors in the investment processD

regarding an ESG investment trust that aims to create environmental or/and social impact in order tobuild a sustainable society, description of its purpose, details of the impact and how to measure and achieve
it including target indicators and numbers, and methodologies

E

the content of the stewardship policy, where the investment trust management company has one related to
key ESG factors in the selection of investment assets that is company-wide or specifically dedicated to theivestment strategy

F the references, where an ESG investment trust discloses further details of the above items from A throughE on the website of the investment trust management company, etc.
(iii) Portfolio Construction394• An ESG investment trust has a target or guideline ratio of its investment asset (on a market value basis)that are selected by the use of key ESG factors out of its net asset value• An ESG investment trust has other target or guideline indicators for evaluation of achievement of the whole
portfolio regarding key ESG factors in the selection of investment asset.
Where either or both of the above is true, supervisors will check the ratio or figures are disclosed in the"Objective and Characteristics of the Fund" section of its delivery prospectus. Where it does not set such target
or guideline ratio, supervisors will check the reason behind is explained.
(iv) Reference Index
Where an investment trust seeks to track a specific ESG index, supervisors will check that it explains how
ESG factors are incorporated in the index in the "Objective and Characteristics of the Fund" section of itsdelivery prospectus and the reason why the investment management trust company has chosen the index.
(v) Periodic disclosure
Supervisors will check the following items are disclosed periodically in the delivery investment reports(periodic disclosure documents for Exchange-Traded Funds; the same applies hereinafter) and the "Investment
Performance" section of the delivery prospectus of an ESG investment trust.
A

the actual proportion, where it has a target or guideline ratio of investment assets selected with the use of
key ESG factors (on a market value basis) out of its net asset valueBthe status of achievement, where it has target or guideline indicators for evaluation of the whole portfolio
regarding key ESG factors considered in the selection of investment assets

C

regarding an ESG investment trust that aims to create environmental or/and social impact in order to build
a sustainable society, the extent of the impact achievedDthe actions taken in accordance with the policies specific to individual publicly offered investment trusts
or company-wide stewardship policies where an investment trust management company has one related to
key ESG factors considered in the selection of investment assets that is company-wide or specifically
dedicated to the investment strategyEthe references, where the further details of the above items from A through D are disclosed on a website,
etc.

(vi) Outsourcing
Where investment management of an ESG investment trust is outsourced to a third party, supervisors will
check the investment management trust company conducts appropriate due diligence on the third party andreview the status of investment management, and that it discloses the actual status of (2) to (5) of its invested
funds in its delivery prospectus and delivery investment reports. Supervisors will check the reason behind is
explained in case of difficulty in the disclosure above.

395

(4) Resources and Due Diligence(i) Organizational ResourcesSupervisors will check that an investment management trust company has adequate resources to implement
operations in line with an investment strategy considering ESG factors and to monitor its implementation status
on an ongoing basis. These resources include development of data, IT infrastructure and human resources
regarding ESG factors.
Where investment management of a publicly-offered investment trust is delegated to a third party,
supervisors will check that the investment trust management company has appropriate resources in place toconduct due diligence on the organizational resources of the third party and to confirm the status of (3)(ii) to(v) of the invested funds.
Where these disclosure are difficult to be made, supervisors will check the reason behind is stated.
(ii) Use of ESG Rating and Data Providers
When an ESG rating provided by a third party is used in the investment process of publicly offeredinvestment trusts, or when data provided by a third party is used in own ESG assessment by an investment
trust management company, supervisors will check it conducts appropriate due diligence which could include
an understanding of the organizational resources of the third party, what is being rated or assessed by its product,
how it is being rated or assessed, and limitations and purposes for which its product is being used.
VI-2-3-6 Other Points of Attention
The provisions of VI-2-2-5(2), (3), and (4) shall be applied mutatis mutandis to appropriateness of business
operations related to investment trust management business, etc.
VI-2-4 Appropriateness of Business Operations Related to Foreign Investment Trust Management BusinessExamination of the appropriateness of investment management business for establishing foreign investment
trusts and giving direction for investment directly from Japan should be conducted in accordance with VI-2-3(excluding VI-2-3-2 (2) and (3), VI-2-3-4, and VI-2-3-5).
VI-2-5 Appropriateness of Business Operations Related to Fund Management BusinessSupervisors shall examine the appropriateness of the business operations of fund management companies(companies engaging in fund management business (financial instruments business involving the activities specified
under Article 2(8)(xv) of the FIEA); the same shall apply hereinafter) by paying attention to the following points.
VI-2-5-1 Control Environment for Business Execution(1) Investment and Administration of Investment Assets
Supervisors shall examine whether a fund management company is properly managing and administering
investment assets by paying attention to the following points. It should be noted that the following points should be396

taken into consideration in a comprehensive manner in light of the nature and size of the fund managementcompany’s business, and that failure to meet some of the criteria should not automatically be deemed to mean thatthe investment and administration of investment assets are inappropriate.
(i)

Whether the fund management company has properly specified the matters regarding internal organizationthat decide its investment policy (including a specific decision-making process).
(ii)

Whether the fund management company has prescribed a specific investment method for investment ofinvestment assets by the investment division.
(iii)

Whether the fund management company has developed an appropriate control environment regarding themanagement of securities transactions between various investment assets and between investment assets andits own assets or third-party assets.
(iv)

In cases where the fund management company entrusts all or part of the authority over the investment

made on behalf of rights holders (as specified under Article 42(1) of the FIEA; the same shall apply hereinafter)
to another entity, under Article 42-3 of the FIEA (including cases where the entrusted entity entrusts part of theauthority to yet another entity), whether the fund management company has properly established the criteria
for selecting the entity to which the authority is entrusted and the method of communications therewith.
Whether the investment management company has developed a control environment for continuously
examining the entrusted entity’s business execution capability and its compliance with contract provisions.
Whether it has specified measures to be taken when a problem is found in the entrusted entity’s businessexecution capability (e.g., providing guidance for business improvement and refusing to renew the entrustment
contract).
(v)

Regarding the selection of the entities to which orders are placed and business operations are entrusted,

whether the fund management company has properly specified the matters concerning the entities’ transaction
execution capability, control environment for legal compliance, credit risk and trading costs as items thatshould be taken into consideration.
(vi)

Whether the fund management company has arrangements and procedures for a division independent

from the investment division to periodically examine whether investment assets are properly invested(including whether records on the investment status are stored), including whether the investment decision
process is appropriate, in accordance with the investment guideline or the investment contract specified under
Article 2(2)(v) of the FIEA.
(2) Execution of Transactions
When fund management companies execute transactions, they are required to select the transaction form that
benefits customers most, by taking into consideration the transaction price and other execution costs in acomprehensive manner. In light of the increasing diversification of the transaction forms due to the advance offinancial techniques, supervisors shall examine the status of a fund management company’s transaction execution
by paying attention to the following points, for example:(i)

At-Average-Price Transaction (transaction made at the average of prices of various orders of the sametransaction and delivery dates aggregated by issue and order category (sell or buy))397

A. Separation of Divisions
Whether the fund management company has separate divisions for making investment divisions andfor taking orders. In cases where organizational separation is difficult, whether, at the minimum, different
persons are responsible for these two tasks.
B. Examination of Transactions
Whether the fund management company has a control environment for ensuring that a relevant
management division, for example, examines the whole range of business processes related to ataverage-price transactions.
C. Disclosure to Customers and Consent Thereof
Whether the fund management company makes at-average-price transactions after making priordisclosure to customers and obtaining their consent. In cases where the fund management company
makes orders involving proportional allocation of executed transactions with regard to two or moreinvestment asset accounts, whether it provides customers with appropriate explanations regarding thecriteria for allocation, in the case of the total executed transaction volume falling short of the total ordervolume.
(ii)

Transactions Made via Bulk Orders
In cases where the fund management company places a bulk sell or buy order for the same issue on behalfof two or more investment asset accounts, and allocates the executed transactions to each asset account basedon the allocation criteria prescribed by the Financial Instruments Business Operator after aggregating thetransactions by issue and by buy/sell order, whether it has developed a control environment similar to the one
described in (i) above, from the viewpoint of ensuring fairness among customers.
(iii)

Transactions Made between Investment Asset Accounts
Transactions made between investment asset accounts are in principle prohibited because there is riskthat investors in one of the funds involved in the transactions may receive unfavorable treatment and that suchtransactions may be utilized in acts that go against investor protection such as transfers of profits between thefunds.
On the other hand, of transactions specified under Article 129(1)(i) of the FIB Cabinet Office Ordinance,
if a transaction between investment assets accounts falls under a case where the prohibition of transactions
between investment assets accounts does not apply, the relevant management division is required to beadequately prepared to verify that the transactions meet the requirements in (a) and (b) of Article 129(1)(i).
The "case where it is deemed to be necessary and rational," as specified by Article 129(1)(i)(a)(4) of the
FIB Cabinet Office Ordinance, is a case in which transactions between investment assets accounts executed byfund management companies meet the need to ensure fairness among customers and fulfill their duties of best
execution and loyalty to customers, and this applies to transactions in which relevant "sell" or "buy" decisions
by both of the funds executing the transactions between investment assets accounts are deemed necessary andrational, and that such transactions are executed in the best possible manner for the investment decisions thus
made (or the transactions executed to follow best execution practice result in the offsetting of possible losses
involved in such transactions).
398

In determining whether there is necessity and rationality, factors such as the investment policy of the funds
involved (including in-house investment limits introduced by the fund management businesses for the purposeof risk management, etc.), inflow or outflow of money associated with cancellation/formation of funds(including whether there is a need to sell or buy assets in order to maintain the portfolios of individual funds,etc.), etc. are considered.
On the other hand, from the viewpoint of best execution practice, factors such as transaction costs,
mitigation of market impact, etc. are considered in addition to transaction prices.
From the above viewpoints, such transactions as listed below are considered as ones in which fairness among
funds and fair price formation are ensured and as constituting a "case where it is deemed to be necessary andrational." (It must be noted, however, that these are shown only as examples and not the only ones that qualify.)
A. To have traders execute transactions based on investment decisions made by several fund managers(limited to transactions regarding which there is not the risk of the price formation process being distorted
in light of liquidity and other factors related to the relevant issue and, in cases where the transactions are
executed by the same trader, the trader has no discretion over execution).
B. To place both market buy and sell orders before the market’s opening (limited to orders which have norisk of distorting the price formation process in light of liquidity and other factors related to the relevant
issue).
C. To place both buy and sell orders in intraday trading at a reasonable interval (limited to orders whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
D. To conduct transactions related to index funds executed through program trading based on contracts andtrust contract provisions (limited to transactions which have no risk of distorting the price formation
process in light of liquidity and other factors related to the relevant issue).
E. To make VWAP transactions and discretionary transactions, regarding which the decision on the timingof order placement, price and other execution terms related to individual issues are entrusted by the fundmanagement company to a third-party entity (limited to transactions which have no risk of distorting theprice formation process in light of liquidity and other factors related to the relevant issue).
F. To make futures transactions, regarding which it is difficult to avoid the placement of orders for the same
issue because of the small number of issues available for futures trading (limited to transactions whichhave no risk of distorting the price formation process in light of liquidity and other factors related to therelevant issue).
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a fund management company’scontrol environment for business execution, through daily supervisory administration and the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by the fundmanagement company by requiring the submission of reports based on Article 56-2(1) of the FIEA. When the fundmanagement company is deemed to have a serious problem from the viewpoint of protecting public interests and399

investors, the supervisors shall take actions, including issuing an order for business improvement based on Article
51 of the FIEA. When the fund management company is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider necessary actions, including the issuance of an order for businesssuspension based on Article 52(1) of the FIEA.
VI-2-5-2 Control Environment for Customer Solicitation and Explanations(1) Prohibition of Advertisements Using Exaggerated Descriptions(i)

Whether the fund management company includes in its advertisements descriptions indicating that theperformance, contents and method of its investment are markedly superior to those of other Financial
Instruments Business Operators without providing the basis therefor.
(ii)

When including investment performance data in its advertisement, whether the fund managementcompany uses descriptions that could cause misunderstanding by investors, by putting excessive emphasis on
specific parts of the performance. (When investment performance data is included in an advertisement,
appropriate and easy-to-understand descriptions must be used, from the viewpoint of protecting investors. For
example, it is necessary to examine whether the advertisement specifies the method of investment evaluationand the basis for the use of benchmarks and properly expresses that the investment performance data is anindicator that concerns past results but does not promise future performance.)(iii)

When including investment simulation in its advertisement, whether the fund management company uses

descriptions that could cause misunderstandings by investors by setting arbitrary assumptions, for example.
(When investment simulation is included in an advertisement, appropriate and easy-to-understand descriptions
must be made, from the viewpoint of protecting investors. For example, it is necessary to examine whether theadvertisement specifies the basis for the use of assumptions in the simulation and properly indicates that thesimulation is based on prescribed assumptions and does not promise future investment performance.)(2) Points of Attention Regarding Provision of Pre-Contract Documents
In cases where a fund management company concurrently conducts business unrelated to investment
management and where it receives remuneration related to investment management business and fees related toother business collectively under the same contract, the fund management company must separately specify the
remuneration related to investment management business and the fees related to other business with regard to the“matters concerning fees, remuneration or any other consideration payable by the customer with regard to said
Contract for Financial Instruments Transaction,” as specified under Article 37-3(1)(iv) of the FIEA.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a fund management company’scontrol environment for customer solicitation and explanations, through daily supervisory administration or thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the fund management company by holding in-depth hearings and, when necessary, requiring the submission of400

reports based on Article 56-2(1) of the FIEA. When the fund management company is deemed to have a serious
problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions, including
issuing an order for business improvement based on Article 51 of the FIEA. When the fund management company
is deemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary
actions, including the issuance of an order for business suspension based on Article 52(1) of the FIEA.
VI-2-5-3 Duty of Loyalty and Measures to Prevent Internal Collusion(1) Points of Attention Regarding Fund Management Companies Engaging in Two or More Types of Business
When supervisors examine the appropriateness of measures taken by a fund management company, which isengaging in two or more types of business (as specified under Article 29-2(1)(v) of the FIEA), to prevent internal
collusion, they shall pay attention to the following points, for example, depending on the nature of its business, fromthe viewpoint of preventing conflicts of interests and ensuring the appropriateness of business operations in other
ways.
(i)

Whether the fund management company has taken appropriate measures to prevent collusion between its

different types of business, such as establishing an internal control system and procedures for the preventionof such collusion in a manner suited to the nature of its business.
(ii)

Regarding the “non-disclosure information,” as specified under Article 147(ii) of the FIB Cabinet Office

Ordinance, whether the fund management company has put in place information management measures, suchas the appointment of the relevant manager and the establishment of management rules, and ensures theeffectiveness of information management by, for example, properly identifying and examining the status of theusage of the non-disclosure information and revising the management method as necessary.
(2) Points of Attention Regarding Prevention of Conflicts of Interests in Investment Management Business
Whether appropriate measures have been taken to prevent practices that could promote the interests of specificrights holders at the expense of other rights holders, such as establishing an internal control system and proceduresfor the prevention of collusion between different types of business in a manner suited to the nature of the business.
(3) Duty of Loyalty to Rights Holders
It should be kept in mind that if a fund management company causes financial damage to a rights holder due toa clerical error involved in the investment of investment assets and fails to compensate for the damage, it could
constitute a violation of the duty of loyalty. The same shall apply to cases where the clerical error occurs at an entity
to which business operations are entrusted and where the fund management company that has the obligation of duty
to the investor fails to compensate for the damage.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a fund management company’s
measures to prevent collusion between different types of business, through daily supervisory administration or the401reporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the fund management company by holding in-depth hearings and, when necessary, requiring the submission ofreports based on Article 56-2(1) of the FIEA, since such an issue could directly undermine the interests of rights
holders and investment assets and, in some cases, lead to legal violations, such as a violation of the duty of loyalty
and duty of due care. When the fund management company is deemed to have a serious problem from the viewpointof protecting public interests and investors, the supervisors shall take actions, including issuing an order for business
improvement based on Article 51 of the FIEA. When the fund management company is deemed to have committed
a serious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business suspension based on Article 52(1) of the FIEA.
VI-2-5-4 Other Points of Attention
The provisions of VI-2-2-5(2), (3), and (4) shall be applied mutatis mutandis to appropriateness of business
operations related to fund management business.
VI-2-6 Points of Attention Regarding Real Estate-Related Fund Management Companies
Real estate investment trusts and other real estate-related funds are financial products based on the investmentof funds collected from a broad range of investors, including individual investors, mainly in real estate (including
financial products backed by real estate as the underlying assets; the same shall apply in VI). Financial instruments
business operators which manage these products are required to ensure the appropriateness of the implementationof due processes, information disclosure and measures to prevent conflicts of interest, which are prerequisites forthe exercise of an appropriate price formation function of the real estate market, thereby fulfilling the duties ofloyalty and due care to investors.
While the viewpoints and supervisory methods and responses specified in VI-2-2 to VI-2-5 shall be applied tothe supervision of real estate-related fund management companies, depending on the investment style, attention also
needs to be paid to the following items. In this respect, supervisors shall pay particular consideration to whether realestate-related fund management companies sufficiently identify and understand the characteristics unique to realestate, in comparison with other assets, and the risks involved in the investment therein, as they need to conduct
their business in a sound and appropriate manner based on sufficient understanding of these matters. It should be
noted that the supervision conducted in this manner is not intended to manipulate specific real estate prices.
VI-2-6-1 Control Environment for Legal Compliance
Real estate-related fund management companies’ control environments for legal compliance shall basically be
examined based on the supervisory viewpoints and methods specified in III-2-1. However, they shall also be
examined in relation to a broad range of matters, including measures to prevent conflicts of interest specific to thereal estate-related fund business.
VI-2-6-2 Internal Control Environment
As real estate-related fund management companies are bound to the duties of due care and loyalty, they are402

required to establish a sufficient control environment for legal compliance and risk management. Their management
teams need to formulate various rules that ensure thorough legal compliance and risk management rules that ensure
appropriate risk management based on the analysis and evaluation of risks involved in real estate investment, andcheck the status of compliance therewith.
It should be kept in mind that in doing the above, the management teams need to establish an internal control
environment, including a control environment for due diligence that pays due consideration to the uniquecharacteristics of real estate.
VI-2-6-3 Evaluation Items Concerning Operations of Real Estate-related Fund Management Companies(1) Evaluation Items Concerning Due Diligence Control Environment for Purchase and Sales of Real Estate
Real estate due diligence is an important task for the understanding of the legitimate investment value of realestate, and thus its appropriateness shall be examined with due consideration of the following points.
Meanwhile, the management team must always understand the progress of implementation of measures toensure the appropriateness of due diligence and the effectiveness of examination functions, while remaining awareof the issues.
(i)

Examinations shall be performed to see whether estimates of various costs of repair/renewal areappropriately investigated and reflected in the appraised value of real estate, considering the significance ofan impact on cash flows in the future.
(ii)

The DCF method is an approach for valuation based on cash flows, and is a major and effective method

for the appraisal of real estate. However, there are many preconditions, which may blur details. Thus, the point
is whether the following items are verified, and the result of verification is recorded when the DCF method isadopted.
A. Validity of adopted figures (based on the projected estimates, in particular) and basis for judgment
B. Validity of the overall scenario and basis for judgment
C. Comparison and balance between the result of adopting the DCF method and the result of adopting othermethods/means.
(iii)

The following points shall be considered when entrusting the formulation of engineering reports (ER)and appraisal reports and receiving them:
A. Whether it is ensured that ER writers and real estate appraisers make impartial decisions based on
objective standards.
B. Whether necessary information etc., is provided to ER writers and real estate appraisers, whenrequesting ERs and real estate appraisal. Also, whether such provision of information, etc. is properly
managed.
C. Whether the following points are confirmed in addition to necessary examinations on how the
information, etc., mentioned in B. above has been reflected in the requested ER:
a. Whether necessary investigations are conducted and the investigation results are justified by
objective grounds when investigating soil contamination and harmful substances.
403

b. Whether it is confirmed what kind of repairs are used as the basis for calculations of cost estimatesof repairs and renewals of individual parts of a building.
c. Whether necessary verifications of compliance have been conducted regarding the target property,
not only compliance with laws but also with ordinances, such as district plans, etc.
D. When receiving the appraisal report from the appraiser who was requested to perform the evaluation,
whether the necessary examination has been conducted to see how the information, etc., listed B. above
has been reflected in the report and whether the following points have been verified:a. Whether the concept of ER has been considered and reflected. Whether the reasons and grounds forany items not being reflected have been confirmed.
b. In the case of adopting the DCF method, whether estimates of future income and utilization rate,etc., are verified as relevant and based on objective data. Also, whether the level of relevance has
been verified in the same way for the estimation of discount rates and terminal rates, which serve aspreconditions.
c. Whether necessary examinations have been performed of items that may possibly influence theliquidity of the real estate itself and the cash flows that would be generated by the real estate.
E. In the cases where listed details in the ER and appraisal report are not used when calculating thepurchase/sales price based on the result of due diligence, whether the relevance of adopted values, etc.,
is verified and the basis for such values is recorded and stored.
(2) Control Environment for Preventing Conflict of Interest Transactions
The management team needs to be aware of the potential for risks of conflict of interest transactions to occur,and identify not only interested persons specified in laws, but also possible business partners with which conflictsof interest may arise, and then to establish an adequate management system concerning the transactions with these
persons. Examination shall be made, focusing on the following points.
(i)

In cases where the management team adopts a policy to the effect that a fair transaction price for acquiringproperty can be calculated on the basis of the appraised value of the real estate, with a certain range ofadjustment, whether the real estate-related fund management company has developed a control environment
for periodically examining the appropriateness of such range of adjustment in view of the market conditions;
whether the real estate-related fund management company has developed a control environment for
appropriately announcing such policy (if the policy is revised, the reasons for the revision shall be included)(in the case of a private placement fund, such announcement shall be made by making notifications to
subscribers).
(ii)

Whether the real estate-related fund management company has developed a centralized management

system for property information (including the state of negotiations concerning purchase and sales, etc.), andauthorized compliance personnel to manage negotiations concerning sales and purchases from the perspectiveof preventing conflict of interest transactions.
(iii)

Whether the real estate-related fund management company is aware of a high risk of conflict of interest

occurring in cases where it uses the warehousing function when it is unable to acquire real estate held by a404

third party at the time said party wishes to sell the same, and with this in mind, carries out negotiations, clarifies
the sharing of roles, and conducts due diligence procedures appropriately.
(3) Points to Consider in the Cases Where Management of Real Estate-related Assets of Several Funds are Entrusted
to One Real Estate-related Fund Management Company
In the cases where a real estate-related fund management company is entrusted with the management of realestate from several funds, it shall be considered, at the time when property information is obtained, to see whether
measures have been taken to avoid competition over the acquisition among management funds and whether aframework has been established to enable each fund to make decisions independently.
(4) Points of Attention When Acquiring Shares in Overseas Companies That Holds Real Estate Assets
When an investment corporation wants to acquire a real estate asset located overseas but the corporation itself
is unable to do so because of inevitable reasons including local laws and local practices, such a corporation canacquire a majority of shares with voting rights in the company that holds the said real estate asset (hereinafterreferred to as "overseas real estate holder"). In such a case, all of the following requirements must be met.
The overseas real estate holder's sole purpose of business is acquisition, assignment and other transactions(i)of real estate assets in the country of its location.
(ii) The investment corporation receives annual payments from the funds available to pay out by the overseas
real estate holder as dividends in an amount proportionate to the percentage of the number of shares theinvestment corporation holds or the amount it invests in the overseas real estate holder (or an amount paidout in accordance with laws or practices in the overseas real estate holder's country of location).
(iii) The overseas real estate holder has its financial statements audited or verified by a firm engaged in
conducting audits or verification at the request of customers.
(5) Others(i)

Scope of “Acquisition of Real Estate,” etc.
“Acquisition of real estate” does not include the development of housing sites or the construction ofbuildings by an investment corporation itself, but includes cases where the investment corporation concludes
a contract for work and orders the development of housing sites or construction of buildings.
However, in cases where an investment corporation is unsuitable to conclude a contract for thedevelopment of housing sites or construction of buildings, including the following cases, such practice does
not fall within the scope of “acquisition of real estate.”
A.

When conducting large-scale repair and renovation work, etc., tenants need to be relocated for a certain
period of time, and the fluctuations of cash flows will heavily affect the entire portfolio.

B.

When an investment corporation purchases undeveloped land and constructs new buildings, various
risks will be involved in the development of real estate (development risk, authorization risk,
construction completion risk, tenant risk, price fluctuation risk, interest fluctuation risk during
development, and large natural disaster risk, etc.), and such risks may greatly affect the entire portfolio
405because the investment does not generate immediate cash flows.
(ii)

Forward Commitment by Investment Corporations
In cases where an investment corporation makes a forward commitment, etc. (referring to a postdated sales

contract under which payment and delivery shall be made at least one month after the conclusion of the contract,
or any other contract similar thereto; hereinafter the same shall apply in (ii)), attention shall be paid to thefollowing points. Similar treatment shall be applied in cases where an investment corporation manifests theintention to make a postdated purchase, if such manifestation of intention is effectively binding on thetransaction.
A.

Whether the investment corporation clearly shows the possible impact on its financial status in theevent of its failure to fulfill the forward commitment, etc., by appropriately announcing the terms ofcancellation.

B.

Whether the investment corporation has, while taking into consideration the market environment,
financing environment and the individual situations of the corporation, drawn up rules regarding theacquisition price of the property under a forward commitment, etc. and the maximum period from theconclusion of the contract until the delivery of the property, as well as the method for procuring funds
for payment, and complies with such rules; in particular, in the case of a listed investment corporation,
whether the corporation has developed a control environment for carefully considering a forward
commitment, etc., under which it might have to pay an excessive penalty compared with the dividend
resources, including the delisting requirements.

C.

While the property under a forward commitment, etc. is not included in the balance sheet until payment
is made for it, the price volatility risk for the property until that time is attributed to the investment
corporation. In light of this, whether the investment corporation conducts continuous appraisal of theproperties that it holds, and publicizes the results of the appraisal of such properties (in the case ofproperties which are yet to be constructed and therefore cannot be appraised, the results of the priceresearch).

(iii)

Issuance of Subordinated Investment Corporation Bonds by Investment Corporations
In cases where the investment corporation issues subordinated investment corporation bonds, supervisors

shall check whether the corporation has carefully examined the necessity of fund raising through the issuanceand the appropriateness of the terms of issuance, while taking into consideration that investors’ interest would
be harmed depending on the terms of issuance, and has publicized information on these matters appropriately.
(iv)

Control Environment for Managing the Outsourcing of Business Operations
Real estate-related fund management companies, while exercising investment discretion, outsource part oftheir businesses to various corporations (ER corporations, appraisal corporations, trust banks, property
management corporations, and building management corporations, etc.). Thus, appropriate supervision overthe said outsource is essential if they are to exercise loyalty and fulfill their duties. In order to effectuate
supervisions, it is necessary to improve various reporting lines from outsourcees (both direct and indirect via
trust banks, etc.) upon formulating various regulations/standards, including selection criteria for outsourcees,
thereby implementing effective monitoring periodically. Meanwhile, it should be noted that the appropriate
406

clarification of role sharing between outsourcers and outsourcees is a prerequisite for a control environment
for managing the outsourcing of business operations.
(v)

Investment, etc., in Development SPC
Whether analysis and risk management have been appropriately implemented with respect to various risks(development risk, authorization risk, construction completion risk, tenant risk, price fluctuation risk, interest
fluctuation risk during development, and large natural disaster risk, etc.). Whether monitoring of projectprogress has been property conducted. Meanwhile, attention should be taken to ensure that investment in thedevelopment SPC by funds other than those specializing in development-style projects does not impose
excessive influence on the entire portfolio, considering that the development does not generate immediate cash
flows.
(vi) Control Environment for Managing Information
As for the information management of real estate-related fund management companies, which manage
listed real estate investment juridical persons, it is necessary to manage information appropriately, by taking
measures to ensure confidentiality of information prior to decision making, such as investment decisions basedon asset management outsourcing contracts, etc. (decision making, etc., concerning acquisition and sales), as
well as confidentiality of information prior to transaction and prior to disclosure.
(6) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the above evaluation points,
through daily supervisory administration and the reporting of problematic conduct, they shall identify and keep
track of the status of voluntary improvement made by the real estate-related fund management company by requiring
the submission of reports based on Article 56-2(1) of the FIEA. When the real estate-related fund managementcompany is deemed to have a serious problem from the viewpoint of protecting public interests and investors, thesupervisors shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA.
When the real estate-related fund management company is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider necessary actions, including the issuance of an order for businesssuspension based on Article 52 (1) of the FIEA.
VI-2-7 Points of Special Attention Regarding Investment Management Business for Qualified Investors
VI-2-2 to VI-2-6 shall be applied mutatis mutandis to the appropriateness of the business operations ofinvestment management business operators for qualified investors (meaning a person engaged in investment
management business for qualified investors prescribed in Article 29-5(1) of the FIEA; the same shall apply
hereinafter). In addition, supervisors shall examine the appropriateness by paying attention to the following points
in particular.
VI-2-7-1 Points of Attention Regarding the Control Environment for Business Execution407

(1) Points of Attention Regarding the Control Environment for Execution of Transactions
In the case of an investment management business operator for qualified investors which does not have separate
divisions (personnel) for making investment decisions and for taking orders, as an alternative, whether measures
have been implemented for preventing prohibited acts pertaining to investment management business, in view of
the investment policy, the amount of assets managed and other circumstances of the investment managementbusiness for qualified investors.
(2) Points to Consider in Cases Where Compliance Work is Outsourced
In cases where an investment management business operator for qualified investors has outsourced its
compliance work, supervisors need to pay attention to the following points, for example.
It should be kept in mind that the following points are general supervisory viewpoints, and that supervisors mayneed to examine other points too, in view of the business operations of the investment management business for
qualified investors.
(i) Whether the business operator has clearly specified a policy and procedures for selecting the contractors.
(ii) In cases where compliance work is entrusted to a group corporation in Japan or overseas, whether the business
operator can evaluate that a system has been developed for compliance of an investment managementbusiness operator for qualified investors, considering the degree to which the said corporation possesses
compliance functions and its execution of the outsourced business.
(iii)

In cases where compliance work is entrusted to an attorney, a legal professional corporation or a person

equivalent thereto (hereinafter referred to as “attorney, etc.” in this item (iii) and in VI-3-1-2), whether thebusiness operator has considered the following points.
A. Whether the attorney, etc. entrusted with the work is a person recognized as being capable of properly
carrying out the necessary guidance, etc. for complying with laws and regulations regarding financial
instruments business.
B. Whether the following items have been stipulated in the outsourcing contract concluded with the said
attorney, etc.:
a. Identification and examination of actual business conditions from a perspective of legal complianceb. Preparation and management of a compliance manual, and periodic implementation of compliancetraining
c. Periodic preparation of a report on compliance, as well as the storing and provision of reports to thetrustord. System of communication between the trustor and contractor (including responses in the event of adispute)e. Other matters in addition to those listed in a to d above, which are needed for compliance work
pertaining to the investment management business for qualified investors
VI-2-8 Points of Special Attention Regarding Businesses Specially Permitted for Overseas Investors, etc.

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VI-2-5 and VI-2-7 shall also apply regarding the appropriateness of business operations of persons engaging inbusinesses specially permitted for overseas investors, etc. Supervisors shall examine the appropriateness by paying
attention to the following points in particular.
VI-2-8-1 Points of Attention Regarding the Control Environment for Business Execution(1) Requirements for Businesses Specially Permitted for Overseas Investors, etc.
(i) In accordance with the supervisory viewpoints in VI-1-2, whether it is found that adequate staffing forproperly performing businesses specially permitted for overseas investors, etc. is secured, and whether it isfound that an environment necessary for properly performing businesses specially permitted for overseas
investors, etc. has been developed.
(ii) Whether the investment ratio of non-residents (referring to non-residents prescribed in Article 6(1)(vi) of theForeign Exchange and Foreign Trade Act; the same shall apply hereinafter) out of overseas investors, etc. tothe total investment amount of the fund is over 50% .
(iii) Whether internal records are properly made and preserved, for example, as a means to properly confirm thatthe customer, by way of sufficiently confirming, as the customer who is an individual with an address in aforeign country and is going to acquire an invested business equity pertaining to businesses speciallypermitted for overseas investors, etc., falls under Article 246-10(1)(i) or (ii) of the FIB Cabinet Office
Ordinance, by fully utilizing a self-reported document and other materials voluntarily submitted by thecustomer (a report on outstanding balance of transactions, a copy of a deposit passbook, etc.) or documents,
etc. prescribed in Article 246-14(1)(v)(c) of the FIB Cabinet Office Ordinance, thereby managing andpreserving documents in which the confirmation results and grounds therefor are stated.
(iv) Whether efforts are being made to ensure appropriate solicitation by examining as necessary whether staff
ever induce customers to make false reports on their assets with the intention of soliciting investments from
customers who do not meet requirements for making investments. In particular, in cases where an overseas
investor, etc. who does not fall under a professional investor becomes a customer, whether the obligation todeliver documents, such as a document for delivery prior to conclusion of contract, under the FIEA and otherconduct control are properly observed.
(2) Supervisory Method and Actions
Regarding issues of supervisory concern, which were identified through day-to-day supervisory work and thereporting of problematic conduct, in relation to persons engaging in businesses specially permitted for overseas
investors, etc., supervisors shall hold an in-depth hearing and, when necessary, request the submission of a reportbased on Article 63-14 of the FIEA (including cases where applied mutatis mutandis pursuant to Article 63-11(2) of
the same Act). In particular, the other parties to businesses specially permitted for overseas investors, etc. are mainly
non-residents, and therefore, supervisors shall endeavor to ascertain and eliminate problems at an early stage by
positively utilizing frameworks for cooperation with foreign authorities. When a serious problem from the viewpointof protecting public interests and investors has been found, supervisors shall take action, such as issuing a business
improvement order based on Article 63-13(1) of the FIEA (including cases where applied mutatis mutandis pursuant409

to Article 63-11(2) of the same Act; hereinafter the same shall apply in VI-3-3). Furthermore, when a serious andmalicious illegal act has been found, supervisors shall consider necessary action, including the issuance of a businesssuspension order based on Article 63-13(2) of the FIEA (including cases where applied mutatis mutandis pursuant
to Article 63-13(2) of the same Act; hereinafter the same shall apply in VI-3-3) or a business abolition order basedon Article 63-13(3) of the FIEA (including cases where applied mutatis mutandis pursuant to Article 63-11 (2) of
the same Act; hereinafter the same shall apply in VI-3-3).
VI-2-9 Points of Special Attention Regarding Businesses Specially Permitted for the Transitional Period, etc.
VI-2-2, VI-2-4, and VI-2-8 shall also apply regarding the appropriateness of business operations of persons
engaging in businesses specially permitted for the transitional period, etc.

Supervisors shall examine theappropriateness by paying attention to the following points in particular.
VI-2-9-1 Points of Attention Regarding the Control Environment for Business Execution(1) Requirements for Businesses Specially Permitted for the Transitional Period, etc.
Persons engaging in businesses specially permitted for the transitional period need to confirm that a customer
falls under the category of overseas investors, etc. (referring to overseas investors, etc. prescribed in Article 3-3(6)of the Supplementary Provisions of the FIEA; hereinafter the same shall apply in VI-2-9) or that other requirements
for businesses specially permitted for the transitional period, etc. are met and make a record. When ascertaining theactual status through checking submitted documents and business reports, etc., supervisors shall conduct verification
while paying attention to the following points, for example.
(i) Whether the person engaging in businesses specially permitted for the transitional period appropriately
confirms that customers are only overseas investors, etc. and prepares and preserves internal records on theconfirmation results.
(ii) In cases where a customer is a Financial Instruments Business Operator or a registered financial institution
engaging in investment management business, whether the person engaging in businesses specially permitted
for the transitional period confirms the trade name, registration number, address, etc. of the Financial
Instruments Business Operator or the registered financial institution and prepares and preserves internal records
on the confirmation results.
(iii) Whether a foreign investment management business operator has obtained registration of the same type asthat under the FIEA for conducting investment management business in countries or regions that have a system
regarding persons engaging in investment management business that is found to be at the equivalent level asthat in Japan.
(iv) Whether a foreign investment management business operator has continued engaging in investment
management business three years or more in a foreign country in compliance with the laws and regulations ofthat country. Additionally, whether the period of engaging in the relevant business is calculated while excluding
a leave period, etc.
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(v) Whether the main subjects of investment are not shares, share options, or bonds with share options that
contain voting rights against domestic companies, etc., or beneficial interests in which any of these is the trust
property.
(2) Supervisory Method and Actions
Businesses specially permitted for the transitional period, etc. were introduced as a temporary measure to enable
commencement of businesses through simple procedures from the perspective of facilitating acceptance of foreign
investment management business operators for developing Japan's capital markets' functions as an international
financial center. In light of the purpose of this system, supervisors shall conduct supervision while paying attention
to the following points, for example.
(i) It is prescribed that businesses specially permitted for the transitional period, etc. may only be conducted until
the time when five years have passed from the day of notification, or in cases where a person becomes a Financial
Instruments Business Operator, etc. (limited to one engaging in investment management business), a notifier of
specially permitted businesses, or a notifier of businesses specially permitted for overseas investors, etc. until thelapse of that five-year period, until the time of becoming said Financial Instruments Business Operator, etc.,
notifier of specially permitted businesses, or notifier of businesses specially permitted for overseas investors, etc.
Therefore, whether the person is scheduled to be a Financial Instruments Business Operator, etc., notifier of
specially permitted businesses, or notifier of businesses specially permitted for overseas investors, etc. in Japan
within that five-year period of the temporary measure.
(ii) In cases where a Financial Instruments Business Operator, etc., notifier of specially permitted businesses, ornotifier of businesses specially permitted for overseas investors, etc. intends to obtain registration or makenotification, whether the person considers the need for satisfying the requirements respectively in accordancewith a business category.
VI-2-10 Appropriateness of Investment Corporations’ Business Operations
VI-2-10-1 Items Regarding Investment Corporations’ Organizational Management(1) Points of Attention Regarding Management of Executive Committee Meetings(i)

Whether the investment corporation’s executive committee meetings have become a matter of formality.
For, example, attention shall be paid to whether decisions are made through the so-called round-robinarrangement, instead of being made at meetings attended by executives in person.

(ii)

Whether the investment corporation has received appropriate data and materials and sufficient

explanations from the asset investment company in order to ensure the effectiveness of deliberations by the
executive committee(iii)

Whether the investment corporation’s executive committee clearly categorizes the business operations

entrusted to the company undertaking general clerical work and the asset investment company and checks
whether the fees paid to them are appropriate and suited to the categories of the business operations entrusted
to them.
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(2) Role of Executive Officers
Whether executive officers understand the items to be decided by the executive committee and refer allnecessary items thereto.
(3) Supervisory Executives
Whether supervisory executives not only attend executive committee meetings, but also supervise the status ofbusiness execution by executive officers based on the recognition of their role as the supervisors of executive
officers as specified under Article 111(1) of the Investment Trust Act. Whether they require executive officers, thecompany undertaking general clerical work, the asset investment company and the asset custody company to reportto them and conduct necessary investigations, depending on the circumstances.
(4) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding an investment corporation’sorganizational management, through daily supervisory administration and the reporting of problematic conduct,
they shall identify and keep track of the status of voluntary improvement made by the investment corporation byrequiring the submission of reports based on Article 213 of the Investment Trust Act. When the investment
corporation is deemed to have a serious problem from the viewpoint of protecting public interests and investors, thesupervisors shall take actions, including issuing an order for business improvement based on Article 214 of theInvestment Trust Act. When the investment corporation is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider necessary actions, including the rescission of registration based on
Article 216(1) of the Investment Trust Act.
VI-2-11 Other Points of Attention
VI-2-11-1 Points of Attention Regarding Investment Trust Act and Trust Act
The points of attention regarding the laws and regulations applicable to investment trusts, to which assets were
entrusted before the new Trust Act entered into force, are as explained below. It should be noted that the definitionsof terms used in VI-2-11-1 are as follows:(i) “New Trust Act”: Trust Act (Act No. 108 of 2006)(ii) “Act for Establishment of Laws and Regulations Related to the Trust Act”: A law for the establishment oflaws and regulations necessitated by the entry into force of the Trust Act (Act No. 109 of 2006).
(iii) “New Investment Trust Act”: Revised Investment Trust Act specified under Article 5 of the revised law(iv)“Former Investment Trust Act”: Investment Trust Act before the revision as specified under Article 25 of

the Act for Establishment of Laws and Regulations Related to the Trust Act(v) “New Law-Based Trust”: Investment trusts to which assets were entrusted after the entry into force of the
New Investment Trust Act and New Trust Act

412

(vi)

“Former Law-Based Trust”: Investment trusts to which assets were entrusted before the entry into forceof the New Investment Trust Act and New Trust Act
The Former Law-Based Trusts may be converted into New Law-Based Trusts under Article 3 or Article 26(1)of the Act for Establishment of Laws and Regulations Related to the Trust Act. Unless the conversion is made, theyshall be subject to Article 2 of the Act for Establishment of Laws and Regulations Related to the Trust Act. Therefore,
Former Law-Based Trusts are not eligible for the provisions of the New Trust Act nor the Act for Establishment ofLaws and Regulations Related to the Trust Act regarding a registry of beneficiary rights, consolidation of trusts anda notice regarding investment trusts by the settlor nor for the provisions of the New Trust Act concerning requests
for purchases by beneficiaries who have opposed written resolutions regarding changes in investment trust contract
provisions (Articles 4(2)(xvii), 6(7), 16(ii), 17, 18, 20, 25, 49(2)(xviii) and 50(4) of the New Investment Trust Act,
Article 16(ii), 17 and 18 of the New Investment Trust Act as applied mutatis mutandis pursuant to Article 54(1) of
the same act, Articles 16(ii), 17, 20 and 25 of the New Investment Trust Act as applied mutatis mutandis pursuant
to Articles 57 and 59 of the same act, the penalties related to these provisions and relevant FIEA Enforcement Orderand cabinet office ordinance). Instead, they are subject to the relevant provisions of the Former Investment Trust
Act, the FIEA Enforcement Order and cabinet office ordinance that were effective before the new provisions tookeffect.
VI-2-11-2 Points of Attention Regarding Investment Trusts without Settlor Instructions
The points of attention specified in VI-2-3-2(2) shall be applied mutatis mutandis to the provision of documents
to beneficiaries, etc., based on Article 13(1) of the Investment Trust Act as applied mutatis mutandis pursuant to
Article 54(1) of the same act.
VI-2-11-3 Points of Attention Regarding Merger of Investment Corporations
In the case of an absorption-type merger, if money is to be paid for adjusting the merger ratio upon the calculationof the number of units of investment equity in the corporation surviving the merger to be delivered to the investorsof the corporation extinguished upon the merger (e.g. merger ratio adjustment money or substitute money for
distribution; hereinafter referred to as “money delivered upon merger”), attention should be paid to the amount ofmoney delivered upon merger or the calculation method thereof and the amount of money delivered upon merger
to be allocated according to the number of units of investment equity held by the investors of the extinguishedcorporation, which can be regarded as the matters listed in Article 147(1)(ii) of the Investment Trust Act.
VI-2-11-4 Points of Attention Regarding Segregated Management, etc.
(1) Points of Attention Regarding Management, etc. of Crypto-and Other Assets
When a Financial Instruments Business Operator manages crypto-and other assets as investment assets ininvestment management business, appropriate handling of segregated management of crypto-and other assets needs
to be secured based on Article 42-4 of the FIEA and Article 125(ii)(d) of the FIB Cabinet Office Ordinance asapplied mutatis mutandis pursuant to Article 132(1) of that Cabinet Office Ordinance. In addition, there is a risk
413

that investor protection would not be ensured if crypto-and other assets, which are investment assets, are leaked due
to unauthorized computer access, etc. Therefore, it is required to take appropriate actions against such risk of leakage
through establishment of an internal control environment (including a control environment for internal audits
according to the nature of the business), such as segregated management and information technology risk
management, etc., in normal times.
Supervisors shall oversee the state of such management by applying mutatis mutandis V-2-1-4.
(2) Points of Attention Regarding Management, etc. of Electronically Recorded Transferable Rights That Must Be
Indicated on Securities, etc.
When a Financial Instruments Business Operator manages electronically recorded transferable rights that must
be indicated on securities, etc. as investment assets in investment management business, appropriate handling ofsegregated management of electronically recorded transferable rights that must be indicated on securities, etc. needs
to be secured based on Article 42-4 of the FIEA and Article 132(2)(v) or (vi) of the FIB Cabinet Office Ordinanceas well as Article 43-2 of the FIEA and Article 136(1)(v) or (vi) of the FIB Cabinet Office Ordinance. In addition,
there is a risk that investor protection would not be ensured if electronically recorded transferable rights that must
be indicated on securities, etc., which are investment assets, are leaked due to unauthorized computer access, etc.
Therefore, it is required to take appropriate actions against such risk of leakage through establishment of an internal
control environment (including a control environment for internal audits according to the nature of the business),such as segregated management and information technology risk management, etc., in normal times.
Supervisors shall oversee the state of such management by applying mutatis mutandis IV-3-6-6 and IV-3-6-7.
VI-2-12 Points of Attention Regarding Supervision of Non-Affiliated Business Operators(1) Major Supervisory Viewpoints(i)

In the case of a Financial Instruments Business Operator who does not have membership in any Financial
Instruments Firms’ Association (referred to as “Non-Affiliated Business Operators” in VI-2-12), whether it
has developed internal rules that are in line with Rules Set by Associations, etc.

(ii)

Whether the Financial Instruments Business Operator has developed a control environment that ensuresappropriate compliance with internal rules (e.g., information sharing among officers, information sessions
for employees and examination of status of compliance).
(iii)

When rules set by associations, etc., have been revised, whether the Financial Instruments Business

Operator makes sure to quickly review and revise internal rules accordingly.
(2) Supervisory Method and Actions
If a problem is found regarding creation and revision of internal rules at a Non-Affiliated Business Operator andthe status of compliance, supervisors shall conduct in-depth inquiry and, if necessary, have the operator submit areport based on provisions of Article 56-2(1) of the FIEA to look into the status of spontaneous efforts to improve
the situation at the said Financial Instruments Business Operator. When the operator is deemed to have a serious
414

problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. Further, if, after requesting areport, an operator is not confirmed to have introduced internal rules that are in line with Rule Set by Associations,etc., or that it has failed to introduce a system to ensure compliance with the relevant internal rules, supervisors shallconsider necessary responses, including issuance of a Business Improvement Order based on provisions of Article
52(1) of the FIEA.

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VI-3 Various Administrative Procedures (Investment Management Business)
VI-3-1 Registration
VI-3-1-1 Investment Management Business(1) Items Regarding Examination of Staffing Level
When supervisors examine whether or not a Financial Instruments Business Operator is sufficiently staffed toproperly conduct the financial instruments business, as specified under Article 29-4(1)(i)(e) of the FIEA, they shallcheck the following points based on its application and attachments thereto as well as hearings. Note that theexamination as to whether the operator has the structure/system necessary to operate financial instruments businessappropriately, thereby falling under Article 29-4(1)(i)(f) of the FIEA, shall also be based on the following points.
(i) Whether it can be confirmed that officers and employees with sufficient knowledge and experience have been
secured and a sufficient organization has been established to conduct the relevant financial instruments
business in light of the following requirements:
A. Top managers must be sufficiently qualified to conduct investment management business in a fair andappropriate manner, in terms of their backgrounds and capabilities.
B. Managing directors must understand the viewpoints regarding governance indicated in the FIEA andvarious other laws and regulations, and have sufficient knowledge and experience to conduct governanceand sufficient knowledge and experience regarding compliance and risk management to conduct
financial instruments business in a fair and appropriate manner.
C. Persons with sufficient knowledge and experience regarding investment assets must be secured for the
position responsible for making asset investment on behalf of rights holders.
D. The compliance division (staff in charge of compliance) must be independent from the asset investment
division and staffed with personnel with sufficient knowledge and experience.
E. In addition to securing the personnel described in C. and D. above, the Financial Instruments Business
Operator must be staffed and organized so that personnel necessary for conducting relevant business inan appropriate manner are allocated to individual divisions and managers in charge of internal control
are appropriately allocated.
F. Staff capable of conducting the following processes should be secured with regard to the relevantbusiness.
a. Compilation and management of account documents (including the account documents as specified
in VI-3-2-4), reports and other documents.
b. Disclosurec. Segregated management of investment assets
d. Risk management
e. Computer system management
f. Trading management and customer management by relevant management divisions
416

g. Management of sensitive corporate informationh. Advertisement screening
i. Customer information management
j. Processing of complaints and disputes
k. Execution of asset investment business by the investment divisionl. Internal auditsm. Accounting and screening related to investment trust assets in the case of investment of investment
trust assets(ii)

When the qualifications of employees and officers are examined in a comprehensive manner in relation

to the following criteria regarding organized crime groups, their members and financial crimes, whether thereis the risk that public confidence in the financial instruments business could be damaged because of the
inclusion of officers and employees with inappropriate qualifications among its staff.
A. Officers and employees should not be current or former members of organized crime groups.
B. Officers and employees should not have close relationships with organized crime groups.
C. Officers and employees should not have the experience of being sentenced to a fine for violation of the
FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
D. Officers and employees should not have the experience of being sentenced to a fine (including similar
punishments imposed under foreign laws and regulations equivalent thereto) for violation of the Act on
Prevention of Unjust Acts by Organized Crime Group Members (excluding the provisions of Article 322(7) of the same act) or other foreign laws and regulations equivalent thereto, or for committing a crimeprescribed under the Penal Code or under the Act on Punishment of Physical Violence and Others.
E. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion, as well as attempts at these crimes).)(Note) It should be kept in mind that in cases where it is deemed as a result of comprehensive
examination based on the criteria described in (ii) A. to D. that a major shareholder in the Financial
Instruments Business Operator could exercise undue influence on it, thereby damaging publicconfidence in it, the business operator may be deemed to be “not adequately staffed to properly
conduct financial instruments business.”(2) Documents Specifying Contents and Methods of Business Operations
Supervisors shall check whether documents specifying the contents and methods of an investment managementbusiness operator’s business operations properly specify the following items:(i)Types of financial instruments transactions which the investment management business operator conducts(ii)

Items specified under Article 8(ix) of the FIB Cabinet Office Ordinance.

(iii)

Basic principles on business operations
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A. The investment management business operator’s basic policy for business operations and principles on
the conduct of business operations
B. Items regarding the basic policy for asset investment
C. Types of investment assets
D. Items regarding the entrustment of the authority over investment
E. Items regarding improvement of the investment management business operator’s financial condition(iv)

Method of Business Execution
A. Items regarding the investment method
B. Items regarding customer solicitation and contract signing
C. Items regarding the administration of investment assets(v)

Method of the allocation of business operations
Items regarding the investment management business operator’s organization(vi)

Arrangements and procedures for dealing with complaints(vii) Name of the Financial Instruments Firms’ Association to which the investment management business
operator belongs and items regarding compliance with voluntary regulatory rules set by the association.
(3) Items to Be Specified in Documents Prescribed under Article 9(i) of the FIB Cabinet Office Ordinance.
(Documents Specifying Framework for Business Execution Such as Staffing and Organization)(i)

The lineup of officers and employees at the start of the investment management business (including each

officer’s experiences and knowledge regarding investment instructions and investment assets), an organization
chart and the outline of business operations conducted by individual divisions(ii)

Framework for Business Operations Related to Asset Investment
A. Items regarding the internal organization responsible for deciding the investment policy concerninginvestment assets
B. The asset investment division’s arrangements and procedures for asset investment
C. Items regarding the selection of an entity to which asset investment is entrusted (including cases of reentrustment) and arrangements and procedures for communications therewith(iii)

Knowledge and Experience of Persons in Charge of Asset Investment
The knowledge and experience of each person in charge of asset investment, with regard to investment
assets, must be specified.

(iv) Knowledge and Experience of Persons in Charge of Compliance
The knowledge and experience of persons in charge of compliance, with regard to processes for ensuring
compliance, must be specified.
(v)

Internal Control System and Procedures for Asset Investment and Other Operations
Items regarding rules concerning investment instructions (including investment instructions and investment
made by an entity entrusted with asset investment in cases where asset investment is entrusted to an outside
entity), rules concerning the division in charge of internal inspection of individual divisions, andarrangements and procedures for clerical processes.
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(vi)

Arrangements and Procedures for Management of Sensitive Corporate Information
A. The person responsible for the management of sensitive corporate information must be specified, andthe person’s details must be included, in internal rules.
B. Management arrangements and procedures must be specified in internal rules and a framework forenabling the rules to be effectively enforced must be in place.

(vii) In cases where investment trust assets are invested, the knowledge and experience of persons in charge ofaccounting work related to investment trust assets must be specified.
A. The knowledge and experience of each person in charge of accounting work related to investment trust
assets, with regard to the relevant work, must be specified.
B. In cases where accounting work related to investment trust assets are entrusted to a third-party entity, theknowledge and experience of the said third-party entity, with regard to the relevant work, must be
specified.
(4) Points of Attention Regarding Business Operators That Do Not Have Plans to Join Any Financial Instruments
Firms’ Association
Supervisors shall notify the following points and request appropriate responses to business operators who do
not have plan to join any Financial Instruments Firms' Association at the time of submission of a registration request.
(i) That supervisory responses in accordance with VI-2-12 shall be taken if the operator fails to introduce
internal rules that are in line with Rules Set by Associations, etc. or a system to ensure compliance with suchrules after registration(ii) That failure to revise internal rules in accordance with revisions in Rule Set by Associations, etc., mayconstitute a situation that corresponds to (i)(5) Cases Not Requiring Registration
A corporation is allowed to engage in investment management business irrespective of the provision of Article
29 of the FIEA in cases where it meets the provision of Article 61(2) or (3) of the FIEA (cases where a corporation
which is established based on foreign laws and regulations and which engages in investment management businessabroad seeks to undertake investment management exclusively on behalf of Financial Instruments Business
Operators (business operators engaged in investment management business)).
(6) Points of Attention Regarding Applications for New Registrations
Supervisors shall confirm with a business operator who applies for a new registration whether there are grounds
for rejecting the application, in principle, by requiring the submission of the following documents.
Of the prima facie evidence, certificates of savings and other deposit balances issued by financial institutions
shall be originals.
(i) Prima facie evidence of documents which show the calculation of net assets (referring to net assets prescribedin Article 29-4(1)(v)(b) of the FIEA)(ii) Prima facie evidence of documents which show the calculation of net assets for the most recent month419

VI-3-1-2 Investment Management Business for Qualified Investors(1) Basic Points to Consider When Screening Registrations
For the purpose of promoting entry into the investment management business, some requirements for registering
an investment management business for qualified investors were relaxed for small investment management business
whose only customers are qualified investors. In light of this objective, when examining such registrations,supervisors examine in a way that is suited to the investment policy, the amount of assets managed and othercircumstances of the relevant investment management business for qualified investors, while also being mindful oftransparency and expeditiousness, and they shall be mindful of not examining all registrations in a uniform fashion.
(2) Items Regarding Examination of Staffing
VI-3-1-1(1) shall, in principle, be applied mutatis mutandis when examining the organization of an investment
management business for qualified investors. In addition the following points shall be taken into account.
(i) With regard to the position responsible for making asset investment on behalf of rights holders, whether at
least one or two persons who fall under either of the following items have been secured as persons with
sufficient knowledge and experience regarding investment assets.
A. A person who has been engaged in the business of providing advice or managing the relevant assets forno less than one year.
B. A person equivalent to A.
(ii)

With regard to establishment of an independent compliance division (staff in charge of compliance),

whether at least one or two persons who fall under either of the following items have been secured as persons
in charge of compliance (excluding cases where compliance work is outsourced).
A. A person who has been engaged in business related to guidance for ensuring compliance with laws andregulations with regard to the financial instruments business for no less than one year.
B. A person equivalent to A.
(iii)

With regard to the relevant business, whether at least one or two personnel needed for the processes listed

in items a through m in VI-3-1-1(1)(i)F (excluding those not required for the relevant business to be
conducted in an appropriate manner, considering the investment policy, the amount of assets managed andother circumstances of the investment management business for qualified investors) have been secured.
(Note) In cases where arrangements and procedures for enabling proper compliance with laws and regulations
are deemed to have been established, the business operator may make the personnel secured under item(ii) and the personnel secured under item (iii) the same.
(3) Examination Items Pertaining to the Relevance of Investment Management Business for Qualified Investors
When examining an investment management business for qualified investors, in addition to the points ofattention listed in (2), supervisors shall make the following checks with regard to the management of the total
amount of all investment assets and the management of the rights holders (including the investors of a registered420

investment corporation that is the other party to a contract set forth in Article 2(8)(xii)(a) of the FIEA and the persons
set forth in the items of Article 15-10-4 of the FIEA Enforcement Order; hereinafter the same shall apply in VI-31-2) for all investment assets
Supervisors shall confirm whether an investment management business operator for qualified investors(i)has taken measures to prevent the total amount of all investment assets exceeding the amount prescribed in
Article 15-10-5 of the FIEA Enforcement Order.
(ii)

Investment management business operators for qualified investors are required to conduct business in away such that their business operations do not fall under the category of “situations in which a Financial
Instruments Business Operator, which conducts investment management business for qualified investors, isdeemed to have not taken necessary and appropriate measures for preventing persons other than qualified
investors from becoming rights holders, by such means as checking the attributes of rights holders andpersons seeking to become rights holders and identifying the patterns of sale, purchase and other transactionsof securities by rights holders” as prescribed in Article 123(xiii-2) of the FIB Cabinet Office Ordinancepursuant to Article 40(ii) of the FIEA.
To this end, supervisors shall confirm whether the following measures have been implemented for any
investment management business for qualified investors
A. That internal rules for the following matters be established.
a. In cases where the investment management business operator for qualified investors sells the
securities of its own accord: that it verifies in advance the attributes of the customers being solicited,
and that it explains to customers that the securities have a restriction on resale.
b. In cases where a third party sells the securities: that the business operator verifies in advance theattributes of the customers being solicited, and that it verifies that customers are being told that the
securities have a restriction on resale.
c. That the business operator continuously verifies the attributes of the rights holders and theimplementation of the resale restriction (including follow-up in cases where violations of this havebeen identified).
B. That there is ongoing confirmation that the attributes of solicited customers are being verified in advanceand that explanations are being given about how the securities have a restriction on resale, in accordancewith the abovementioned internal rules.
C. That there is ongoing confirmation of the distribution of actual rights holders, in accordance with theabovementioned internal rules.
D. That any violations are being appropriately followed up, in accordance with the abovementioned internal
rules.
E. That internal audits and so forth are used to examine whether the measures listed in A to D above arebeing implemented appropriately.
(iii)

In cases where a person intending to conduct investment management business for qualified investors isa Financial Instruments Business Operator, a person who has made notification under the FIEA and is engaging
in either businesses specially permitted for qualified institutional investors, etc. or specially permitted421

investment management business, or a person who has made notification under the FIEA and is engaging inbusinesses specially permitted for overseas investors, etc., supervisors shall also confirm the following matters.
A. That the total amount of all investment assets does not exceed the amount prescribed in Article 15-10-5of the FIEA Enforcement Order.
B. That the rights holders for all investment assets consist only of qualified investors.
(4) Documents Specifying Contents and Methods of Business Operations
VI-3-1-1(2) shall be applied mutatis mutandis to the items to be specified in the documents specifying thecontents and methods of business operations.
However, with regard to “(iv) Method of Business Execution,” in addition to confirming that items regarding
the management of the total amount of all investment assets have been included in the statements on items regarding
the administration of investment assets, supervisors shall also confirm that items regarding the management of rights
holders for all investment assets have been specified. In addition, with regard to “(v) Method of the Allocation ofBusiness Operations,” supervisors shall confirm that items regarding the outsourcing of compliance or otherbusiness operations (including the name or trade name of contractors) have been specified as items regarding theinvestment management business operator’s organization.
(5) Items to Be Specified in Documents Prescribed under Article 9(i) of the FIB Cabinet Office Ordinance(Documents Specifying Framework for Business Execution Such as Staffing and Organization)
VI-3-1-1(3) shall be applied mutatis mutandis to the items to be specified in documents specifying framework
for business execution such as staffing and organization.
However, in cases where compliance work is outsourced to a group corporation in Japan or overseas or to an
attorney, etc., supervisors shall confirm that the following items have been specified with regard to “(iv) Knowledge
and Experience of Persons in Charge of Compliance.”
A. Name or trade name of the contractor.
B. Address or location of the contractor.
C. Outline of the business operations conducted by the contractor.
D. Outline of the outsourcing contract.
E. The contractor’s compliance management system (including the knowledge and experience of the person
in charge), in light of the business operations intended to be conducted by the investment managementbusiness operator for qualified investors (the trustor).
(6) Others
The items listed in VI-3-1-1(4) to (6) shall be applied mutatis mutandis to administrative processes regarding
the registration of investment management business for qualified investors.
VI-3-1-3 Investment Corporation422

(1) Points of Attention when Accepting Notification Concerning the Establishment of Investment Corporations
The following points shall be considered when the director-general of a Local Finance Bureau receives a written
notification concerning the establishment of an investment corporation pursuant to the provisions of Article 69(1)of the Investment Trust Act:(i)

Points to Consider in Relation to Examinations of Establishment Notification
A. Page 2, section 1 of the establishment notification: Trade name of an investment corporation to beestablishedThe trade name should not lead investors to mistakenly believe that the corporation is a publicorganization
B. Page 2, section 3 of the establishment notification: (4) Amount of contribution for establishment
Whether the total of issued prices of investment accounts is lower than the total amount ofcontribution prescribed in Article 57 of the Enforcement Order of the Investment Trust Act
C. Page 2, section 3 of the establishment notification: (7) Outline of asset management of the said
investment corporation
Whether assets are mainly to be managed as an investment in specified assets(ii)

Items Related to Examinations of Documents Attached to the Establishment Notification
A document, submitted by a foreigner living outside Japan, which corresponds to the certificate of residence

or a document equivalent thereto shall fall under the category of “documents in lieu of these” prescribed in
Article 108(2)(i) of the Ordinance for Enforcement of the Investment Trust Act.
(iii)

Receipt Procedures, etc., of Establishment Notification
A. Receipt procedures
The director-general of a Local Finance Bureau, upon receiving a written notification of
establishment of an investment corporation under Article 69(1) of the Investment Trust Act, shall return
a copy of the written notification and a set of bylaws to the party making the notification after entering
the receipt number, the receipt date, and other necessary information at the bottom right on the first page
thereof.
B. The director-general of a Local Finance Bureau, upon receiving a notification of establishment of aninvestment corporation, shall record its details in the register book of the notification of establishmentof investment corporations, etc. (Attached List of Formats VI-1).

(2) Points to Consider When Receiving Notification of Failure to Establish Investment Corporations
The director-general of a Local Finance Bureau, upon receiving a notification of failure to establish an
investment corporation, under Article 110(1) of the Ordinance for Enforcement of Investment Trust Act, shallperform the following procedures:(i)

Inquire with the project planner about the responses to those who applied for investments and make arecord of the merits.

423

(ii)

Enter the date of receipt of the notification of failure to establish an investment corporation into theregistry book for notification of establishment of investment corporations, etc., and briefly describe the reasonsfor failure to establish an investment corporation in the remarks column.
(3) Points to Consider When Receiving Application for Registration of Investment Corporations
The following points shall be considered when the director-general of a Local Finance Bureau receives anapplication for registration (Ordinance for Enforcement of the Investment Trust Act, Attached List of Formats 9(hereinafter the same shall apply in (iii)) pursuant to the provision of Article 188(1) of the Investment Trust Act.
(i)

Points to Consider Concerning Examinations on Application for Registration
A. Application for Registration Two, page 3, section 2: (5) Minimum net asset to be maintained
Whether the minimum net assets are maintained above the amount prescribed in Article 55 of the
Enforcement Order of the Investment Trust Act
B. Application for Registration Two, page 3, section 2: (6) Subject and policy of asset management
Whether assets are mainly to be managed as investments in specified assets
C. Application for Registration Six, page 9: (1) Total contribution
Whether the total contribution at the time of establishment of an investment corporation is above theamount prescribed in Article 57 of the Enforcement Order of the Investment Trust Act(ii)

Points to Consider Concerning the Examinations on Attached Documents to the Application for

Registration
A document submitted by a foreigner living outside Japan, whichcorresponds to the certificate ofresidence or a document equivalent thereto, shall fall under the category of “documents in lieu of these”
prescribed in Article 108(5) of the Ordinance for Enforcement of the Investment Trust Act.
(iii)

Other Points to Consider Concerning Receipt of Application for Registration
A. The director-general of a Local Finance Bureau, upon receiving an application for registration of aninvestment corporation, shall record the date of receipt of the application for registration of an investment
corporation in the register book of the notification of establishment of investment corporations, etc.
B. After the offer period of investment to be issued at the time of establishment listed in the notification of
the establishment of an investment corporation has elapsed, and after the period usually necessary forthe submission of an application for registration for an investment corporation has elapsed, if anapplication for registration for the relevant investment corporation or the notification of failure toestablish investment corporations has not been submitted, the director-general of the Local Finance
Bureau shall refer to the project planner who submitted the notification of the establishment of aninvestment corporation to find out about the circumstances.

(iv)

Registration Procedures, etc.
A. Registration number
a. Each registration shall be identified by a serial registration number which is assigned by each local
finance bureau (however the following numbers shall not be used: 4, 9, 13, 42, 83, 103, and 893).

424

b. When a registration is no longer valid, its registration number shall be retired and no new number
shall be issued in its place.
c. Registration numbers shall be managed by the registration number file of investment corporations
using Attached List of Formats VI-2.
B. Notification to applicants for registration
After the examinations on the application for registration of investment corporations, when it is foundthat the said application form and the attached documents are complete and there are no grounds forrejecting the application, the director-general of the Local Finance Bureau shall promptly notify theapplicant to that effect, using the prepared Attached List of Formats 14 of the Ordinance for Enforcementof Investment Trust Act.
(v)

Report to the Commissioner of Financial Services Agency
Every month, registration forms for newly registered investment corporations shall be collectively reported

to the Commissioner of the Financial Services Agency, using Attached List of Formats VI-3, by the 15th of thefollowing month.
(vi)

Refusal of Registration (Refer to II-5-6)
The director-general of a Local Finance Bureau shall, when refusing registration, enter the grounds forrefusal and the corresponding number among the items listed in Article 190(1) of the Investment Trust Act as
grounds for refusal, or shall specifically clarify the part of the application for registration or attached documentsthat lists false information or is missing important facts, using Attached List of Formats 15 of the Ordinancefor Enforcement of the Investment Trust Act.
(vii) Storing of Applications for Registration
Notification of establishment, notification of failure of establishment and their attached documents shallbe stored by the director-general of a Local Finance Bureau who has received the said notifications. Application
for registration, notification of changes, notification of dissolution and their attached documents shall be storedby the director-general of a Local Finance Bureau who has registered the registered investment corporation.
(viii) Registry of Registered Investment Corporations
A. Registry of registered investment corporations shall be made available for public inspection and an
applicant for inspection shall be required to enter necessary items in the application for inspection of theregistry of registered investment corporations, using Attached List of Formats VI-4.
B. The date of inspection of the registry of registered investment corporations shall be a day other than aholiday as specified in Article 1 of the Act on Holidays of Administrative Organs, and the inspection
period shall be within the duration designated by the director-general of the Local Finance Bureau.
However, when it is necessary to organize registry books or for any other reason, the inspection dateor time may be changed or the inspection may be suspended or refused.
C. The registry of registered investment corporations must not be taken out of the place of inspection
designated by the director-general of the Local Finance Bureau.

425VI-3-2 Approval and Notification
VI-3-2-1 Approval
When approving other businesses based on Article 35(4) of the FIEA, supervisors shall pay attention to thefollowing points.
(i)

Whether the relevant business violates relevant laws and regulations.

(ii)

Whether there is the risk of the applicant Financial Instruments Business Operator’s net asset value

falling below 50 million yen (10 million yen in cases where the application is made by an investment
management business operator for qualified investors (excluding those conducting Type I financial instruments
business)).
(iii)

In cases where the relevant business involves the signing of contracts with customers, whether the

Financial Instruments Business Operator has prescribed specific procedures for the prevention of conflicts ofinterest, which is necessary for investor protection.
(iv)

Whether the Financial Instruments Business Operator has established internal rules regarding therelevant business.
VI-3-2-2 Notification
Supervisors shall receive and process notifications specified under the FIEA with due consideration of thefollowing points. When they have received notifications regarding the businesses specified under Article 35(2) ofthe FIEA in particular, supervisors shall pay attention to whether the procedures legally necessary for regulating thebusinesses have been implemented. In addition, regarding the businesses listed below, they shall check whether
their contents and methods meet the following criteria. In this case, the provision of relevant written documents andthe implementation of paper-based procedures may be substituted by electronic means — using computer systems
and other information technologies — subject to customers’ consent. Regarding businesses that do not meet thefollowing criteria, the applicant business operators shall be required to file an application based on Article 35(4) of
the FIEA.
(1) Businesses Related to Signing of Association Contracts as Specified under Article 667 of the Civil Code and theCorresponding Intermediary, Brokerage and Agency Businesses, and Businesses Related to Signing of Anonymous
Association Contracts as Specified under Article 535 of Commercial Code and the Corresponding Intermediary,Brokerage and Agency Services (excluding the businesses specified under Article 2(8)(ix) of the FIEA)
When soliciting customers to sign association contracts, whether Financial Instruments Business Operators andtheir officers and employees provide sufficient explanations regarding the contents of the contracts and makesolicitation in an appropriate manner suited to the customers’ intentions, knowledge and experience regarding therelevant associations, as well as their financial capacity and the nature of their investment funds. At the time of thesigning of the contracts, whether they provide the customers with written explanations regarding the contents of thecontracts.

426

(2) Business Related to Signing of Loan Participation Contracts and the Corresponding Intermediary, Brokerageand Agency Services.
(i) Description of Business
The loan participation contract is a contract envisaged by “Accounting Treatment and Representation of Loan
Participation,” a report issued on June 1, 1995 by the Japanese Institute of Certified Public Accountants.
(ii)

Conduct of BusinessSupervisors shall examine whether the Financial Instruments Business Operator meets the following

requirements regarding the conduct of business:
A. To take due care to protect the original debtors and the transferees when executing business.
B. To provide the transferees with sufficient explanations regarding the nature and contents of the relevant
debts.
C. To establish adequate arrangements and procedures for evaluating the relevant debts and ensure
appropriate price formation
D. To provide appropriate solicitation in light of the transferees’ intentions, experiences and financial
capacity.
E. At the time of the signing of the contract, to provide the transferee with written explanations regarding
the contents of the contract.
VI-3-2-3 Investment Report(1) Items Concerning Discretionary Investment Management Services to be Entered in an Investment Report(i)With regard to the items to be entered in an investment report prescribed in Article 42-7(1) of the FIEA

and in Article 134(1)(ii) of the FIB Cabinet Office Ordinance, they shall include, in the cases where assets ofa number of clients are jointly managed, the total amount of assets to be jointly managed, the financial
composition, name, number and price of securities, etc., comprising the said assets, as well the said clients’shares of the said assets and values corresponding to their shares.
(ii)

With regard to repo transactions from among the “purchase and sale or other transactions” prescribed in

Article 134(1)(iii)(d)1. of the FIB Cabinet Office Ordinance, only if the investment method pertaining to thosetransactions is found to leverage the customer’s portfolio upon investment, supervisors shall pay attention to
the following points, based on Recommendation 5 in the Financial Stability Board, “Strengthening Oversightand Regulation of Shadow Banking: Policy Framework for Addressing Shadow Banking Risks in Securities
Lending and Repos” (August 2013):
A. Global data: the amount of securities on loan as a proportion of total lendable assets and of the fund’s
assets under management (AUM); and book values of repo transactions
B. Concentration data: Top 10 collateral securities received by issuer, top 10 counterparties of repo
transactions
C. Repo transaction data breakdowns:
a. By collateral type427

b. By currency
c. By maturity tenor (transactions themselves)
d. By geography (counterparty)e. Cash versus non-cash collateral,f. Maturity of non-cash collateralg. Settlement/clearing (tri-party, central counterparty, bilateral)
D. Re-use and re-hypothecation data: share of collateral received that is re-used or re-hypothecated,compared to the maximum authorised amount if any. Information on any restrictions on type of securities
E. Return data breakdowns:
a. Sale or purchase of securities on condition of repurchase or resaleb. Secured securities lending transactions
c. Cash collateral reinvestment
F. Number of custodians and the amount of assets held by each
G. The way securities received by the counterparty are held (in segregated accounts or pooled accounts)(iii)

Items to be entered, as prescribed in Article 134(1)(iv) of the FIB Cabinet Office Ordinance, shall include

details of transaction fees and account management fees when such fees are paid separately from rewards forthe discretionary investment contract under an integrated contract of discretionary investment management
services and security-related services.
(iv)

With respect to details of transactions to be entered, as prescribed in Article 134(1)(vi) of the FIB Cabinet

Office Ordinance, it is not necessary to enter the price and quantity of each of the agreed transactions; instead,they can be simplified in light of the purpose and characteristics of transactions. For example, it is sufficient tolist the types of mutual transactions of managed assets (requirements, etc., prescribed in each item of Article
129(1) of the FIB Cabinet Office Ordinance).
(v) The “external audit of business operations related to financing or discretionary investment contracts” asspecified in Article 134(1)(xi) of the FIB Cabinet Office Ordinance shall include the following (including theequivalent thereof):- Audit of financial statements and audit of internal control;- Audit by an accounting auditor under the Companies Act;
- Assurance engagements on internal controls; and- Examination of whether the performance disclosure information of asset management companies conforms
to the Global Investment Performance Standards (GIPS).
(vi)

In a case where matters specified in Article 134(2) of the FIB Cabinet Office Ordinance are enteredpursuant to each subparagraph of Article 96(2) of the FIB Cabinet Office Ordinance, with respect to the “capital
relationship between the financial instruments business operator, etc., and the fund-related persons” asspecified under Article 96(2)(iii) of the FIB Cabinet Office Ordinance, if the fund-related person is a parent
corporation, etc., (as specified under Article 1(3)(xiv) of the FIB Cabinet Office Ordinance) of the financial
instruments business operator, etc., subsidiary corporation, etc., (as specified under Article 1(3)(xvi) of the FIB
Cabinet Office Ordinance) of the financial instruments business operator, etc., or related foreign corporation,428

etc. (as specified under Article 126 (iii) of the FIB Cabinet Office Ordinance) of the financial instruments
business operator, etc., such fact must be entered.
With respect to the “personal relationship between the financial instruments business operator, etc., and thefund-related person” as specified under Article 96(2)(iii) of the FIB Cabinet Office Ordinance, the conditionsof concurrent holding of positions by officers or employees at a specific time which is deemed to be reasonablemust be entered.
(Note) In cases where the term of the investment report to be delivered to right holders which is set bydiscretionary investment business operators is shorter than the term as specified under Article 134(3) of
the FIB Cabinet Office Ordinance (six months (or three months if a right holder is a surviving employees’
pension fund or a national pension fund); hereinafter the “legal term”), it is not necessary to make all legal
entries in every investment report delivered to right holders. Instead, it shall be enough if legal entries are
made in investment reports as a whole which are delivered within the legal term.
(2) Details of Items to be Entered in a Report on Investment Trust Asset Management (complete version)
A management report concerning investment trust assets (complete version), in accordance with the provisions ofArticle 14-1 of the Investment Trust Act, shall be prepared so as to be easily understood by investors, and thefollowing items, which are pursuant to Article 58(1) of the Rules for Calculation of Investment Trust Assets(hereinafter referred to as “Investment Assets Calculation Rules”) shall be included. Furthermore, appropriate
responses shall be given when referrals are made.
(i) Structure of the investment trust (including investment policy)
The purpose and characteristics of the investment trust are presented in ways that make them easily
understood by investors, including such items as the scheme, investment method, investment limits anddividend policy.
(ii)

Process of Asset Management During the Calculation of the Said Investment Trust Assets
A. The state of net asset value at the beginning, during and at the end of the period shall be included. In
addition, the relationship between the management policy of the investment trust assets of the said
investment trust and the “future management policy” described in the investment report of the previous
term (examination results on whether investment activities have been in compliance with the
management policy) shall be included.
B. The future management policy shall be described specifically, and shall be based on the management
policy for investment trust assets of the said investment trust.
C. With respect to dividend from the current period’s profits, the grounds for the determination of thedividend and future management policy for retained earnings shall be included.

(iii)

Transition of Management Status
A. In accordance with the categories below, management performance during the corresponding period
below shall be included (referring to the performance that allows accurate understanding of the status ofinvestment trust assets, such as net asset value, dividends, rate of fluctuation during the current period
beneficiaries yield, stock price indices, composite ratio of major investment target assets or percentage429

of outstanding principal, etc.).
a. Unit-type investment trust: from the start of the trust of investment trust assets to the end of thecalculation period for the investment trust assets (referred to as the “end of the current period” in (2)below).
b. Open investment trust (excluding those applicable to c. or d. below): At least five periods prior to thecurrent period (however, at least five formulation periods prior to the current formulation period in
the cases where the provision of Article 59(1) of the rules for investment asset calculation applies).
c. Open bond investment trust (excluding those applicable to d. below): At least three periods prior tothe current period (however, at least three formulation periods prior to the current formulation period
in the cases where the provision of Article 59(1) of the rules for investment asset calculation applies).
d. Open bond investment trust whose calculation period is one day: at least one formulation period.
B. As a tool for the comparison between net asset value and market conditions during the current period,
when the management policy for investment trust assets of the said investment trust adopts the
management method that is linked with specific indices, in addition to the ratio of fluctuation of thecalculation period of trust, the movement of the said indices shall be included.
(iv) Rewards etc. paid to the investment trust management company and entrusted company during theaccounting period, and other costs the beneficiary bears in relation to the trust property, as well as details of
the services provided in exchange for such costs shall be shown.
Trust fees and other costs that the investor bears during the accounting period, as well as details of theservices provided in exchange for such costs, shall be presented in ways that make them easily understoodby the investor.
(v) The number of stocks both at the end of the calculation period immediately preceding the calculation
period for the investment trust assets (referred to as the “end of the previous period” in (2) below) and at
the end of the current period, the aggregate market value by stock at the end of the current period and totaltransaction volume and total transaction value of stocks during the calculation period of the said investment
trust asset.
A. Stocks include warrant. In this case, “the number of stocks” shall be replaced with “number of accounts.”
B. List by currency (in the case of Euro, list by country).
C. List by stock. In the case of domestic stocks (excluding warrants), list by business sector, together withproportion of business sector to the aggregate domestic market value at the end of the current period.
D. With respect to aggregate domestic market value and aggregate domestic market value of warrants at theend of the current period, list each of their proportions to the total value of net investment trust assets.
E. With respect to aggregate foreign market value and aggregate foreign market value of warrants at theend of the current period, list each of their proportions to the total value of net investment trust assets.
F. Transaction volume and transaction value of stocks in the said calculation period shall be listed by sales
transaction and by purchase transaction. Changes (increase or decrease) due to capital increase/reduction,
stock split, or change in par value shall be listed in the brackets, and a note shall be provided to that
effect.
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G. List the stock transaction ratio and transaction fees per beneficiary right during the relevant calculation
period(vi)

List by type and name of each bond, aggregate market value at the end of the current period and totaltransaction value of the relevant investment trust asset during the calculation period.
A. List by type of currency. (In the cases where Article 59(1) of the rule for calculation of investment trust
assets applies, the total amount is sufficient, regardless of the type of currency. In the case of Euro, listby country.)
B. Types shall be classified into national bond certificates, local bond certificates, special bond certificates,
warrants, and other bond certificates.
C. List by stock name.
D. Total transaction value during the relevant calculation period shall be classified into sales and purchase,and increase/reduction through allocation of bonds with warrants, redemption or exercise of warrants
shall be listed in the brackets, and a note is given to that effect.
E. If purchase and sale of bonds fall under the category of repo transactions, the matters to be stated as
referred to in (1)(ii) above shall be applied mutatis mutandis.
(vii) The items shall be listed by name, as specified in Article 58 (1)(vii) of the Rules for Calculation of Investment Trust
Assets, with respect to investment trust beneficiary certificates (excluding mother fund beneficiary certificates,
hereinafter the same shall apply in (2)), mother fund beneficiary certificates and investment corporation
investment certificates
A. List by currency (in the case of Euro, list by country)
B. List the transaction commission fees per mother fund beneficiary certificate for the relevant calculation
period. In this case, with respect to transaction commission fees for an investment trust that incorporates
the said mother fund beneficiary certificates (hereinafter referred to as “baby fund”), list the part
corresponding to the said baby fund of the mother fund.
(viii) In the cases where securities loans are made at the end of the current period, the total number or aggregate
face value shall be listed, depending on the type of securities.
A. Securities shall be classified into stocks and bonds, and the total number of stocks or aggregate facevalue of bonds shall be listed, respectively.
B. If the lending of securities falls under the category of repo transactions, the matters to be stated as referred
to in (1)(ii) above shall be applied mutatis mutandis.
(ix) With respect to transactions of derivatives (referring to the transactions of derivatives prescribed in Article
2(20) of the FIEA; the same shall apply hereinafter), the outstanding contract balance of the transactions or
the transaction balance at the end of the current period and contract transaction value or transaction value
during the calculation period of the relevant investment trust asset shall be listed by type.
With respect to transactions of securities-related derivatives (referring to the transactions of securitiesrelated derivatives prescribed in Article 28(8)(iii) of the FIEA; the same shall apply hereinafter), theoutstanding contract balance of the transactions at the end of the current period and contract transaction value
or transactions value during the calculation period of the relevant investment trust asset shall be classified
431

and listed by transaction of stocks or by transaction of bonds, etc. (However, in the cases where Article 59(1)of the Investment Assets Calculation Rules applies, it is acceptable to list the outstanding contract balance ofthe transactions at the end of the current period and contract transaction value or value of transactions during
the calculation period of the relevant investment trust asset, regardless of the above.)
With respect to transactions of derivatives other than transactions of securities-related derivatives, theasset balance at the end of the current period and management status during the calculation period of therelevant investment trust assets shall be presented in such a way to be easily understood by investors.
(x) The items listed in Article 58(1)(x) of the Investment Assets Calculation Rules shall be listed by real estate,leasehold right or surface right of real estate.
Asset balance at the end of the current period and management status during the calculation period of therelevant investment trust assets shall be listed in categories such as real estate, real estate leasehold right orsurface right.
(xi) The amount of claims as of the end of the current period and aggregate transaction value during the
calculation period of the relevant investment trust assets shall be listed for notes prescribed in Article 3(vi)of the Enforcement Order of the Investment Trust Act.
Asset balance at the end of the current period and management status during the calculation period of therelevant investment trust assets shall be presented in such a way to be easily understood by investors.
(xii) With respect to monetary claims prescribed in Article 3(vii) of the Enforcement Order of the Investment
Trust Act, the total amount of claims as of the end of the current period shall be listed by type and theaggregate transaction value during the calculation period of the relevant investment trust assets shall be listedby type of claims.
Asset balance at the end of the current period and management status during the calculation period of therelevant investment trust assets shall be presented in such a way to be easily understood by investors.
(xiii) With respect to equity interest in a silent partnership prescribed in Article 3(viii) of the Enforcement
Order of the Investment Trust Act, major details of assets under management as of the end of the current
period shall be listed by type.
Asset balance at the end of the current period and management status during the calculation period of therelevant investment trust assets shall be presented in such a way to be easily understood by investors.
(xiv) With respect to the commodities prescribed in Article 3(ix) of the Enforcement Order of the Investment
Trust Act, the volume at the end of the previous period and the end of the current period, the aggregate market
value at the end of the current period, and the total transaction value of the commodity during the calculation
period of the said investment trust asset shall be listed by type.
A.

List by currency (in the case of Euro, list by country)

B.

Transaction value of the commodity in the said calculation period shall be listed by sales transaction
and by purchase transaction

C.

List the stock transaction ratio and transaction fees per beneficiary right during the relevant calculation
period(xv) With respect to transactions of commodity investment, etc., the outstanding contract balance of the432

transactions at the end of the current period and contract transaction value or transactions value during the
calculation period of the relevant investment trust asset shall be listed by type.
The asset balance at the end of the current period and management status during the calculation period of
the relevant investment trust assets shall be presented in such a way to be easily understood by investors.
(xvi) With respect to assets other than specified assets, major details of the assets as of the end of the current
period shall be listed by type.
The asset balance at the end of the current period and management status during the calculation period of
the relevant investment trust assets shall be presented in such a way to be easily understood by investors.
(xvii) With respect to specified assets and other assets listed in item (i) or from item (iii) through item (ix) of
Article 3 of the Enforcement Order of the Investment Trust Act as of the end of the current period, thepercentage of total value of each asset against the total amount of investment trust assets shall be listed.
The percentage shall be the proportion of the total amount of each asset (by name in the case of motherfund beneficiary certificates) to the total amount of investment assets. Also the percentage of aggregate net
assets pertaining to assets in foreign currencies as of the end of the current period against the total amount ofinvestment assets shall be provided in the Note.
(xviii) In the cases where assessment on prices of specified assets has been conducted pursuant to the provisionof Article 11(1) of the Investment Trust Act, the name of the person who has conducted the said assessment
and the outline of the result and method of the said assessment shall be given.
With respect to the outline of the results and method of the said assessment, type and items of specified
assets on which the said assessment was conducted and the qualification, etc., of the assessor shall be included
in such a way to be easily understood by investors.
(xix) Status of assets, liabilities, principals and net asset values of beneficiary certificates as of the end of thecurrent period and the status of the profit or loss of the relevant investment trust assets during the calculation
period shall be given.
In the cases where there are noted items set forth in the calculation rules for investment trust assets, thesaid items should be presented in the Note.
(xx) The status of transactions with an interested person, etc., during the calculation period of the relevant
investment trust assets, and the total amount of commission fees paid to the relevant interested person, etc.,
shall be listed.
The status of transactions shall be classified into sales amount and purchase amount by type of security,derivative transaction, and other transaction, and the trading value with interested persons and the percentage
against the total amount of each item shall also be included.
(xxi)

In the cases where an investment trust management company, etc., is engaged in Type I financial

instruments business or Type II financial instruments business, the status of transactions with the said
investment trust management company, etc., during the calculation period of the relevant investment trust
assets and the total amount of commission fees paid to the said investment trust management company, etc.,
shall be listed.
The trading status shall be grouped into sales amount and purchase amount by type, such as securities and433

derivative transactions, and the amount of internal transactions and the percentage against the total amountof each item shall be given.
(xxii) In the cases where an investment trust management company, etc., is engaged in real estate business,the status of transactions with the investment trust management company, etc., which is a real estatetransaction business operator, during the calculation period of the relevant investment trust assets and thetotal amount of commission fees paid to the said investment trust management company, etc., shall be listed.
The status of transactions shall be classified into sales/purchases, leasing, etc., by type of real estate, andthe amount of internal transactions and the percentage against the total amount of each item shall be given.
(xxiii)In the cases where an investment trust management company, etc., is engaged in specified real estate

cooperative business, the status of transactions with the investment trust management company, etc., whichis the specified real estate cooperative business operator, during the calculation period of the relevant
investment trust, assets shall be listed.
The status of transactions shall be classified into sales/purchases, leasing, etc., by type of real estate, andthe amount of internal transactions and the percentage against the total amount of each item shall be given.
(xxiv)In the case of termination of the trust contract period pertaining to the relevant investment trust asset,a summary of investment trust asset management shall be prepared.
The outline of the process of management from the start of the trust of the relevant trust asset to the endof the previous period shall also be included. Meanwhile, when the outline of the process of the said
management is given in (i) above, the outline of the process of the said management may be omitted. The
term “the status at the end of every calculation period” in Attached List of Formats No. 2 of the Calculation
Rules for Investment Trust Assets under the provision of Article 59 (1) of the said rules may be replaced by“the status at the end of every formulation period.”(xxv)

In the cases where an investment trust management company, etc., is engaged in the commodity trading

consignment business, the status of transactions with the said investment trust management company, etc.,
during the calculation period of the relevant investment trust assets and the total amount of commission fees
paid to the said investment trust management company, etc., shall be listed.
The trading status shall be grouped into sales amount and purchase amount by type of commodity and oftransaction of commodity investment, etc., and the amount of internal transactions and the percentage against
the total amount of each item shall be given.
(3) Items to be Listed in a Summary Investment Report Pertaining to Investment Trust Assets
The summary investment report prepared under the provisions of Article 14(4) of the Investment Trust Act isrequired to include critically important information regarding the status of investment so as to provide theinformation necessary for the investor to correctly understand the current status of the assets under management.
In light of this, specific presentation of each item in Article 58-2(1) of the Investment Assets Calculation Rules mustcomply with "Rules on Investment Reports, Etc. Regarding Investment Trusts and Investment Corporations," a setof self-regulatory rules by the Investment Trusts Association, and service providers are required to make creative
efforts to facilitate investor understanding by, for example, using ample charts and diagrams and easy-to-understand,434

simple explanation in text. Hence, service providers shall pay attention to these considerations and respond properly
when referrals are made.
(4) Items to be Listed in an Investment Report of Investment Trust Fund Without Instruction by Trustor
The criteria for specific items to be included pursuant to each item of Article 58(1) and Article 58-2(1) of theInvestment Assets Calculation Rules, applied mutatis mutandis pursuant to Article 62 of the said rules, shall beequivalent to (2) and (3) above.
(5) Items to be Listed in an Investment Management Report Pertaining to Investment Corporations
An investment management report to be prepared pursuant to the provision of Article 129(2) of the Investment
Trust Act shall be prepared in such a way to be easily understood by investors, and the criteria for specific items to
be included pursuant to Article 71 of the Calculation Rules for Investment Corporations (hereinafter referred to as
the “Investment Corporation Calculation Rules”) shall be given pursuant to (2) above; provided, however, that thisshall not apply when it may cause difficulty in understanding the status of property or profit/loss of investment trust
corporations.
In the cases where an investment trust management company, etc., which has entered into an asset management
contract, manages the assets of an investment corporation jointly with another investment trust corporation, theaggregate value of assets under joint management of the said investment trust management company, the type ofthe said assets, the share of the said investment corporation concerning the said assets, and the amount equivalent
to its share shall be entered as items required to clarify the status of management of an investment corporation
during the relevant business period, as prescribed in Article 73(1)(xxii) of the Investment Corporation Calculation
Rules.
VI-3-2-4 Account Documents Regarding Investment Trust Assets
III-3-3(1) (excluding (ii), (iii), (v), (vi) and (viii)) shall be applied mutatis mutandis to the supervision of accountdocuments regarding investment trust assets compiled and stored based on the Investment Trust Act, and attention
shall also be paid to following points:(1) Of account documents compiled and stored based on the Investment Trust Act, those that may be stored by theelectromagnetic method are the account documents as specified under Article 26(1), Article 254(1) and Article
255(1) of the Ordinance for Enforcement of the Investment Trust Act.
(i)

Points of Attention Regarding Compilation and Storage of Account Documents in Microfilm Form
A. Microfilm used for storage must have the durability sufficient for the storage periods prescribed for eachcategory of documents as shown below.
a. Account documents related to investment trust assets: 10 years from the expiry of the accounting
period or the trust contract period of relevant investment trusts assets, as specified under Article 26(2)of the Ordinance for Enforcement of the Investment Trust Act.
b. Account books related to investment corporations: 10 years from the approval of the financial results435

of relevant investment corporations, as specified under Article 254(2) of the Ordinance for
Enforcement of the Investment Trust Act (from the closing of the account book in the case of acommercial account book).
c. Account documents related to asset custody companies: 10 years from the approval of the financial
results of relevant investment corporations as specified under Article 255(2) of the Ordinance for
Enforcement of the Investment Trust Act.
B. One of the microfilms used for data storage must be selected and specified as the original.
C. It must be ensured that a back-up of the original as specified in B. above is made and stored as a copy.
D. It must be ensured that account books required for inspection by inspection departments are compiled
within a reasonable period of time.
E. A person in charge of making and storing microfilms must be appointed and procedures for the
management of microfilms must be established.
(ii)

Points of Attention Regarding Compilation and Storage of Account Documents by Electromagnetic

MethodA. The durability of the media used for storage is subject to the requirements specified in (i)A. above.
B. It must be ensured that the computer system used for storage prevents data falsification and mishandlingby requiring IDs and passwords for data access and input.
C. In addition to A. and B. above, III-3-3(6)(i), (iii), (iv) and (vi) to (x) shall be applied mutatis mutandis.
VI-3-2-5 Criteria for Items to be Included in Notification of Foreign Investment FundThe criteria for items to be included in a notification of a foreign investment fund prescribed in each item of
Article 58 (1) of the Investment Trust Act and each item of Article 96 (2) of the Ordinance for Enforcement of theInvestment Trust Act shall be as follows:(1) Items Related to Trustors (limited to the cases similar to investment trust fund without instruction by trustor),
Trustees, and Beneficiaries(i)

Items Related to Trustors
The name, amount of capital, details of business and outline of operations of a trustor (name of the company

that manages the said foreign investment fund, and the management company in the cases of a managementcompany which is entrusted with the management of investment trust assets by a company that manages aforeign investment fund) shall be entered.
(ii)

Items Related to Trustees
The name, the amount of capital, details of business and outline of operations of a trustee (custodycompany) shall be entered.
(iii)

Items Related to Beneficiaries
Details of the right to dividend, the right to redemption, the repurchase right, and other rights (including

the date of emergence and termination of rights) and procedures for the exercise of rights shall be entered.

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(2) Items Related to Beneficiary Certificates(i)Name of the relevant foreign investment fund(ii)Form of foreign investment fundItems regarding registered or bearer form, par-value or no par-value, open end type or closed end type,exchange of registered form and bearer form, transfer of registered beneficiary certificates, and re-issuance ofbeneficiary certificates shall be entered.
(iii)

Number issued (offered)(iv)

Total value of issues (offered)
When submitting notification of a foreign investment fund without entering the “issue price” or “offer

price,” the estimated total values as of the date of submission of the said notification shall be entered with anote to that effect.
(v)

Issue (offer) price
When submitting notification of a foreign investment fund without entering the “issue price” or “offer

price,” a note specifying the scheduled date and method of determining the price shall be given.
(vi)

Subscription fee
A. In the cases where subscription fees at each subscription handling office are different, the subscription
fee of each office shall be listed. When subscription fees cannot be disclosed due to compelling reasons,a note to that effect shall be given.
B. When fees change, subject to the volume and value of subscription, the fees of the said volume and value
at each stage shall be listed.

(vii) Subscription unit
(viii) Subscription period(ix)

OthersA. The method of subscription, interest on deposit for subscription, transfer of deposit of subscription toinvestment trust assets, and items related to other subscriptions, etc., shall be entered.
B. In the cases where the subscription, etc., of the said foreign investment fund is handled in areas otherthan Japan, the number of issues (offered) and total value of issues (offered) shall be entered.

(3) Items Related to Administration and Management of Trust(i)Administration of Trust
A. Items related to administration of a fund entrusted to a trustee until its redemption
Formulation of management report on investment trust assets, method of treatment of profits, anditems related to partial cancellation, etc., shall be entered.
B. Others
Procedures concerning change in the conditions and modification of a contract with relatedcompanies, items related to the method of disclosure when changes are made, and other important items
shall be entered.

(ii)

Management of Trust
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A. Basic policy of management
The basic attitude concerning management of investment trust assets shall be described in a detailed
manner.
B. Investment target
The type of assets to be invested in, investment criteria, and proportion of planned investment by
type or region, if any, etc., shall be given.
C. Investment limit
a. The grounds for all the investment limits prescribed in the laws and regulations or contracts, etc.,
shall be described.
b. The presence of limits to the underwriting of securities, margin trading, borrowing, concentrated
investment, investment in other funds, investment in assets with less liquidity and the grounds anddetails of such limits, if any, shall be given.
D. Dividend policy
The dividend policy prescribed in the contracts, etc., shall be listed.
E. Loan of assets
Details of loans of assets acquired from investment trust assets(4) Items Related to Calculation of Trust and Distribution of Profits(i)

Items Concerning Calculation of Trust
A. Appraisal of assets
Method and frequency of calculation and method, frequency, and place of disclosure of net value of
assets per unit of beneficial certificates of foreign investment funds (including evaluation of assets to beinvested in) shall be entered.
B. Administration rewards, etc.
Items regarding all rewards and commission fees paid from investment trust assets of a foreign
investment fund, the method of calculation, amount of payment, method of payment, and time of
payment by each receiver shall be listed.
C. Others
Period of existence of foreign investment fund, calculation period of trust, requirements for limited
redemption, etc., in relation to addition and partial cancellation shall be entered.

(ii)

Items Related to Distribution of Profits
A. Items related to the calculation of the possible amount of dividend shall be listed.
B. Regarding payment of profits and distribution of payments at the time of redemption, delivery from
beneficiary to trustor (limited to those similar to an investment trust fund with instruction by trustor),
immunity of trustee, and delivery from trustor (limited to those similar to an investment trust fund with
instruction by trustor) to beneficiary, time, place and method shall be entered.

(5) Items related to the transfer of all or part of business (limited to those similar to an investment trust fund with438

instruction by trustor), procedures for business transfer, method of notification to beneficiaries, and the details ofobjection if a beneficiary is entitled to oppose the business transfer.
(6) Items Related to Resignation and Removal of Trustee and Appointment of New Trustee
Procedures for resignation and removal of trustee and the appointment of a new trustee shall be described.
(7) When a trustor entrusts another party with power regarding instruction of management (limited to those similar
to an investment trust fund with instruction by trustor) or when a trustee entrusts another party with management
power (limited to those similar to an investment trust fund without instruction by trustor), details of the entrustment,
specific details of entrusted power and the cost of entrustment shall be entered.
(8) Name of Financial Instruments Business Operator Which Handles Subscriptions in JapanThe names of all Financial Instruments Business Operators which handle subscriptions shall be listed.
VI-3-2-6 Investment Report on Foreign Investment Funds(1) Criteria for Items to be Entered in a Report on Investment Trust Asset Management (complete version)
A report on investment trust asset management (complete version) under the provisions of Article 59 of the Investment Trust
Act, applied mutatis mutandis pursuant to Article 59 of the said act, shall be prepared so as to be easily understood by investors,
and the following items, which are pursuant to Article 63(1) of the Investment Assets Calculation Rules shall be included.
Furthermore, appropriate responses shall be given when referrals are made.
(i) Structure of the foreign investment fund (including investment policy)
The purpose and characteristics of the investment trust are presented in a way that makes them easily
understood by investors, including such items as the scheme, investment method, investment limits anddividend policy.
(ii) Process of Asset Management During the Calculation Period of Investment Trust Assets Related to theRelevant Foreign Investment Fund
A. The state of net asset value at the beginning, during, and at the end of the period shall be included. Also,
the relationship with the management policy of the investment trust assets of the said foreign investment
fund shall be described.
B. The future management policy shall be prepared based on the investment report of the said foreign
investment fund.
C. The amount of dividend per unit, the right to which has been fixed during the current period, shall beentered.
D. With regard to an investment report on investment trust assets at the time of termination of trust, theoutline of the management process from the acquisition to termination of the said trust shall be given.
(iii) Change in Management Status
A. Management performance (net asset value, dividend, etc.) of the previous ten terms shall be given.
B. As a tool for the comparison between net asset value and market conditions during the current period,439

when the management policy for investment trust assets for the said investment trust adopts a form ofmanagement that is linked with specific indices, the movement of the said indices shall be included.
(iv) The balance sheet as of the last day of the calculation period of investment trust assets of the relevant foreign
investment fund (hereinafter referred to as “end of the current period” in VI-3-2-6) and a statement of income
and a statement of retained earnings during the relevant calculation period, and their notes shall be given.
A. The balance sheet and its notes at the end of the current period shall be included.
B. A statement of income and a statement of retained earnings during the relevant calculation period, andtheir notes shall be included. The amount of loss shall be represented by “△”, “–”, or in the bracket.
(v) Trust and other fees as well as other costs that the beneficiary bears regarding investment trust assets related
to the relevant foreign investment fund, as well as details of the services provided in exchange for such costs,
shall be shown.
Trust fees and other costs that the investor bears during the accounting period, as well as details of theservices provided in exchange for such costs, shall be presented in such a way that make them easily
understood by the investor.
(vi) Statement of Net Assets at the End of the Current Period
A. The number of issuance units of the foreign investment fund at the end of the current period shall be
specified and the value of net income per unit as of the end of the current period shall be given, which is
to be obtained by dividing aggregate net assets by the said number of issuance units.
B. When the relevant items are given in the balance sheet of (iv) above, the statement of net assets may bereplaced by the said balance sheet.
(vii) Major Names of Security Certificates to be Invested in
A. Regarding the top 30 valuations among invested stocks at the end of the current period or on the mostrecent date as of the formulation of the investment report on investment trust assets, the name of the said
stocks, quantity, aggregate market value and investment ratio shall be included.
B. In lieu of A. above, monetary value and the investment ratio of securities and the place of issuance ofstocks and non-stock securities, at the end of the current period or on the most recent date as of theformulation of the investment report on investment trust assets, shall be given by type of securities, placeof issuance or region of listed financial instruments exchange, etc.
(viii) Major Types of Rights Pertaining to Transactions of Derivatives to be Invested in
Asset balance at the end of the current period and the management status during the calculation period of
the relevant investment trust assets shall be listed by type of transaction of derivatives.
(ix) Major Types of Real Estate to be Invested in and Real Estate Leasehold Rights or Surface Rights
Asset balance at the end of the current period and the management status during the calculation period of
the relevant investment trust assets shall be listed by categories, such as real estate, and real estate leasehold
rights or surface rights.
(x) Major Types of Money Claims to be Invested in
Assets outstanding at the end of the current period and the management status during the calculation
period of the said investment trust assets shall be presented in such a way to be easily understood by440

investors.
(xi) Major Types of Drafts to be Invested in
Assets outstanding at the end of the current period and the management status during the calculation
period of the said investment trust assets shall be presented in such a way to be easily understood byinvestors.
(xii) Major Types of Specified Assets to be Invested in as prescribed in Article 3 (viii) of the Enforcement Orderof the Investment Trust Act and Equivalent Thereto
Assets outstanding at the end of the current period and the management status during the calculation
period of the said investment trust assets shall be presented in such a way to be easily understood byinvestors.
(xiii) Major Types of Commodities to be Invested in
Regarding the top 30 valuations among invested commodities at the end of the current period or on themost recent date as of the formulation of the investment report on investment trust assets, the name of thesaid commodities, quantity, aggregate market value and investment ratio shall be included.
(xiv) Major Types of Rights Pertaining to Transactions of Commodity Investment, etc. to be Invested in
Asset balance at the end of the current period and the management status during the calculation periodof the relevant investment trust assets shall be listed by type of transaction of commodity investment, etc.
(xv) Besides those listed in each of the previous items, items to be included in an investment report formulated
pursuant to the Japanese laws and regulations under which the relevant foreign investment fund is established(items equivalent to those to be included pursuant to each item of Article 58(1) of the calculation rules forinvestment assets, in the cases where no specific statute applies to investment reports formulated pursuant to
the laws and regulations of the country concerned under which the relevant foreign investment fund isestablished).
In the cases under Article 58(1) of the Investment Assets Calculation Rules, items in accordance with VI3-2-3-(2) shall be entered.
(2) Criteria for Items to be Entered in a Summary Investment Report
The summary investment report prepared under the provisions of Article 14(4) of the Investment Trust Act,applied mutatis mutandis pursuant to Article 59 of the said act, is required to include critically important information
regarding the status of investment so as to provide the information necessary for the investor to correctly understandthe current status of the assets under management. In view of this, it shall include critically important information
about the status of the investment and, as such, provide an amount of information similar to that provided in thesummary investment report for investment trusts (refer to VI-3-2-3(3)) to an extent possible.
In view of such considerations, presentation of each item in the Article 63(3) shall be made in line with therealities of laws in the countries and funds overseas, taking into consideration the provisions of the "Rules on
Investment Reports, Etc. Regarding Investment Trusts and Investment Corporations," a set of self-regulatory rulesby the Investment Trusts Association (flexible measures are required in this regard if items prescribed in these rules
cannot be included for inevitable reasons due to the realities of laws in the countries and funds overseas), paying
441

attention to the requirement that service providers are required to make creative efforts to facilitate investor
understanding by, for example, using ample charts and diagrams and easy-to-understand, simple explanation in text.
Furthermore, an appropriate response to inquiries shall be made in accordance therewith.
VI-3-2-7 Items to be Included in Notification on Foreign Investment Corporations
The following are the items to be included in a notification of foreign investment funds prescribed in Article
220(1) of the Investment Trust Act and each item of Article 261(2) of the Ordinance for Enforcement of theInvestment Trust Act.
(1) Objectives, Trade Name, Address(i)

Objectives
A. The objectives listed in the bylaws of foreign investment corporation or equivalent thereto shall be
included.
B. The number of issuances (offer), total value of issue (offer), issue price (offer price), subscription fees,
subscription unit, subscription period, etc., shall be listed pursuant to VI-3-2-5 (2).

(ii)

Trade Name and Address
The trade name and address (name in the original language shall be attached) shall be listed in the registryof foreign investment corporations or equivalent thereto.
(2) Items Related to Organization and Officers(i)Items Related to Organization
A. The name and details of the organization of the relevant foreign investment corporation
B. The names and outlines of relevant businesses of corporations concerned (a juridical person equivalent
to an asset management company, asset deposit company or equivalent thereto, or a juridical person
entrusted with administrative work or equivalent thereto) involved in the management of the said foreign
investment corporation shall be included, in addition to those of companies issuing foreign investment
certificates for the relevant foreign investment corporation.

(ii)

Items Related to Officers
The names, addresses and duties of officers of the foreign investment corporation (details of duties of

personnel equivalent to executive officers or supervisory officers of investment corporations) shall be listed.
(3) Items Related to Administration and Management of Assets(i)

Items Related to Administration of Assets
A. Items related to the administration of assets conducted until the dissolution of the relevant foreign
investment corporation shall be listed.
B. With regard to an asset custody company or an enterprise equivalent thereto, the name, amount of capital,
details of business and outline of operations shall be entered.
C. Others442

Changes in the bylaws or the equivalent documents and procedures concerning changes in the contract
with concerned companies, items related to the disclosure method of such changes, and other important
items shall be included.
(ii)

Items Related to Asset Management
A. Basic policy of management
Specific details about the basic attitude toward the management of assets shall be included.
B. Investment target
The type of assets to be invested in, investment criteria, and the proportion of planned investment by
type or region, if any, etc., shall be given.
C. Investment limita. Grounds for all investment limits prescribed in laws, regulations and bylaws, etc., or other documents
equivalent thereto, etc., shall be described.
b. The presence of limits to the underwriting of securities, margin trading, borrowing, concentrated
investment, investment in other funds, and investment in assets with less liquidity and grounds forand details of such limits, if any, shall be mentioned.
D. Dividend policy
The dividend policy prescribed in bylaws or other documents equivalent thereto shall be included.
E. With regard to an asset management company or an enterprise equivalent thereto, the name, amount of
capital, details of business and outline of operations shall be entered.

(4) Items Related to Calculation and Distribution of Profits(i)

Items Related to Calculation
A. Asset
The method and frequency of calculation and the method, frequency and place of disclosure of net
value of assets per unit of foreign investment certificates (including evaluation of assets to be investedin) shall be entered.
B. Administration rewards, etc.
Regarding all rewards and commission fees paid from the assets of the foreign investment
corporation, the method of calculation, amount of payment, method of payment and time of payment
classified by each receiver shall be listed.
C. Others
The period of existence of the foreign investment corporation, fiscal year, limits on additional
contribution and return of contribution, and conditions for dissolution, etc., shall be entered.

(ii)

Items Related to Profit Distribution
Items related to the payment of profits at the time of dissolution or the distribution of profits at the time ofeach settlement shall include the time, place, method of delivery from an asset custody company to a foreign
investment company, immunities of an asset custody company, and delivery from trustor to investor or party
equivalent thereto.
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(5) Items Related to the Rights Indicated on Foreign Investment Certificates
Details of voting rights, the rights of investors or other persons equivalent thereto, the right to receive dividend,
the right to receive settlement (including the date of emergence of termination of rights) and procedures for exerciseof rights shall be included.
(6) Items Related to Distribution or Redemption
Details of the claim for distribution or redemption of the relevant foreign investment corporation (including thedate of emergence and termination of rights) and the procedures for exercise of rights shall be included.
(7) Items Related to Transfer of All or Part of Business of a Party Equivalent to an Asset Management Company
The procedures of business transfer, the method of notification to investors or parties equivalent thereto, anddetails of objections if investors or parties equivalent thereto are entitled to oppose the business transfer.
(8) Items Related to Resignation of a Party Equivalent to Asset Custody Company and Appointment of New Asset
Deposit Company or a Party Equivalent Thereto
The procedures for resignation of a party equivalent to an asset custody company, and the appointment of a new
asset depository company or a party equivalent thereto shall be described.
(9) Details of Entrustment When a Party Equivalent to Asset Custody Company Entrusts the Power to Manage
Assets of Another Party
Specific details of entrusted power and the cost of such entrustment shall be listed.
VI-3-3 Points of Attention Regarding Administrative Processes Related to Businesses Specially Permitted forOverseas Investors, etc.
VI-3-3-1 Confirmation of Matters to be Notified(1) Major Supervisory Viewpoints(i) Whether there are any omissions, etc. with regard to matters required to be notified. Whether
the requirements for notification are satisfied.
(ii) Whether there are any omissions, etc. with regard to documents required to be attached.
Furthermore, whether there are any discrepancies, etc. between the notified matters and thecontents of the attached documents.
(iii) In cases where the person making the notification is a juridical person, whether it is possible
to make contact with said juridical person's representative. In cases where the person making
the notification is a foreign juridical person, whether it is possible to make contact with said
foreign juridical person's representative in Japan.
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(iv) Whether the principal business office or office (for a foreign juridical person, its principal
business office or office in Japan) and the business office or office where businesses speciallypermitted for overseas investors, etc. are conducted is a so-called virtual office. (In cases where,
such as where the notified business office, etc. is a rental office based on a short-term contract,businesses specially permitted for overseas investors, etc. are likely to be conducted at a place
other than said business office, supervisors shall strive to grasp the actual conditions throughhearings and requesting the submission of relevant materials.)(v) When a notification of abolition of businesses specially permitted for overseas investors, etc.
based on Article 63-10(3)(ii) of the FIEA has been filed by a person engaging in businesses
specially permitted for overseas investors, etc., supervisors shall check whether customertransactions by said person engaging in businesses specially permitted for overseas investors, etc.
have been completed and properties that were deposited by customers as well as properties
occupied in its calculation have been returned.
(2) Supervisory Method and Actions
Upon receiving a written notification regarding businesses specially permitted for overseas investors, etc.,
supervisors shall check the matters to be notified as to whether there are any deficiencies in relation to therequirements for the relevant businesses. When any deficiencies or doubts, etc. are found in the content regarding
the matters to be notified as a result, supervisors shall request corrections before accepting the written notification.
In cases where any deficiencies or doubts, etc. are found in the content after receiving a written notification,
supervisors shall request the submission of a report based on Article 63-14 of the FIEA as necessary to ascertain thestatus of corrections and shall consider necessary action, including the issuance of a business improvement order ora business suspension order, depending on circumstances.
If no specific corrective measures are presented or it is deemed that any of the reasons for disqualification
specified in the items of Article 63-9(6) of the FIEA applies, supervisors shall issue a business abolition order basedon Article 63-13(3) of the FIEA, in principle.
VI-3-3-2 Preparation and Publication, etc. of the List of Notifiers, etc.
(1) Preparation and Publication, etc. of the List of Notifiers, etc.
In order to enable investors to acquire information on persons engaging in businesses speciallypermitted for overseas investors, etc., the FSA shall prepare and publish on its website a list
indicating matters concerning those persons that are subject to public inspection based on Article
63-9(4) of the FIEA (including cases where applied mutatis mutandis pursuant to Article 63-11(2) ofthe FIEA) (the matters shall be those prescribed in (4) and shall be hereinafter referred to as the"matters to be indicated in a list of notifiers for businesses specially permitted for overseas investors,etc." and the list shall be hereinafter referred to as the "list of notifiers for businesses speciallypermitted for overseas investors, etc.").
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To this end, the FSA shall, for each month, after confirming the status of receiving notifications
at Local Finance Bureaus, prepare, update and publish on its website the list of notifiers forbusinesses specially permitted for overseas investors, etc.
(2) Preparation and Publication, etc. of the List of Notifiers Subject to Business Abolition Orders
To provide investors information on persons engaging in businesses specially permitted foroverseas investors, etc. to whom a business abolition order was issued based on Article 63-13(3) of
the FIEA, the FSA shall prepare and publish on its website a list of notifiers for businesses speciallypermitted for overseas investors, etc. to whom a business abolition order was issued (hereinafterreferred to as the "list of notifiers for businesses specially permitted for overseas investors, etc.
subject to business abolition orders")
As such, when a business abolition order has been issued based on Article 63-13(3) of the FIEA
to a person engaging in businesses specially permitted for overseas investors, etc., the FSA shallremove such person from the list of notifiers for businesses specially permitted for overseas investors,
etc. or the list of uncontactable notifiers for businesses specially permitted for overseas investors,
etc. (as defined in (3) below), enter that person in the list of notifiers for businesses speciallypermitted for overseas investors, etc. subject to business abolition orders, and publish it on its
website.
(3) Preparation and Publication, etc. of the List of Uncontactable Notifiers for Businesses Specially
Permitted for Overseas Investors, etc.
In order to enable investors to acquire information on persons engaging in businesses speciallypermitted for overseas investors, etc. with whom supervisory authorities cannot make contact or
locate their business places or offices, the FSA shall prepare and publish on its website a list of
notifiers for businesses specially permitted for overseas investors, etc. who are not in contact(hereinafter referred to as the "list of uncontactable notifiers for businesses specially permitted foroverseas investors, etc.").
As such, if the FSA finds, through day-to-day supervisory work, any person engaging inbusinesses specially permitted for overseas investors, etc. with whom supervisory authorities cannot
make contact or locate their business places or offices, the FSA shall remove the matters to be
indicated in a list of notifiers for businesses specially permitted for overseas investors, etc. regarding
such person from the list of notifiers for businesses specially permitted for overseas investors, etc.,
enter those matters in the list of uncontactable notifiers for businesses specially permitted foroverseas investors, etc. and publish it on its website. In making the entry and in publication, thefollowing shall be clearly indicated: the notified business office or office cannot be identified; a notice
shall be made to the Commissioner of the Financial Services Agency or other competent official
having jurisdiction over notifications for businesses specially permitted for overseas investors, etc.
(referring to the Commissioner of the Financial Services Agency or other competent official having446

jurisdiction over notifications for businesses specially permitted for overseas investors, etc.
prescribed in Article 246-20(1) of the FIB Cabinet Office Ordinance; hereinafter the same shall applyin (4) below) within 30 days from the day when the failure of ascertainment was published on the
FSA website; a business abolition order may be issued if supervisors receive no notice during said
period, after conducting separate administrative procedures such as a hearing, etc.
With regard to persons engaging in businesses specially permitted for overseas investors, etc.
whose business offices or offices have been identified, the FSA shall remove them from the list of
uncontactable notifiers for businesses specially permitted for overseas investors, etc. and enter themin the list of notifiers for businesses specially permitted for overseas investors, etc. With regard to
persons engaging in businesses specially permitted for overseas investors, etc. to whom a businessabolition order has been issued based on Article 63-13(3) of the FIEA, the FSA shall remove themfrom the list of uncontactable notifiers for businesses specially permitted for overseas investors, etc.
and enter them in the list of notifiers for businesses specially permitted for overseas investors, etc.
subject to business abolition orders(4) Matters to be Indicated in a List of Notifiers for Businesses Specially Permitted for Overseas
Investors, etc.
(i) Matters to be indicated in a list of notifiers for businesses specially permitted for overseas
investors, etc. shall be as follows (however, M. below shall be excluded from the matters to be
indicated in the list of uncontactable notifiers for businesses specially permitted for overseas
investors, etc., and Q. below shall only be entered in the list of uncontactable notifiers forbusinesses specially permitted for overseas investors, etc.).
A. Trade name or name and corporate number
B. The Commissioner of the Financial Services Agency or other competent official having
jurisdiction over notifications for businesses specially permitted for overseas investors, etc.
C. Names and positions of the representative, other officers and employees specified by Cabinet
Order
D. Types of employees specified by Cabinet Order
E. Types of businesses
F. Name, address and phone number of the principal business office or office (for a foreign juridical
person, including the principal business office or office in Japan);
G. Name, address and phone number of the business office or office where businesses speciallypermitted for overseas investors, etc. are conducted
H. URL of the website
I. Types of other businesses conducted
J. Amount of capital or total contribution
K. Whether having been registered as a financial instruments business operator
L. Date of notification under Article 63-9(1) of the FIEA or the most recent date of notification447

pursuant to Article 63-9(7) of the FIEA
M. Status of administrative dispositions, etc.
N. Name of the invested business equity
O. Type of the invested business equity
P. Details of the invested business
Q. Date of publication of the failure of ascertainment of the business office or office(ii) Entry regarding the status of administrative dispositions, etc. as prescribed in M. above
A. With regard to persons engaging in businesses specially permitted for overseas investors, etc.
to whom a business improvement order based on Article 63-13(1) of the FIEA or a businesssuspension order based on Article 63-13(2) of the FIEA has been issued, the status of the relevant
administrative disposition shall be entered.
B. With regard to persons engaging in businesses specially permitted for overseas investors, etc.
to whom a warning based on the Supervisory Guidelines has been issued or for whom any
problem such as the failure to respond to a report order under Article 63-14 of the FIEA has beenfound, the details of the problem shall be entered.
VI-3-3-3 Points of Attention Regarding Business Operators Which Fail to Make Necessary Notifications
When supervisors have found that any person is engaging in businesses specially permitted foroverseas investors, etc. without fulfilling the obligation to make a notification under Article 63-9(1)of the FIEA, as a result of receiving a complaint from a customer, an inquiry from an investigative
authority, or the provision of information from a Financial Instruments Business Operator or a
Financial Instruments Firm's Association, etc., or based on a newspaper advertisement, etc., theyshall warn that person in writing to immediately suspend such act or immediately make thenecessary notification.
VI-3-3-4 Points of Attention Concerning Supervisory Actions for Persons Engaging in Businesses Specially
Permitted for Overseas Investors, etc.
(1) Points of Attention in Cases Where Businesses are Suspected of Not Falling under Businesses
Specially Permitted for Overseas Investors, etc.
Supervisors shall strive to publicize the need to obtain registration based on Article 29 of the FIEA whenbusinesses of a person engaging in businesses specially permitted for overseas investors, etc. do not satisfy therequirements for the relevant businesses.
If supervisors suspect, through day-to-day supervisory work, that any person engaging in businesses speciallypermitted for overseas investors, etc. fails to meet the requirements mentioned above, they shall require such person
to make a report based on Article 63-14 of the FIEA, and shall take necessary action, including the issuance of abusiness abolition order based on Article 63-13(3) of the FIEA, when they find it necessary to do so based on such448

report. In addition, the same action shall be taken when it is deemed, through on-the-spot inspections, etc., that therequirements mentioned above are not met.
(2) Points of Attention in Cases Where Businesses No Longer Fall under Businesses Specially Permitted forOverseas Investors, etc.
In cases where businesses conducted by a person engaging in businesses specially permitted for overseas
investors, etc. no longer fall under the relevant businesses due to such reasons as an increase in overseas investors,
etc. other than non-residents, supervisors shall take the following action from the perspective of investor protection.
(i) Order based on Article 63-9(9) of the FIEA
As prescribed in Article 63-9(9) of the FIEA (including cases where applied mutatis mutandis pursuant to
Article 61-11(2) of the same Act), "when the right set forth in Article 2(2)(v) or (vi) pertaining to the act set forthin paragraph (1), item (i) of the preceding Article that a notifier for businesses specially permitted for overseas
investors, etc. commenced as the relevant businesses has come to no longer fall under the right prescribed inparagraph (1), item (i) of the preceding Article, or when the money invested or contributed by overseas investors,
etc. (referring to the overseas investors, etc. prescribed in paragraph (2) of the preceding Article) who hold thatright has come to no longer fall under the money invested or contributed mainly by non-residents" is considered
to refer to cases where the relevant businesses were businesses specifically permitted for overseas investors, etc.
at the time of commencement thereof but have come to no longer fall under businesses specifically permitted foroverseas investors, etc. for a reason not attributable to the responsibility of the relevant person engaging inbusinesses specifically permitted for overseas investors, etc., and in such cases, supervisors shall order that person
to take measures such as transferring the relevant businesses to another Financial Instruments Business Operator.
(ii) Cases other than (i) above
In cases other than (i) above, a special clause specified in Article 63-8 of the FIEA shall not apply, andtherefore, a person engaging in businesses specially permitted for overseas business investors, etc. will engage ininvestment management business without being registered under the FIEA. Accordingly, against such person,supervisors shall take necessary action, including the issuance of a business abolition order based on Article 6313(3) of the FIEA.
(3) Points of Attention Concerning Actions for Persons Engaging in Businesses Specially Permitted for Overseas
Investors, etc. Whose Business Office or Office Cannot be Identified
In cases where supervisors find, through day-to-day supervisory work, any person engaging in businesses
specially permitted for overseas investors, etc. with whom supervisory authorities cannot make contact and whosebusiness office or office cannot be identified, the FSA shall, in accordance with VI-3-3-2(3), include such personin the list of uncontactable notifiers for businesses specially permitted for overseas investors, etc., while clearly
indicating that the notified business office or office cannot be ascertained and other facts, and shall publish it on
its website. If supervisors receive no notice from that person after 30 days have passed since the day of the
publication, supervisors shall issue a business abolition order to that person based on Article 63-13(3) of the FIEA.

449

(4) Points of Attention in Issuing a Business Abolition OrderWith regard to problems concerning the appropriateness of business operations of a person engaging inbusinesses specially permitted for overseas investors, etc., if the impact on investors, etc. and maliciousness of the
conducted act are significant or serious, but it is unlikely that the issuance of a business improvement order basedon Article 63-13(1) of the FIEA or a business suspension order based on Article 63-13(2) of the FIEA will lead toan improvement in the situation in relation to that person, supervisors shall issue a business abolition order basedon Article 63-13(3) of FIEA.
In addition, "a case where the purpose of supervision cannot be achieved by any other method" as prescribed in
Article 63-13(3) of the FIEA does not necessarily mean to require the issuance of a business improvement order ora business suspension order prior to the issuance of a business abolition order based on the provisions of the same
paragraph. For example, when a person engaging in businesses specially permitted for overseas investors, etc. isdeemed to have committed a serious violation of the law that may lead to cancellation of registration if that person
is a Financial Instruments Business Operator, etc., supervisors shall immediately issue a business abolition ordersince the case falls under "a case where the purpose of supervision cannot be achieved by any other method."
In the event that a business abolition order has been issued against a person engaging in businesses speciallypermitted for overseas investors, etc., supervisors shall check whether customer transactions by that person havebeen completed and whether properties deposited by customers as well as properties occupied in its calculation havebeen returned, before requiring that person to make a notification of the abolition of businesses specially permitted
for overseas investors, etc. as prescribed in Article 63-10(3)(ii) of the FIEA.
VI-3-4 Points of Attention Regarding Administrative Processes Related to Businesses Specially Permitted for theTransitional Period, etc.
VI-3-3 shall also apply for points of attention regarding administrative processes related to businesses speciallypermitted for the transitional period, etc.
VI-3-5 Points of Attention Regarding Administrative Processes Related to Investment Corporations
VI-3-5-1 Notification of Changes Related to and Dissolution of Registered Investment Corporations(1) Notification of Changes Related to Registered Investment Corporations(i)VI-3-1-3(3)(i) and (ii) shall be applied mutatis mutandis to the notification of changes related to registeredinvestment corporations.
(ii)

Notifications of changes related to registered investment corporations, based on Article 191(1) of theInvestment Trust Act, that are received by the director-general of a Local Finance Bureau (excluding
notifications of a relocation of the head office from a region under the jurisdiction of one Local Finance Bureau
to a region under the jurisdiction of another) shall be collectively reported each month to the FSA

450

Commissioner by the 15th day of the following month, in the format specified in the Attached List of Formats
VI-5.
(iii)

In cases where an investment corporation’s notification of a change has revealed that a new executive

officer meets the provision of any of Article 98(ii) to (v) of the Investment Trust Act, that a new supervisory
officer meets the provision of any of the items of Article 100 of the Investment Trust Act, or that a new
accounting auditor meets the provision of any of the items of Article 102(3) of the Investment Trust Act, thedirector-general of the relevant Local Finance Bureau shall immediately instruct the investment corporation totake corrective action. If corrective action is not taken immediately, the registration shall be rescinded basedon Article 216(1) of the Investment Trust Act.
(2) Notification of Cross-Jurisdictional Relocation of Head Office(i)When the director general of a Local Finance Bureau has received notification of a relocation of the head

office from a region under the jurisdiction of his/her bureau to a region under the jurisdiction of another bureau,
he/she shall send the notification document with an opinion of his/her bureau and the results of the most recent
inspection attached thereto, in the format specified in the Attached List of Formats VI-6, to the director-generalof the Local Finance Bureau to which the authority over the relevant registered investment corporation will betransferred, in addition to implementing the procedures specified under Article 275(1) of the Ordinance for
Enforcement of the Investment Trust Act.
(ii)

When the director-general taking over the authority over the registered business operator has completed

registration change procedures based on Article 275(2) of the Ordinance for Enforcement of the Investment
Trust Act, he/she shall immediately notify the director-general who previously had the authority via e-mail, etc
or through other means.
(iii)

The director-general who previously had the authority shall cancel the registration of the relevant

investment corporation after being notified, by the director-general who has taken over the authority, of thecompletion of the registration of the relocation based on Article 275(2) of the Ordinance for Enforcement of
the Investment Trust Act.
(iv)

Relocations of the head offices registered each month shall be collectively reported to the FSA

Commissioner by the directors-general of Local Finance Bureaus who have taken over the authority, by the
15th day of the following month in the format specified in the Attached List of Formats VI-7.
(3) Notifications of Dissolution of Investment Corporations
Notifications of dissolution of investment corporations (the format is as specified in the Attached List of Formats
XVII of the Ordinance for Enforcement of the Investment Trust Act) received by the directors-general of Local
Finance Bureaus shall be collectively reported each month to the FSA Commissioner by the 15th day of thefollowing month, in the format specified in the Attached List of Formats VI-8.
VI-3-5-2 Extraordinary Reports
Procedures to be implemented by the directors-general of Local Finance Bureaus are as follows.
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(1) The director-general of a Local Finance Bureaus, upon receiving an extraordinary report, based on Article 215(1)of the Investment Trust Act, shall immediately send a copy thereof to the FSA Commissioner.
(2) Notice to Investment Corporations
Directors-general of Local Finance Bureaus shall hold consultations with the FSA before giving notice, basedon Article 215(2) of the Investment Trust Act, to an investment corporation.
It should be noted that the directors-general shall report the results of the deliberations made by their bureaus
and express the opinions thereof in the consultations.
VI-3-5-3 Consultations, etc., with the FSA about Permissions and Administrative Actions Regarding Investment
Corporations, etc(1) Consultations with FSA about Permissions for Investment Corporations, etc.
(i)

The directors-general of Local Finance Bureaus shall hold prior consultations with the FSA with regard

to the following permissions and approvals, the authority over which is delegated to them as a matter ofsupervisory process.
A. Permission based on Article 81(4) of the Companies Act as applied mutatis mutandis pursuant to Article
73(4) of the Investment Trust Act
B. Permission based on Article 82(4) of the Companies Act as applied mutatis mutandis pursuant to Article
73(4) of the Investment Trust Act
C. Permission based on Article 297(4) of the Companies Act as applied mutatis mutandis pursuant to Article
90(3) of the Investment Trust Act
D. Permission based on Article 318(5) of the Companies Act as applied mutatis mutandis pursuant to Article
94(1) of the Investment Trust Act
E. Permission based on Article 371(2) or (4) of the Companies Act as applied mutatis mutandis pursuant to
Article 115(1) of the Investment Trust Act (including cases where Article 371(4) of the Companies Act
is applied mutatis mutandis pursuant to Article 115(5) of the Investment Trust Act)
F. Permission based on Article 433(3) of the Companies Act as applied mutatis mutandis pursuant to Article
128-3(2) of the Investment Trust Act
G. Permission based on Article 442(4) of the Companies Act as applied mutatis mutandis pursuant to Article132(2) of the Investment Trust Act
H. Permission based on Article 371(2) or (4) of the Companies Act as applied mutatis mutandis pursuant to
Article 154-3(2) of the Investment Trust Act (including cases where Article 371(4) of the Companies
Act is applied mutatis mutandis pursuant to Article 154-3(5) of the Investment Trust Act)I.

Permission based on Article 500(2) of the Companies Act as applied mutatis mutandis pursuant to
Article 157(3) of the Investment Trust Act(ii)

The directors-general of Local Finance Bureaus shall hold prior consultations with the FSA with regard452

to the exercise of the authority regarding the following matters, the authority over which is delegated tomatters of supervisory process concerning investment corporations:A. Order based on Article 307(1) of the Companies Act as applied mutatis mutandis pursuant to Article
94(1) of the Investment Trust Act
B. Appointment of a person responsible for performing the duties of a temporary officer based on Article
108(2) of Investment Trust Act
C. Order based on Article 359(1) of the Companies Act as applied mutatis mutandis pursuant to Article
110(2) of the Investment Trust Act
D. Order based on Article 162 of the Investment Trust Act
E. Application for a court order of the dissolution of an investment corporation based on Article 824(1) of
the Companies Act as applied mutatis mutandis pursuant to Article 144 of the Investment Trust Act
F. Application with a court appointment of an administrator based on Article 825(1) of the Companies Act
as applied mutatis mutandis pursuant to Article 144 of the Investment Trust Act
G. Appointment of a liquidator or a liquidation supervisor based on Article 151(3) of the Investment Trust
Act
H. Appointment of a liquidator or a liquidation supervisor based on Article 151(4) of the Investment Trust
Act
I. Appointment of a liquidator or a liquidation supervisor based on Article 151(5) of the Investment Trust
Act
J. Dismissal of a liquidator or a liquidation supervisor based on Article 153(1) of the Investment Trust Act
K. Appointment of a liquidator or a liquidation supervisor based on Article 153(1) of the Investment Trust
Act
L. Determination of the amount of remuneration for the liquidator based on Article 154(2) of the Investment
Trust Act or determination of remuneration for the liquidation supervisor based on Article 154(2) of theInvestment Trust Act as applied mutatis mutandis pursuant to Article 154-2(2) of the same act.
M. Appointment of an appraiser of a debt with an undetermined value based on Article 501(1) of theCompanies Act as applied mutatis mutandis pursuant to Article 157(3) of the Investment Trust Act
N. Appointment of a person in charge of the storage of account documents based on Article 508(2) of theCompanies Act as applied mutatis mutandis pursuant to Article 161 of the Investment Trust Act
O. Appointment of a person responsible for performing the duties of a temporary liquidator or a temporary
liquidation supervisor based on Article 108(2) of the Investment Trust Act as applied mutatis mutandis
pursuant to Article 153(2) of the same act
P. Immediate appeal based on Article 872 of the Companies Act as applied mutatis mutandis pursuant to
Articles 84(2), 139-9(8), 139-10(2), 141(3), 144, 149-3(4). 149-8(4). 149-13(4), 150 and 163(iii)

When the directors-general of Local Finance Bureaus have decided to grant permissions and approvals

regarding the above matters, they shall notify the applicants in the format specified in the Attached List ofFormats VI-9. When they have decided not to grant permissions or approvals, the notice shall be made in theformat specified in the Attached List of Formats VI-10.
453

(2) Consultations with FSA about Administrative Actions(i)

The directors-general of Local Finance Bureaus shall hold prior consultations with the FSA with regard

to the following matters, the authority over which is delegated to them as a matter of supervisory processconcerning investment corporations.
It should be noted that the directors-general shall report the results of the deliberations made by theirbureaus and express the opinions thereof in the consultations.
A. Order for business improvement based on Article 214(1) of the Investment Trust Act
B. Rescission of registration based on Article 216 of the Investment Trust Act(ii)

In cases where the director-general of a Local Finance Bureau intends to take an administrative action

against a person planning to establish an investment corporation or against an investment corporation, andwhere the said person or investment corporation, an investment management company to which the investment
corporation or said person entrusts asset investment, an entity to which the asset investment is re-entrusted
under Article 202(1) of the Investment Trust Act, an asset administration company in charge of the relevant
assets, or the company undertaking the relevant general clerical work is located in a region under thejurisdiction of another Local Finance Bureau, the said director-general shall, in principle, solicit the opinion of
the director-general of the other Local Finance Bureau before taking said administrative action and later
communicate the action taken thereto.
(3) Notice to Heads of Relevant Administrative Organizations
When giving notice to relevant administrative organizations based on Article 132(6) and Article 135(1) of the
Enforcement Order of the Investment Trust Act, the directors-general of Local Finance Bureaus shall pay attention
to the following points:(i)

Notice regarding a registration application based on Article 187 of the Investment Trust Act must be given

to the section in charge of the relevant department of the administrative organization concerned immediately
after the receipt of the registration application.
(ii)

Regarding a report based on the items of Article 132(3) of the Enforcement Order of the Investment Trust

Act, the contents of the report must be quickly notified to the section in charge of the relevant department of
the administrative organization concerned, by the end of the month following the month of the receipt of thereport at the latest.
(4) Re-delegation to Directors-General of Local Finance Offices
Of the administrative processes delegated to the directors-general of Local Finance Bureaus based on Article
135 of the Enforcement Order of the Investment Trust Act, the directors-general may re-delegate the following
processes to the directors-general of local Finance Offices that have jurisdiction over the regions where theapplicants and the investment corporations are located, as well as to the heads of the Oar and Kitami Branch Offices.
(i)

Administrative processes regarding the receipt of notification related to the establishment of an investment

corporation as specified under Article 69(1) of the Investment Trust Act
454

(ii)

Administrative processes regarding the receipt of a notification based on Article 152(1) of the Investment

Trust Act
(iii)

Administrative processes regarding the receipt of a registration application as specified under Article

188(1) of the Investment Trust Act(iv)

Administrative processes regarding the receipt of a notification of change as specified under Article

191(1) of the Investment Trust Act(v)

Administrative processes regarding the receipt of a notification based on Article 192(1) of the Investment

Trust Act
VI-3-5-4 Issuance of Certificates(1) Issuance of Certificates to Trust Companies, etc.
(i)

Issuance of Certificates Necessary for Reduction of License Registration Tax Regarding OwnershipTransfer
The following procedures should be taken with regard to the issuance of the certificate, as specified under
Article 31-5(2) of the enforcement rules for the Act for Special Tax Measures, necessary for the reduction of
the license registration tax for trust companies, etc., based on Article 83-2-3(2) of the said act.
It should be kept in mind that a trust company, etc., seeking to become eligible for the provision of Article
83-2-3(2) of the Act for Special Tax Measures needs to do so within one year from the acquisition of therelevant real estate.
A. An application from a trust company, etc., for a certificate necessary for the reduction of the license
registration tax regarding the transfer of ownership and the certificate to be issued by the FSA
Commissioner shall be in accordance with the format specified in the Attached List of Formats VI-11.
B. The applicant shall be required to fill out the necessary items of the application form and attach to it acopy of the relevant real estate transaction contract, in order to confirm the dates of the signing of thecontract and the real estate acquisition.
C. After the application for a certificate has been submitted, the certificate shall be issued upon theconfirmation, made in reference to the attached documents and other materials, of the following points
regarding the items specified in the submitted application.
a. Whether it is specified as an investment policy for the relevant investment trust, under the investment
trust contract provisions, that the ratio of the total value of specified real estate assets (as specified
under Article 83-2-3(2)(i) of the act for special tax measures) to the total value of specified assets
included in the trust assets of the said investment trust (hereinafter referred to as the specified realestate asset ratio in this paragraph (1)) should be 75% or higher.
b. In cases where funds are borrowed, whether the borrowed funds have been provided by qualified
institutional investors as specified under Article 2(3)(i) of the FIEA.
c. Whether the specified assets invested by the investment trust meet either of the following criteria:i) The specified real estate asset ratio is 75% or higher.
455

(When the submitted asset investment report confirms a specified real estate asset ratio of 75%
or higher, this criterion shall be deemed to be met.)ii) The specified real estate asset ratio is expected to rise to 75% or higher when the applicant trust
company, etc., acquires the real estate for which it is filing the application.
(In cases where this criterion is to be met, materials showing the status of the specified assets asof the application date shall be required to be attached to the submitted application in the format
specified in the Attached List of Formats VI-12 in order for the status to be confirmed.)
D. If the type of building section on the application for a certificate is specified as warehouse and the dateof acquisition of the ownership of the said building precedes April 1, 2015, which is the date specified in
the main clause of Article 1 of the Supplementary Provisions Law No. 9 to Partially Revise the Income
Tax and Other Laws (2015), the following actions shall be taken.
a. It shall be ensured that the application includes the ratio of the floor area used for purposes other thanwarehouse use.
b. The applicant shall be requested to attach a certificate by the Minister of Land, Infrastructure andTransport that verifies the ratio of the floor area used for purposes other than warehouse use.
(Note) It should be noted that such a certificate is not issued if the entire building is used for warehouseuse only, as the provisions in Article 83-2-3(2) of the Act for Special Tax Measures do not apply.
(ii)

Issuance of Certificate Necessary for Reduction of Real Estate Acquisition Tax
The following procedures shall be followed with regard to the issuance of the certificate, as specified under

Article 7(5) of the Order for Enforcement of the Local Tax Act, necessary for the reduction of the real estate
acquisition tax for trust companies, etc., based on Article 11(4) of the supplementary provisions of the local
tax act.
A. An application from a trust company, etc., for a certificate for the reduction of the real estate acquisition
tax and the certificate to be issued by the FSA Commissioner shall be in accordance with the format
specified in the Attached List of Formats VI-13.
B. After the application for a certificate has been submitted, the certificate shall be issued upon theconfirmation, made in reference to the attached documents and other materials, of the following points
with regard to the items specified in the submitted application.
a. Whether it is specified as an investment policy for the relevant investment trust, under the investment
trust contract provisions, that the specified real estate asset ratio should be 75% or higher.
b. In cases where funds are borrowed, whether the borrowed funds have been provided by qualified
institutional investors as specified under Article 2(3)(i) of the FIEA and designated under a relevant
ordinance of the Ministry of Internal Affairs and Communications.
c. Whether the specified assets invested by the investment trust meet either of the following criteria:i) The specified real estate asset ratio is at least 75%.
(When the submitted asset investment report confirms a specified real estate asset ratio of 75%
or higher, this criterion shall be deemed to be met.)

456ii) The specified real estate asset ratio is expected to rise to 75% or higher when the applicant trust
company, etc., acquires the real estate for which it is filing the application.
(If this criterion is to be met, materials showing the status of the specified assets as of theapplication date shall be required to be attached to the submitted application in the format
specified in the Attached List of Formats VI-12 in order for the status to be confirmed.)(2) Issuance of Certificates to Investment Corporations(i) Issuance of Certificates Necessary for Reduction of License Registration Tax Regarding Ownership Transfer
The following procedures shall be followed with regard to the issuance of the certificate, as specified under
Article 31-5(3) of the enforcement rules for the Act for Special Tax Measures, necessary for the reduction of
the license registration tax for investment corporations based on Article 83-2-3(3) of the said act.
An investment corporation seeking to become eligible for the provision of Article 83-2-3(3) of the act for
special tax measures needs to do so within one year from the acquisition of the relevant real estate.
A. An investment corporation’s application for a certificate necessary for the reduction of the license
registration tax regarding the transfer of ownership and the certificate to be issued by the directorsgeneral of Local Finance Bureaus shall be in accordance with the format specified in the Attached Listof Formats VI-14.
B. The applicant shall be required to fill out the necessary items on the application form and attach to it acopy of the relevant real estate transaction contract, in order for the dates of the signing of the contract
and the real estate acquisition to be confirmed.
C. After the application for a certificate has been submitted, the certificate shall be issued upon theconfirmation, made in reference to the attached documents and other materials, of the following points
regarding the items specified in the submitted application.
a. Whether it is specified as an asset investment policy under the internal rules that the ratio of the total
value of specified real estate assets (as specified under Article 83-2-3(3)(i) of the Act on Special
Measures Concerning Taxation) to the total value of specified assets owned by the said investment
corporation (hereinafter referred to as the specified real estate asset ratio in this paragraph (2)) shouldbe 75% or higher.
b. Whether the applicant is registered under Article 187 of the Investment Trust Act
c. In cases where funds are borrowed, whether the borrowed funds have been provided by qualified
institutional investors as specified under Article 2(3)(i) of the FIEA.
d. Whether either of the following criteria is met:i)

The specified real estate asset ratio is 75% or higher.
(When the submitted asset investment report confirms a specified real estate asset ratio of
75% or higher, this criterion shall be deemed to be met.)ii)

The specified real estate asset ratio is expected to rise to 75% or higher when the applicant
investment corporation acquires the real estate for which it is filing the application.

457

(If this criterion is to be met (including in the initial year), materials showing the status of thespecified assets as of the application date shall be required to be attached to the submitted
application in the format specified in the Attached List of Formats VI-12 in order for the confirm
the status to be confirmed.)
D. If the type of building section on the application for a certificate is specified as warehouse and the dateof acquisition of the ownership of the said building precedes April 1, 2015, which is the date specified
in the main clause of Article 1 of the Supplementary Provisions Law No. 9 to Partially Revise the Income
Tax and Other Laws (2015), the following actions shall be taken.
a. It shall be ensured that the application includes the ratio of the floor area used for purposes otherthan warehouse use.
b. The applicant shall be requested to attach a certificate by the Minister of Land, Infrastructure andTransport that verifies the ratio of the floor area used for purposes other than warehouse use.
(Note) It should be noted that such a certificate is not issued if the entire building is used for warehouseuse only, as the provisions in Article 83-2-3(3) of the Act for Special Tax Measures do not apply.
(ii)

Issuance of Certificates Necessary for Reduction of Real Estate Acquisition Tax
The following procedures shall be followed with regard to the issuance of the certificate, as specified under

Article 7(7) of the Order for Enforcement of the Local Tax Act, necessary for the reduction of the real estate
acquisition tax for investment corporations, based on Article 11(5) of the supplementary provisions of the saidact.
A. An investment corporation’s application for a certificate necessary for the reduction of the real estate
acquisition tax and the certificate to be issued by the directors-general of Local Finance Bureaus shallbe in accordance with the format specified in the Attached List of Formats VI-15.
B. After the application for a certificate has been submitted, the certificate shall be issued upon theconfirmation, made in reference to the attached documents and other materials, of the following points
regarding the items specified in the submitted application.
a. Whether it is specified as an asset investment policy under the internal rules that the specified realestate asset ratio should be 75% or higher.
b. In cases where funds are borrowed, whether the borrowed funds have been provided by qualified
institutional investors as specified under Article 2(3)(i) of the FIEA and designated under a relevant
ordinance of the Ministry of Internal Affairs and Communications.
c. Whether the specified assets invested by the investment corporation meet either of the following
criteria:i)

The specified real estate asset ratio is 75% or higher.
(When the submitted asset investment report confirms a specified real estate asset ratio of 75%
or higher, this criterion shall be deemed to be met.)ii)

The specified real estate asset ratio is expected to rise to 75% or higher when the applicant
investment corporation acquires the real estate for which it is filing the application.

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(If this criterion is to be met (including in the initial year), materials showing the status of thespecified assets as of the application date shall be required to be attached to the submitted
application in the format specified in the Attached List of Formats VI-13 in order for the status
to be confirmed.)459

VII. Supervisory Evaluation Points and Various Administrative Procedures (Investment Advisory andAgency Business)
VII-1 Governance (Investment Advisory and Agency Business)
Supervisors shall pay attention to the following points when examining the governance of Financial Instruments
Business Operators (limited to business operators engaging in investment advisory and agency business; the same
shall apply in VII).
VII-1-1 Officers of Financial Instruments Business Operators(1) Major Supervisory Viewpoints
Whether the Financial Instruments Business Operator properly takes account of the following eligibility
requirements in the decision-making process regarding proposals for the appointment of its officers.
(i)

A person who does not meet any of the ineligibility criteria (Article 29-4(1)(ii)(a) to (i) of the FIEA) and

who did not meet any of them at the time of registration.
(ii)

A person who has not violated laws and regulations regarding financial instruments business or related

business operations of the FIEA, or a person who has not been subjected to administrative actions taken basedon laws and regulations.
(iii)

A person who has not damaged the interests of investors in relation to the conduct of the investment

advisory and agency business and the investment management business.
(iv)

A person who has not engaged in an illegal or markedly inappropriate act, under particularly grave

circumstances, regarding financial instruments business.
(2) Supervisory Method and Actions
In cases where an officer of a Financial Instruments Business Operator is deemed to meet the ineligibility criteria
specified under any of Article 29-4(1)(ii)(a) to (i) of the FIEA or is found to have done so at the time when thebusiness operator obtained registration under Article 29 of the FIEA, or where an officer of a Financial Instruments
Business Operator is deemed to meet the ineligibility criteria specified under any of Article 52 (1) (vii) and (ix) and(x) of the FIEA, supervisors shall consider taking actions such as ordering the dismissal of the said officer based on
Article 52(2) of the FIEA.
In addition, they shall hold an in-depth hearing regarding the decision-making process concerning the proposal
for the appointment of the said officer and, when necessary, require the submission of a report based on Article 562(1) of the FIEA. Furthermore, supervisors shall consider taking actions such as issuing an order for business
improvement if the Financial Instruments Business Operator’s control environment for governance is deemed tohave a serious problem and the action is deemed to be necessary and appropriate from the viewpoint of protecting
public interests and investors.

460

VII-1-2 Adequate Staffing, etc. for Properly Conducting Financial Instruments Business(1) Major Supervisory Viewpoints
Supervisors shall examine whether Financial Instruments Business Operators are adequately staffed to properly
conduct financial instruments business (limited to investment advisory and agency business; the same shall apply
to VII), in light of VII-3-1, and whether the operators have established the structure/system required for operating
financial instruments business appropriately.
(2) Supervisory Method and Actions
The provisions under VII-3-1 are part of a comprehensive set of elements that supervisors should take into
consideration when examining whether a Financial Instruments Business Operator is adequately staffed to properly
conduct financial instruments business, etc. Even if an officer or an employee is deemed to not meet therequirements, it should not automatically lead to the conclusion that the Financial Instruments Business Operator is
not adequately staffed, etc. The important thing is, first and foremost, that Financial Instruments Business Operators
strive to ensure on their own responsibility that they are adequately staffed, etc. in light of these requirements andother elements.
However, supervisors shall hold in-depth hearings regarding Financial Instruments Business Operators’ view on
their staffing, etc. and their decision-making process concerning the proposed appointments of officers andemployees, in cases where a Financial Instruments Business Operator is deemed to have failed to take those elements
into consideration sufficiently in the said decision-making process and where it is deemed to be necessary andappropriate from the viewpoint of protecting the public interest and investors to hold such hearings. In addition,
they shall require the submission of reports based on Article 56-2(1) of the FIEA when necessary.
Supervisors shall consider taking actions such as issuing an order for business improvement under Article 51 of
the FIEA, in cases where the Financial Instruments Business Operator’s control environment for governance isdeemed to have a serious problem as a result of the examination of the submitted report, and where the action isdeemed to be necessary and appropriate from the viewpoint of protecting public interests and investors.
Furthermore, when the Financial Instruments Business Operator is deemed to be not adequately staffed toproperly conduct financial instruments business, etc. as a result of the examination of the submitted report,
supervisors shall consider taking necessary measures, including issuing an order for business suspension based on
Article 52(1) of the FIEA.
It should be noted that if the Financial Instruments Business Operator is an individual person, supervisors shall
examine the qualifications of the person from the above viewpoints, and as with the case of a corporation, they shalljudge whether the person is sufficiently qualified, etc.to properly operate financial instruments business and takenecessary supervisory actions.

461

VII-2 Appropriateness of Business Operations (Investment Advisory and Agency Business)
Supervisors shall examine the appropriateness of Financial Instruments Business Operators’ business operations
by paying attention to the following points.
VII-2-1 Appropriateness of Business Operations Related to Investment Advisory BusinessVII-2-1-1 Control Environment for Legal Compliance
Investment advisory business operators (Financial Instruments Business Operators engaging in investment
advisory business (as specified under Article 2(8)(xi) of the FIEA; the same shall apply in VII); the same shall apply
in VII) have the function of contributing to the buildup of customers’ assets by providing them with information
regarding investment decisions based on the analysis of the values of securities, financial products and other items.
Therefore, investment advisory business operators are required to conduct their business in a conscientious mannerby putting the top priority on customers’ interests and maintaining sound and appropriate business operations witha high level of self-discipline.
Investment advisory business operators’ control environments for legal compliance shall basically be examinedbased on the supervisory viewpoints and methods specified in III-2-1. However, they shall also be examined inrelation to a broad range of matters, including the status of compliance with voluntary regulatory rules.
(Note) When an investment advisory business operator explains details of securities with an intention, purpose,etc. to have customers acquire the securities for the sake of the issuer, it should be noted that the operator
is handling a public offering or a private placement of securities and classified as a Type I or II Financial
Instruments Business Operator. It should be noted, for example, that if the operator has explained specificproduct details about the securities, and has received reward, directly or indirectly, whose payment is linked
to customers' acquisition of the relevant securities, such an act is deemed Type I or Type II Financial
Instruments BusinessVII-2-1-2 Control Environment for Customer Solicitation and Explanations(1) Prohibition of Advertisements Using Exaggerated Descriptions(i)When the investment advisory business operator includes the results of its investment advice regarding

specific issues in its advertisements, whether it cites only issues for which results are favorable.
(ii)

Whether the investment advisory business operator includes in its advertisements descriptions indicatingthat the results, contents and method of its investment advice are markedly superior to those of otherinvestment advisory business operators without providing the basis therefor.
(iii)

Whether the advertisement does not use descriptions that could mislead users to believe that the customer

solicitation period and the number of customers to be accepted are limited whereas in reality they are notlimited.
(iv)

In cases where the investment advisory business operator has not obtained registration regarding

investment management business, whether its advertisements include representations that could lead investors462

to erroneously believe that it can engage in investment management business.
(2) Points of Attention Regarding Provision of Pre-Contract Documents and Provision of Documents at Contract
Signing
Regarding the matters set forth in Article 95(1)(ii) and (iv) and Article 106(1)(vi) and (vii) of the FIB Cabinet
Office Ordinance, when the name of the department that conducts the analysis of the values, etc. of financial
instruments or makes investment decisions based on this analysis or the department that performs the operations isentered in lieu of the name of the analyst, etc. or the name of the person who performs the advisory service basedon an investment advisory contract, as “a system which enables prompt responses to the customer’s inquiries,” aninvestment advisory business operator may be considered to have developed a system under which records on namesof the analysts, etc. or the persons who perform the advisory service are appropriately created and stored and prompt
responses can be made to customers’ inquiries by checking relevant records.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding an investment advisory business
operator’s advertisements, through daily supervisory administration or the reporting of problematic conduct, theyshall identify and keep track of the status of voluntary improvement made by the investment advisory business
operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on Article 562(1) of the FIEA. When the investment advisory business operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing an orderfor business improvement based on Article 51 of the FIEA. When the investment advisory business operator isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including the issuance of an order for business suspension based on Article 52(1) of the FIEA.
VII-2-1-3 Cancellation of Investment Advisory Contracts (Cooling-Off Rule)(1) Points of Attention Regarding Cancellation of Investment Advisory Contracts(i)

The “usual expenses necessary for the signing of an investment advisory contract,” as specified under

Article 115(1)(i) of the FIB Cabinet Office Ordinance, include the costs of communications using telephone
calls, mail and other means, but do not include travel expenses.
(ii)

The calculation of the “the number of dates between the receipt of the documents provided at the time of

the contract signing and the cancellation date,” as specified under Article 115(1)(iii) of the FIB Cabinet Office
Ordinance, should include the days on which the documents are received and the "time of cancellation" as
specified under Article 115(1)(i) of the FIB Cabinet Office Ordinance.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding an investment advisory business
operator’s cooling-off rules, through daily supervisory administration or the reporting of problematic conduct, they463

shall identify and keep track of the status of voluntary improvement made by the investment advisory business
operator by holding in-depth hearings and, when necessary, requiring the submission of reports based on Article 562(1) of the FIEA. When the investment advisory business operator is deemed to have a serious problem from theviewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing an orderfor business improvement based on Article 51 of the FIEA. When the investment advisory business operator isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including the issuance of an order for business suspension based on Article 52(1) of the FIEA.
VII-2-1-4 Duty of Loyalty and Measures to Prevent Internal Collusion(1) Points of Attention Regarding Investment Advisory Business Operators Engaging in Two or More Types ofBusiness
When supervisors examine the appropriateness of measures taken by an investment advisory business operator
engaging in two or more types of business (as specified under Article 29-2(1)(v) of the FIEA) to prevent internal
collusion, they shall pay attention to the following points, for example, depending on the nature of its business, fromthe viewpoint of preventing conflicts of interest and ensuring the appropriateness of business operations in other
ways.
(i)

Whether the investment advisory business operator has taken appropriate measures to prevent collusion

between its different types of business, such as establishing an internal control system and procedures for theprevention of such collusion in a manner suited to the nature of its business.
(ii)

Regarding the “non-disclosure information,” as specified under Article 147(ii) of the FIB Cabinet Office

Ordinance, whether the investment advisory business operator has put in place information management
measures, such as the appointment of a relevant manager and the establishment of management rules, andensures the effectiveness of information management by, for example, properly identifying and examining thestatus of the usage of the non-disclosure information and revising the management method as necessary.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding measures taken by an investment
advisory business operator engaging in two or more types of business to prevent internal collusion, through daily
supervisory administration or the reporting of problematic conduct, they shall identify and keep track of the status
of voluntary improvement made by the investment advisory business operator by holding in-depth hearings and,
when necessary, requiring the submission of reports based on Article 56-2(1) of the FIEA. When the investment
advisory business operator is deemed to have a serious problem from the viewpoint of protecting public interestsand investors, the supervisors shall take actions, including issuing an order for business improvement based on
Article 51 of the FIEA. When the investment advisory business operator is deemed to have committed a serious andmalicious violation of law, the supervisors shall consider necessary actions, including the issuance of an order forbusiness suspension based on Article 52(1) of the FIEA.

464

VII-2-1-5 Measures to Prevent Legal Violations by Agency/Brokerage Service Providers
When investment advisory business operators entrust business operations to agency/brokerage service providers,
it is important that they provide the service providers with guidance regarding the establishment of arrangements
and procedures for customer due diligence that enable precise identification of the attributes of customers and theactual state of transactions, from the viewpoint of ensuring the implementation of appropriate investment solicitation
suited to customer attributes. In addition, they should require the agency/brokerage service providers to ensure
thorough legal compliance based on the examination of the actual status of their investment solicitation. Supervisors
shall examine an investment advisory business operator’s control environment for the prevention of legal violations
by agency/brokerage service providers by paying attention to the following points in particular:(1) Selection of Agency/Brokerage Service Providers(i)

Points of Attention Regarding Selection of Agency/Brokerage Service Providers
A. When signing contracts for entrusting agency/brokerage services, whether the investment advisorybusiness operator specifies the significance of the entrustment in relation to governance, identifies thevarious risks involved therein and conducts sufficient deliberations on the method of risk management.
B. Whether the investment advisory business operator conducts sufficient deliberations on whether theagency/brokerage service providers have sufficient qualifications to conduct the entrusted business
operations in a sound and appropriate manner. In cases where the agency/brokerage service providers
concurrently engage in other services in particular, whether the investment advisory business operator
not only examines the possibility of the nature of the other services damaging public confidence in theservice providers, but also conducts sufficient deliberations from the viewpoint of reputational risk forthe primary business operator. (The “primary business operator” refers to an investment advisorybusiness operator which signs investment advisory contracts through agency/brokerage services
provided by agency/brokerage service providers. The same shall apply in VII.)(2) Measures Taken by Primary Business Operators to Ensure the Appropriateness of Agency/Brokerage Service
Providers(i)

Development of Internal Control Environment for Supervising Agency/Brokerage Service Providers
A. Whether the primary business operator has developed a control environment for ensuring appropriate
supervision of agency/brokerage service providers through measures such as establishing a division
responsible for the implementation of measures to ensure the sound and appropriate conduct of business
operations related to agency/brokerage services or appointing a person responsible therefor (including
a control environment regarding audits of the business operations of agency/brokerage service
providers).
B. Whether the primary business operator has developed an internal control environment for examining
whether the said division or person has taken proper measures to ensure the appropriateness of thebusiness operations related to the agency/brokerage services.

(ii)

Points of Attention Regarding Measures to Ensure Necessary and Appropriate Supervision of465

Agency/Brokerage Service Providers
A. Whether the primary business operator has taken the following measures in order to ensure a sound andappropriate conduct of business operations related agency/brokerage services and monitors the status of
the conduct of the business operations.
a. To provide guidance regarding business operations related to agency/brokerage services tobrokerage service providers and their employees and implement training programs intended toensure their compliance with laws and regulations regarding the agency/brokerage services.
b. Measures to ensure necessary and appropriate supervision of agency/brokerage service providers,such as examining periodically or as necessary whether the service providers properly conduct theservices, including investment solicitation, and requiring them to make improvement whennecessary.
B. Whether the primary business operator has developed a control environment that ensures the results of
the above monitoring are examined by its division in charge and reported to the management team whennecessary, so that they are reflected in the provision of appropriate guidance by the primary business
operator and in the conduct of business operations by agency/brokerage service providers.
(iii) Measures to Cancel Contracts for Entrusting Agency/Brokerage Services
Whether the primary business operator has developed a control environment for implementing appropriate
measures, such as providing guidance to agency/brokerage service providers and canceling contracts for
entrusting agency/brokerage services, when a problem has been found as a result of the monitoring ofagency/brokerage service providers. In addition, whether it has developed a control environment for properly
protecting customers when canceling the entrustment contract.
(iv)

Whether the primary business operator has established arrangements and procedures for responding tocomplaints, such as specifying the contact point for customer complaints regarding agency/brokerage services,establishing a division in charge of processing complaints, and prescribing procedures for processing
complaints.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding a primary business operator’s
selection of agency/brokerage service providers and its measures to ensure the appropriateness of their business
operations, through daily supervisory administration or the reporting of problematic conduct, they shall identify andkeep track of the status of voluntary improvement made by the primary business operator and the service providers
by holding in-depth hearings and, when necessary, requiring the submission of reports based on Article 56-2(1) of
the FIEA. When the primary business operator and the service providers are deemed to have a serious problem fromthe viewpoint of protecting public interests and investors, the supervisors shall take actions, including issuing anorder for business improvement based on Article 51 of the FIEA. When the primary business operator and theservice providers are deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including the issuance of an order for business suspension based on Article 52(1) of the
FIEA.
466

VII-2-2 Appropriateness of Business Operations Related to Agency/Brokerage Services
Supervisors shall examine the appropriateness of agency/brokerage service providers with due consideration of
the following supervisory viewpoints, for example. It should be noted that the validity of measures to ensure theappropriateness of the business operations of agency/brokerage service providers need to be examined from acomprehensive perspective, in light of the nature and size of their business and their status of concurrent engagement
in different types of business, and that failure to meet some of the criteria included in the supervisory evaluation
points should not automatically be deemed to mean that their business operations are inappropriate.
VII-2-2-1 Control Environment for Legal Compliance
The establishment of the framework for agency/brokerage services is expected to contribute to securing andimproving investors’ access to investment services and facilitate efficient use of various sales channels, including
Financial Instruments Business Operators. On the other hand, it is essential to maintain the sound and appropriate
management of agency/brokerage services in order to prevent illegal transactions that may be made through theabuse of a position as an ordinary business operator.
Therefore, it is important to supervise agency/brokerage service providers in a timely and appropriate mannerso as to ensure that their services are steadily conducted in an appropriate manner. In particular, it is necessary forsupervisors to make sure to prevent agency/brokerage services providers concurrently engaging in other businesses
from using inappropriate practices, such as abuse of a superior bargaining position and misappropriation of customer
information.
Agency/brokerage service providers’ control environments for legal compliance shall basically be examinedbased on the supervisory viewpoints and methods specified in III-2-1. However, they shall also be examined inrelation to a broad range of matters, including the status of compliance with voluntary regulatory rules.
VII-2-2-2 Development of Control Environment by Agency/Brokerage Service Providers(1) Major Supervisory Viewpoints(i)Whether agency/brokerage service providers ensure the conduct of appropriate business operations incompliance with laws and regulations by prescribing specific procedures for customer solicitation, theprovision of explanations of the contents of contracts and the provision of documents at the singing ofcontracts under internal rules.
(ii)

Whether agency/brokerage service providers have prescribed specific procedures for properly examining

the status of compliance with laws and regulations.
(iii)

Whether agency/brokerage service providers have secured an adequate number of personnel with

sufficient knowledge regarding its agency/brokerage services.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the development of control
467

environments by agency/brokerage services providers, through daily supervisory administration or the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by theagency/brokerage services providers by holding in-depth hearings and, when necessary, requiring the submissionof reports based on Article 56-2(1) of the FIEA. When the agency/brokerage services providers are deemed to havea serious problem from the viewpoint of protecting public interests and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51 of the FIEA. When the agency/brokerage
services providers are deemed to have committed a serious and malicious violation of law, the supervisors shallconsider necessary actions, including the issuance of an order for business suspension based on Article 52(1) of the
FIEA.
VII-2-2-3 Provision of Information to Protect Investors(1) Major Supervisory Viewpoints(i)Control Environment for Prevention of Explanations That May be Mistaken for Abuse of Superior

Bargaining Position
Whether agency/brokerage service providers concurrently engaging in other businesses have developed acontrol environment that prevents the provision of explanations that could be mistaken as an abuse of asuperior bargaining position banned under the Antimonopoly Act in relation to the agency/brokerage services
and the businesses in which they concurrently engage.
(ii)

Control Environment for Prevention of Misrecognition of Financial Products as Deposits
In cases where banks and other deposit-taking financial institutions engage in agency/brokerage services

for the signing of investment advisory and discretionary investment contracts, whether they have developed acontrol environment that prevents customers from mistakenly believing these investments to be deposits.
(iii) Control Environment for Prevention of Conflicts of Interest
In cases where agency/brokerage service providers are entrusted by discretionary investment business
operators to mediate the conclusion of discretionary investment contracts and they solicit customers for theconclusion of an investment advisory contract or provide advice, etc., to customers under an investment
advisory contract, whether they have developed a control environment to prevent conflicts of interest in which
they make explanations to customers in advance about the fact that they have concluded a contract withdiscretionary investment business operators.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding agency/brokerage service
providers’ provision of information intended to protect investors, through daily supervisory administration or thereporting of problematic conduct, they shall identify and keep track of the status of voluntary improvement madeby the agency/brokerage services providers by holding in-depth hearings and, when necessary, requiring thesubmission of reports based on Article 56-2(1) of the FIEA. When the agency/brokerage services providers are
deemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors468

shall take actions, including issuing an order for business improvement based on Article 51 of the FIEA. When theagency/brokerage services providers are deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including the issuance of an order for business suspension based on
Article 52(1) of the FIEA.
VII-2-2-4 Measures to Be Taken by Agency/Brokerage Service Providers When Undertaking Services for Two orMore Primary Business Operators(1) Explanations to Customers
When an agency/brokerage service provider undertakes services on behalf of two or more primary business
operators, whether it explains the following items to customers in advance. Whether the service provider does its
utmost to enable customers to understand the items, by using written explanations, for example.
(i)

In cases where the amount of fees to be paid by the customer is different from the amount of fees to be

paid under a similar contract with another primary business operator, the fact that there is a difference must
be explained to the customer.
(ii)

In cases where the agency/brokerage service provider acts as an agency/broker for another primarybusiness operator regarding the signing of a contract similar to the one which the customer intends to sign,
this fact must be explained to the customer.
(iii)

The contents of the similar contract described in (ii) above and other information that could be useful forthe customer must be provided upon his/her request.
(iv)

The trade name of the primary business operator which is the ultimate counterparty to the customer’stransaction must be made clear to the customer.
(2) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding measures taken by
agency/brokerage service providers when undertaking agency/brokerage services on behalf of two or more primarybusiness operators, through daily supervisory administration or the reporting of problematic conduct, they shallidentify and keep track of the status of voluntary improvement made by the agency/brokerage services providers byholding in-depth hearings and, when necessary, requiring the submission of reports based on Article 56-2(1) of the
FIEA. When the agency/brokerage services providers are deemed to have a serious problem from the viewpoint ofprotecting public interests and investors, the supervisors shall take actions, including issuing an order for business
improvement based on Article 51 of the FIEA. When the agency/brokerage services providers are deemed to havecommitted a serious and malicious violation of law, the supervisors shall consider necessary actions, including theissuance of an order for business suspension based on Article 52(1) of the FIEA.
VII-2-3 Actions to Take When Acquiring Information Regarding Continuity of BusinessNot only a juridical person but also an individual may operate a financial instruments business. In addition, since
there are no financial requirements for engaging in this business, other than the deposit for operation, financial
469

instruments business operators are excluded from the monitoring in terms of the net assets requirement or capital
adequacy requirement. Therefore, it should be noted that there is the likelihood that a financial instruments business
operator will file a petition for commencement of bankruptcy proceedings, etc. before the supervisory authorities
properly identify the business operator’s financial conditions. Furthermore, in cases where it has been identified
that, for example, a Financial Instruments Business Operator is insolvent and it could end up being unable to makepayments, supervisors must strive to confirm facts in order to fully examine the need for action from the perspectiveof protecting investors.
With this in mind, where the supervisory authorities have identified that a Financial Instruments Business
Operator could end up being unable to make payments because of insolvency, or where they have received anotification regarding the filing of a petition for commencement of bankruptcy proceedings, etc. or identified thelikelihood of the filing of such petition, they shall take the following measures in addition to those mentioned in III3-2, so as to ensure the protection of investors.
Local Finance Bureaus shall take measures that are suitable for the circumstances of each case, and shallimmediately inform the FSA of the facts regarding the case as well as what actions should be taken, thereby
coordinating such actions.
(1) Response to Cases where a Financial Instruments Business Operator is Identified as Having Financial Problems(i)Supervisors shall confirm facts by conducting hearings on the financial conditions of the subject business

operator and on the status of their contracts with customers (including contract periods, compensation, andthe preservation status of contract fees that are subject to cooling off), and they shall encourage the business
operator to formulate policies to eliminate the risk of it falling into insolvency.
(ii)

In cases where it becomes clear, as a result of a hearing, that a problem has arisen related to the protectionof investors, supervisors shall promptly issue an order for the production of a report based on Article 56-2(1)of the FIEA regarding all the facts of the case and measures for resolving the situation.
(iii) After receiving the report, supervisors shall follow up on the progress of the resolution measures, and incases where no improvements are apparent, they shall examine other actions, including issuing an order forbusiness improvement based on Article 51 of the FIEA.
(2) When Recognizing Information on the Filing of Petition for Commencement of Bankruptcy Proceedings, etc.
(i)

Supervisors shall confirm whether the financial instruments business operator has made a notification

under Article 50(1)(vii) of the FIEA, and request the business operator to quickly take measures as necessary.
(ii)

By issuing an order for production of a report under Article 56-2(1) of the FIEA, supervisors shall quickly

identify the facts regarding the case, as well as the financial instruments business operator’s financial
conditions, the status of contracts with customers (if the business operator has received deposits from customers,
the specific content thereof), how the business operator responds to customers, and the business operator’s
policy for continuing the business.
(iii)

Supervisors shall follow up the status of fulfillment of the actions reported as mentioned in (ii) above, andshall request the financial instruments business operator to brush up the policy for continuing the business. In
470such case, supervisors shall also consider issuing an order for business improvement under Article 51 of the
FIEA.
(3) When Recognizing Information on the Filing of Petition for Commencement of Bankruptcy Proceedings, etc.
by Parent Company, etc.
In cases where the party who is likely to have a material impact on the business management of a financial
instruments business operator by filing a petition for commencement of bankruptcy proceedings, etc. (hereinafterreferred to as the “parent company, etc.” in VII-2-3) has actually filed a petition for commencement of bankruptcy
proceedings, etc. against the financial instruments business operator, supervisors shall, by issuing an order for
production of a report under Article 56-2(1) of the FIEA, quickly identify the financial instruments business
operator’s financial conditions in combination with the most recent conditions of the parent company, etc., thebusiness relationships with the parent company, etc., the status of contracts with customers (if the business operator
has received deposits from customers, the specific content thereof) and the business operator’s policy for continuing
the business.
(4) When an Order of Commencement of Bankruptcy Proceedings, etc. Is Made(i)Supervisors shall confirm whether the financial instruments business operator has made a notification

under Article 50-2(1)(iv) of the FIEA, and request the business operator to quickly take actions as necessary.
(ii)

Supervisors shall try to ensure cooperation with the bankrupt trustee if it is necessary to do so from theperspective of protecting investors.
(5) When the Financial Instruments Business Operator’s Place of Business Cannot Be Ascertained
In accordance with Article 52(4) of the FIEA, if the financial instruments business operator fails to make a
notification after 30 days have passed since public notice was given regarding the fact that the business operator’splace of business cannot be ascertained, the registration of the financial instruments business operator shall be
rescinded.
(6) When Acquiring Other Information Implying the Possibility of Raising the Issue of the Continuity of Businessof a Financial Instruments Business Operator or Parent Company, etc.
(i)

Supervisors shall, through a voluntary hearing, quickly identify the facts regarding such information, as

well as the financial instruments business operator’s financial conditions, the status of contracts with customers(if the business operator has received deposits from customers, the specific content thereof), and the business
operator’s policy for continuing the business.
(ii)

In cases where the financial instruments business operator does not respond to a hearing mentioned in (i)or it is found as a result of such hearing that there is a concern over the continuity of the business of the financial
instruments business operator, supervisors shall quickly identify the facts concerned by issuing an order for
production of a report under Article 56-2(1) of the FIEA. Supervisors shall also consider issuing an order forbusiness improvement under Article 51 of the FIEA when it is necessary to do so from the perspective of471

protecting investors.

472

VII-3 Various Administrative Procedures (Investment Advisory and Agency Business)
VII-3-1 Registration(1) Items Regarding Examination of Staffing
When supervisors examine whether or not a Financial Instruments Business Operator is sufficiently staffed toproperly conduct the financial instruments business, as specified under Article 29-4(1)(i)(e) of the FIEA, they shallcheck the following points based on its application and attachments thereto as well as hearings. Note that theexamination as to whether the operator has the structure/system necessary to operate financial instruments businessappropriately, thereby falling under Article 29-4(1)(i)(f) of the FIEA, shall also be based on the following points.
(Note) When conducting examinations, supervisors shall keep in mind that the required level of staffing, etc.
could vary depending on the contents and methods of business operations specified in the documents
specifying the contents and methods of business operations.
(i)Whether it can be deemed that officers and employees with sufficient knowledge and experience havebeen secured and a sufficient organization has been established to conduct the relevant financial instruments
business in light of the following requirements:
A. Top managers must be sufficiently qualified to conduct financial instruments business in a fair andappropriate manner, in terms of their backgrounds and capabilities.
B. Managing directors must understand the viewpoints regarding governance indicated in the FIEA andvarious other laws and regulations, and have sufficient knowledge and experience to conduct governance,and sufficient knowledge and experience regarding compliance and risk management to conduct
financial instruments business in a fair and appropriate manner.
C. Persons with sufficient knowledge and experience regarding the values of securities and financial
instruments must be secured for the position of providing advice on investment decisions based on theanalysis of the values of securities or financial instruments and other items.
D. The Financial Instruments Business Operator must be staffed and organized so that personnel necessary
for conducting the relevant business in an appropriate manner and managers in charge of internal control
are appropriately allocated.
E. Persons with sufficient knowledge and experience to be in charge of compliance must be secured.
F. Staff capable of conducting the following processes should be secured with regard to the relevantbusiness.
a. Compilation and management of account documents, reports and other documents.
b. Disclosurec. Risk managementd. Computer system management
e. Customer management
f. Advertisement screening
g. Customer information management473

h. Processing of complaints and resolution of disputesi.
(ii)Internal audits

When the qualifications of employees and officers are examined in a comprehensive manner in relation

to the following criteria regarding organized crime groups, their members and financial crimes, whether thereis the risk that public confidence in the financial instruments business could be damaged because of the
inclusion of officers and employees with inappropriate qualifications among its staff.
A. Officers and employees should not be current or former members of organized crime groups.
B. Officers and employees should not have close relationships with organized crime groups.
C. Officers and employees should not have the experience of being sentenced to a fine for violation of the
FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
D. Officers and employees should not have the experience of being sentenced to a fine (including similar
punishments imposed under foreign laws and regulations equivalent thereto) for violation of the Act on
Prevention of Unjust Acts by Organized Crime Group Members (excluding the provisions of Article 322(7) of the same act) or other foreign laws and regulations equivalent thereto, or for committing a crimeprescribed under the Penal Code or under the Act on Punishment of Physical Violence and Others.
E. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion as well as attempts at these crimes).)(Note) If the Financial Instruments Business Operator is an individual, the qualifications of the individual
shall be examined in light of the items specified in (i) and (ii) above.
(iii) When there are any persons who are excluded from the category of a person who makes investment
decisions based on the analysis of the values, etc. of financial instruments pursuant to the provisions of Article
6(2) of the FIB Cabinet Office Ordinance, whether or not it is found that the system can properly manage
relevant persons in light of the following matters:
A. A system is developed for enabling prompt responses to customers’ inquiries or otherwise names of
relevant persons are properly ascertained on a timely basis.
B. In cases where such person falls under any of the provisions of Article 29-4, Paragraph 1, Item 2, Subitems (a) through (I) of the Act, appropriate management of its business status, such as appropriate
disciplinary action, shall be conducted, and internal procedures and rules for this purpose shall beestablished;
C. A system is developed for examining the status of performance of operations by relevant persons ex post
facto.
(2) Points of Attention in Determining Whether Registration is Necessary
Judgment as to whether registration is necessary should be made from a comprehensive viewpoint, with thesignificance of a specific activity to be considered in the context of the full range of activities related to investment474

advisory and agency businesses. Therefore, it should be kept in mind that it would not be appropriate to conclude
that a certain business operator does not need to be registered on the basis of the results of the examination of someparts of the full range of activities.
(i) Cases Not Requiring Registration
A. Cases to which Article 61-1 of the FIEA Is Applicable
Cases where a corporation which has been established based on foreign laws and regulations andwhich engages in investment advisory business abroad or an individual person whose residence islocated in a foreign country and who engages in investment advisory business abroad seeks to provide
investment advisory service exclusively to business operators engaging in investment managementbusiness and those designated under the FIEA Enforcement Order.
B. Cases to which Article 50-2(3) of the FIEA Is Applicable
Cases where a business operator which is allowed to engage in investment advisory business basedon Article 50-2(3) of the FIEA provides investment advisory service for a specified period of time.
(ii) Activities Not Deemed to Fall under Category of Investment Advisory and Agency Services
A. Provision of Investment Decision Information Based on Analysis of Values of Securities and Financial
Products (hereinafter referred to as “investment information, etc.”) to Unspecified People through
Methods that May Be Used Thereby as Necessary
For example, business operators which provide investment information, etc., through the methods
described in a to c below are not required to be registered as investment advisory and agency business
operators.
However, it should be kept well in mind that in cases where business operators provide investment
information, etc., of a specific nature to unspecified people by taking advantage of the Internet and otheradvanced information technologies and where they allow access to the information only to registeredmembers (not allow one-off access), registration is required.
a. Sales of Newspapers, Magazines, Books, etc.
(Note) Cases where newspapers, magazines and books containing investment information, etc.,
are displayed in bookstores and other shops for purchase by any person at any time basedon the judgment on their contents shall not be deemed to fall under the category of activities
regarding investment advisory service. On the other hand, it should be kept in mind that
registration may be necessary in cases where a business operator sells reports containing
investment information, etc., on a subscription basis.
b. Sales of Investment Analysis Tools and Other Computer Software Products(Note) Cases where investment analysis tools and other software products are offered throughInternet-based downloading sales services for purchase by any person, based on the
judgment on the algorithm and other investment analysis functions of the products, shall not
be deemed to fall under the category of investment advisory service. On the other hand, itshould be kept in mind that registration may be necessary in cases where the use of the475software products requires continuous support from the seller, such as the provision of
investment information, etc.
c. Provision of advice on the value of financial products(Note) Providing advice on the value of financial products other than securities, the premium of
options, and the trend of indexes without providing advice regarding investment decisions
based on the analysis thereof or without signing an agreement on the payment of fees shallnot be deemed to fall under the category of investment advisory services.
Providing advice on the average temperature in Japan this winter, for example, shall not
be deemed to fall under the category of investment advisory service.
B. Activities Not Constituting Brokerage for Signing of Discretionary Investment Contract
In cases where business operators undertake activities which do not constitute a brokerage service,on behalf of investment advisory business operators and discretionary investment business operators,
they are not required to be registered as investment advisory/agency business operators.
For example, business operators which undertake only some of the clerical processes related to theactivities described in a to c below on behalf of investment advisory business operators and discretionary
investment business operators may not be required to be registered as investment advisory/agency
business operators.
a. Distribution and Provision of Fliers, Pamphlets, Contract application Forms, etc.
(Note) It should be kept in mind that although merely notifying customers of the trade names ofinvestment advisory business operators and discretionary investment business operators andtheir contacts does not constitute a brokerage service, explaining how to fill out documents
distributed and provided to customers may be deemed to constitute a brokerage service.
b. Receipt and Collection of Contract Applications, Attached Documents, etc. (excluding cases
where the business operator checks the contents of the documents)(Note) It should be kept in mind that in cases where the business operator not only points out
technical errors in the application form or failure to attach necessary documents whencollecting them from customers but also checks the contents of the application form andother documents, the activity may be deemed to constitute a brokerage service.
c. General explanations provided at seminars for financial instruments with regard to the structures,schemes and the utilization methods of financial instruments
VII-3-2 Points of Attention Regarding Depositing of Deposits for Operation(1) When supervisors have received the original of a statement of deposit submitted by investment advisory/agency
business operators after they have deposited a new deposit for operation in order to replace the existing deposit, thesupervisors shall implement the procedures for the certification of the return of the original of the statement ofdeposit in their custody, in accordance with the format specified in the Attached List of Formats V-I, and return itto the business operators.
476

(2) When supervisors have received the original of a certificate of receipt submitted by investment advisor/agency
business operators after they have submitted a request for substitute deposit/additional deposit in order to substituteredemption funds for deposited securities, the supervisors shall provide a certificate of custody in accordance with(5) below and return the original of the statement of deposit already in their custody to the business operators.
(3) When supervisors have received an application from investment advisory/agency business operators for arevision of the contents of a substitute contract for a deposit for operation or for the cancellation of such a contract,they shall grant approval in the approval form regarding deposit contract revision as specified in the Attached Listof Formats V-2 and in the approval form regarding deposit contract cancellation as specified in the Attached List ofFormats V-3, if it is deemed that the revision/cancellation does not lead to insufficient protection of investors.
(4) The public notification of the retrieval of deposits for operation shall be made in the format specified in the
Attached List of Formats V-4.
(5) When supervisors have received the original of a statement of deposit, they shall provide a certificate of custodyin the format specified in the Attached List of Formats V-5.
(6) Supervisors shall ensure that all applicants for registration are aware of the possibility that in cases where
government bonds are deposited as deposits for operation based on Article 31-2(9) of the FIEA, deposits could
become invalid after a certain period of time due to the statute of limitations under the Act Concerning Government
Bonds.
VII-3-3 Account Documents Related to Investment Advisory Business(1)

Supervisors shall pay attention to the following points when preparing a document containing the content ofadvice given under an investment advisory contract.
(i) A document stating the content of the advice provided based on an investment advisory contract shall containthe date of providing the advice, the person who provided the advice, the customer to whom the advice wasprovided, and the issue and order category (sell or purchase).
(ii) In cases where advice under an investment advisory contract is provided in writing, a copy of such document(including electronic media on which the content of advice is recorded) shall be retained.
In cases where advice under an investment advisory contract is provided via the Internet, such as e-mail andSNS (a membership service on a website through which registered users can communicate with each other),the content of advice provided to customers shall be recorded on electronic media and retained.
(2)

Pursuant to the provisions of Article 168 - 2 of the Cabinet Office Ordinance on Financial Instruments Business,

etc., when storing the whole or part of the content of the advice provided based on an investment advisory contract477

in the form of voice recording, in lieu of the compilation of documents, the following points shall be taken into
consideration.
(i)

The electronic media for storage in the form of voice recording should have sufficient durability to last forthe storage period prescribed in Article 157(2) and Article 181(3) of the FIB Cabinet Office Ordinance.
(ii)

It must be ensured that the system used for voice recording prevents data falsification and mishandling bysuch means as managing IDs and passwords, etc.
(iii)

It must be ensured that recordings are integrally stored and a specific one may be searched easily using

the date of advice, the adviser, and the counterparty as keywords or otherwise a system is developed for easily
examining the appropriateness of business operations ex post facto.
(iv)

Backups of voice recordings are created, and backups are managed safely based on (ii) above.

(v)

In addition to (i) to (iv) above, III-3-3(6)(v), (viii) and (ix) apply mutatis mutandis.

478

VIII. Supervisory Evaluation Points and Various Administrative Procedures (Registered Financial
Institutions)
VIII-1 Appropriateness of Business Operations (Registered Financial Institutions)III-2 (excluding III-2-3-4(2), III-2-6(1)(iii)/(v), III-2-8(3) and III-2-15), IV-1-3, IV-3-1 (excluding IV-3-1-2(1),IV-3-1-4(6) and IV-3-1-5), IV-3-2-3(4) and IV-3-3 (excluding IV-3-3-1(1),(2) and (4), IV-3-3-2(4)(iii) to (viii), IV3-3-4(1) and (2), and IV-3-3-5; however, the exclusion shall not apply to registered financial institutions engaging
in foreign exchange margin trading), IV-3-5 (excluding IV-3-5-4), IV-3-6,V-2-4 (excluding V-2-4-4), V-2-5,VI-2( excluding VI-2-2-1(1)(vii) to (ix) and VI-2-2-5(2) and (3)) and VII-2 shall be applied mutatis mutandis to theexamination of the appropriateness of the business operations of registered financial institutions. In addition,
attention shall be paid to the following points.
It should be noted that regarding theoretical prices referred to in IV-3-1-2(6)(iii) A. and B. and internal rules
referred to in (iii) B. and C. in relation to financial instruments intermediary services, registeredinstitutions

may

use

pricescalculated

by

and

rules

establishedbyFinancialfinancial

Instruments

Business Operators to which their business operations are entrusted.
VIII-1-1 Appropriateness of Individual Operations(1) Whether registered financial institutions, which conduct dealing operations of government bond certificates, etc.,
short-term investment securities or asset finance-type investment securities (in the case of accounts other thanspecified trading accounts conducted by registered financial institutions which have adopted specified tradeaccounts (accounts similar to the specified trade accounts for a branch of foreign banks; the same shall apply
hereinafter)), conduct trading for the purpose of investment of securities related to the said operations in an
integrated manner. Also, whether the list of clients has been shared among the concerned parties.
(2) When a registered financial institution conducts any dealing operations in government bond certificates, etc.,
futures commission business, trading operations of short-term investment securities, or trading operations of asset
finance-type investment securities:(i)

Whether the operations and the status of assets are made clear by separating the handling of accounting

affairs and dealing with securities associated with the said operations from the handling of accounting affairs
and dealing with securities associated with other operations(ii)

Whether the following book transfers between accounts concerning securities handled in the said

operations have been conducted:
A. In cases where the registered financial institutions has not adopted specified trading accounts, booktransfers between the commodity bond account and other securities accounts in the cases.
B. In the cases where the registered financial institutions has adopted specified trading accounts, booktransfers between a trading securities account from among specified trading accounts and other securities
accounts or between the derivatives of trading securities from among specified trading accounts and479

derivatives of other trading securities accounts.
(3) In the case of a registered financial institution conducting option trading, except for the cases specified in Article
149-2 of the FIB Cabinet Office Ordinance, whether it makes efforts to disclose market indications concerning
options trading in government bond certificates with high liquidity to investors through appropriate means, such as
store displays, etc.
(4) Whether the registered financial institution compensates for financial instruments losses or offers clients
automatic credit for margins (including remargin) in order to conduct financial instruments trading.
(Note) Overdrafts fall under the category of automatic credit grants.
In such cases, the following measures shall be taken, for example:(i)

If the registered financial institution conducts futures commission business, it shall open an account forbond futures transactions and prohibit the said account having an overdraft feature, and automatic transfer froman overdraft account to the account for bond futures transactions of the same account holder shall not be
conducted.
(ii)

If the registered financial instruments institution conducts financial instruments intermediary services, it

shall not conduct financial instruments intermediary activities by providing automatic credit or by promising
to do so in order to settle a transaction conducted by a client who failed to settle due to insufficient funds inthe securities account opened for the said client in the entrusted Financial Instruments Business Operator.
(5) Regarding registered financial institutions engaged in futures commission business(i)

In the cases where transactions are conducted by using GLOBEX terminals, it shall be made clear whether

it has been stipulated to that effect in the company policy for business conduct(ii)

In dealing with payment to the account for bond futures transactions, it shall be made clear whether staff

in charge of the relevant client has been appointed in advance, the name of the client (or his/her fund manager)
has been registered, and the preliminary consent of the said client shall be obtained by phone each time payment
is made.
(6) Whether the department in charge of the overall operations (receiving orders, transactions and transfers) of aregistered financial institution that conducts transactions of short-term securities is prepared to take all possible
measures to block off the inflow/outflow of so-called subtle information between loan business, etc., and business
related to the issuance of and transactions involving commercial papers and short-term corporate bonds, etc. (shortterm corporate bonds prescribed in the Act on Transfer of Bonds, etc., short-term corporate bonds prescribed in the
Insurance Business Act, specified short-term corporate bonds prescribed in the Act on Securitization of Assets,
short-term commercial and industrial bonds prescribed in the Shoko Chukin Bank Act, short-term bonds prescribedin the Shinkin Bank Act, and short-term Norin-chukin Bank bonds prescribed in the Norin-chukin Bank Act).
(7) Whether registered financial institutions that sell securities-related products:
480

(i)

Take necessary measures to avoid misleading clients when soliciting them to sell a set of deposit products

and securities-related products(ii) Explain fully to clients about risks, such as price fluctuations and differing deposits, when sellingsecurities-related products, such as investment trusts, etc.
(8) Regarding registered financial institutions that conduct financial instruments intermediary services.
(i)

Whether it is provided that officers or employees, etc., who control a division which conducts bothfinancial instruments intermediary services and loan business, financial institution agency service operations,or deposit, etc. intermediary business operations (limited to those handling non-public loan information, etc.,
of clients, who are the issuers of securities; the same shall apply in (8) and VIII-2-1-(2)-(vi)):
A. shall not provide non-public loan information obtained from a person engaged in loan business, financial
institution agency service operations, or deposit, etc. intermediary business operations to a person
engaged in financial instruments intermediary services;
B. shall not use non-public loan information obtained from a person engaged in financial instrumentsintermediary services for the purpose of loan business, financial institution agency service operations,or deposit, etc. intermediary business operations, or shall not provide such information to a person
engaged in loan business, financial institution agency service operations, or deposit, etc. intermediarybusiness operations.
(ii)

Whether internal administrators (referring to internal administrators prescribed in the self-regulatory

regulations of the Japan Securities Dealers Association, entitled "Regulations Concerning Internal
Administrators, etc., of Association Members") appropriately control exchanges of information pertaining toloan business, financial institution agency service operations, or deposit, etc. intermediary business operations
that is to be given to clients for the purpose of legal compliance of those engaged in financial instrumentsintermediary services, as well as exchanges of customer information with entrusted Financial Instruments
Business Operators for the purpose of conducting financial instruments intermediary services and the purposeof legal compliance of entrusted Financial Instruments Business Operators.
(9) Regarding the department supervising private management and implementation of securities, whether theregistered financial institution that handles the private management of securities takes all possible organizational
measures to block off the flow of so-called subtle information pertaining to loans and securities to and from theinvestment division and bond management division; provided, however, that this shall not apply when conducting
any activities deemed applicable to the handling of private management of securities prescribed in Article 15,
paragraph 3 of the FIEA Enforcement Order.
(10) In the cases where an insurance company acting as a registered financial institution has any employee, asprescribed in each item of Article 15-2(2) of the FIEA Enforcement Order (excluding (iii) (hereinafter referred toas the “representative” in (10)), who conducts the specified financial instruments business prescribed in Article 338(2) of the FIEA, the insurance company may entrust the representative office to which the said representative481

belongs to support for the said specified financial instruments business.
(11) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding the appropriateness of a registeredfinancial institution’s specific business operations, through daily supervisory administration or the reporting of
problematic conduct, they shall identify and keep track of the status of voluntary improvement made by theregistered financial institution by holding in-depth hearings and, when necessary, requiring the submission of reports
based on Article 56-2(1) of the FIEA. When the registered financial institution is deemed to have a serious problem
from the viewpoint of protecting public interests and investors, the supervisors shall take actions, including issuingan order for business improvement based on Article 51-2 of the FIEA. When the registered financial institution isdeemed to have committed a serious and malicious violation of law, the supervisors shall consider necessary actions,
including the issuance of an order for business suspension based on Article 52-2(1) of the FIEA.
VIII-1-2 Risk Management Framework Related to Non-Cleared Over-The-Counter Derivative Transactions
Whether a registered financial institution (including those for whom the average total notional amount ofoutstanding non-cleared over-the-counter derivative transactions is less than 300 billion yen that falls under Article
123, paragraph (11), item(iv)B of the FIB Cabinet Office Ordinance) has made efforts to develop a framework for
managing counterparty risks in non-cleared over-the-counter derivatives with financial institutions by exchanging
variation margin.
In addition, whether a registered financial institution subject to the provisions of Article 123, paragraph (1), item
(xxi-ix) (initial margin) of the FIB Cabinet Office Ordinance has made efforts to develop a framework for managing
counterparty risks in non-cleared over-the-counter derivative transactions subject to that provision, including by
exchanging initial margin.
Refer to IV-2-4 (4), etc. for specific supervisory viewpoints.
VIII-1-3 Prevention of Abuse of Superior Bargaining Position(1) Abuse of Superior Bargaining Position by Business Operators Engaging in Two or More Businesses
Supervision of abuse of a superior bargaining position by business operators concurrently engaging in two or
more businesses must be conducted with due consideration of “Regarding Unfair Trading Practices Following
Loosening of Financial Institutions’ Business Categories and Expansion of Business Scope,” a document issued on
December 1, 2004 by the Fair Trade Commission. For example, the following practices may constitute an abuse of
superior bargaining position by business operators concurrently engaging in two or more businesses, so attention
shall be paid thereto. In cases where an employee of a registered financial institution concurrently holds office atanother financial institution, etc. attention is also paid to whether he/she abuses the superior bargaining position
arising from the business of such other financial institution, etc. where he/she holds office.
(i)Whether the registered financial institution effectively forces customers to sign financial instruments

transaction contracts by implying that it will suspend loans or transactions related to other businesses it482

concurrently undertakes, or give unfavorable treatment to them unless they sign the contracts.
(ii)

Whether the registered financial institution effectively forces customers to sign financial instruments

transaction contracts by requesting them to do so when it makes transactions with them regarding businesses
it concurrently undertakes.
(iii)

In cases where customers intend to sign contracts with business competitors of the registered financial

institution, whether the financial institution tries to prevent the signing of the said contracts by implying it
will suspend transactions with them regarding businesses it concurrently undertakes or give unfavorable
treatment to them.
(iv)

Whether the registered financial institution effectively forces customers to refrain from signing contracts

with its competitors by requesting them to do so when it makes transactions with them regarding businesses
it concurrently undertakes.
(2) Points of Attention Regarding Abuse of Superior Bargaining Position
Supervisors shall examine a registered financial institution’s control environment for the prevention of abuse of
a superior bargaining position by paying attention to the following points:(i)

Whether the registered financial institution has established a division responsible for the implementationof measures to prevent the said abuse or appointed a person responsible therefor and developed an internal
control environment for examining whether the said division or person is properly implementing theprevention measures.
(ii)

Whether the registered financial institution provides training periodically and as necessary, with persons

with knowledge and practical experiences regarding its businesses as trainers, in order to prevent the said
abuse.
(iii)

Whether the registered financial institution has established arrangements and procedures for responding

to complaints, such as specifying the contact point for customer complaints regarding the said abuse,
establishing a division in charge of processing complaints and prescribing procedures for processing
complaints.
(3) Supervisory Method and Actions
When supervisors have recognized an issue of supervisory concern regarding abuse of a superior position by aregistered financial institution concurrently engaging in two or more businesses, through daily supervisoryadministration or the reporting of problematic conduct, they shall identify and keep track of the status of voluntary
improvement made by the registered financial institution by holding in-depth hearings and, when necessary,
requiring the submission of reports based on Article 56-2(1) of the FIEA. When the registered financial institution
is deemed to have a serious problem from the viewpoint of protecting public interests and investors, the supervisors
shall take actions, including issuing an order for business improvement based on Article 51(2) of the FIEA. Whenthe registered financial institution is deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including the issuance of an order for business suspension based on
Article 52-2(1) of the FIEA.
483

VIII-1-4 Points of Attention Regarding Supervision of Non-Affiliated But Registered Financial Institutions(1) Major Supervisory Viewpoints(i) In the case of a Registred Financial Institution that does not have membership in any Financial Instruments
Firms’ Association (hereinafter referred to as “Non-Affiliated Registered Financial Institution”), whether it
has developed internal rules that are in line with Rules Set by Associations, etc.
(ii) Whether the Non-Affiliated Registered Financial Institution has developed a control environment that
ensures appropriate compliance with internal rules (e.g., information sharing among officers, information
sessions for employees and examination of status of compliance).
(iii) When Rules Set by Associations, etc. have been revised, whether the Non-Affiliated Registered Financial
Institution makes sure to quickly review and revise internal rules accordingly.
(2) Supervisory Method and Actions
If a problem is found regarding the creation and revision of internal rules at a Non-Affiliated Registered
Financial Institution and its status of compliance, supervisors shall conduct in-depth inquiry and, if necessary, havethe operator submit a report based on provisions of Article 56-2(1) of FIEA to look into the status of spontaneous
efforts to improve the situation at the said financial institution. When the operator is deemed to have a serious
problem from the viewpoint of protecting the public interest and investors, the supervisors shall take actions,
including issuing an order for business improvement based on Article 51-2 of the FIEA. Further, if, after requesting
for a report, an operator is not confirmed to have introduced internal rules that are in line with Rule Set by
Associations, etc., or that it has failed to introduce a system to ensure compliance with the relevant internal rules,
supervisors shall consider necessary responses, including issuance of a Business Improvement Order based onprovisions of Article 52-2(1) of FIEA.

484

VIII-2 Various Administrative Procedures (Registered Financial Institutions)
VIII-2-1 Registration
III-3-1 (excluding (1) and (4)), VI-3-1 (excluding VI-3-1-2) and VII-3-1 shall be applied mutatis mutandis to
the treatment of registration applications from financial institutions, and attention shall also be paid to the following
points. It should be noted that terms used in the relevant formats specified in the Attached List of Formats shallbe replaced as necessary.
(1) Registration Numbers
The registration numbers to be recorded in a registry of financial institutions shall be specified as follows:
Example) Director-General of XX Local Finance Bureau (Registered Financial Institution) No. XX(2) Items Regarding Examination of Staffing
When examining whether or not a registered financial institution is sufficiently staffed to properly conduct thebusiness of registered financial institutions as specified under Article 33-5(1)(iii) of the FIEA, supervisors shallcheck the following points based on the submitted registration application and attachments thereto as well as ahearing. Note that the examination as to whether the operator does not have structure/system necessary to operate
financial instruments business appropriately, thereby falling under Article 33-5(1)(v) of the FIEA, shall also bebased on the following points.
(i)

Whether the registered financial institution is staffed and organized so that personnel necessary for

conducting relevant business in an appropriate manner are allocated to individual divisions and managers incharge of internal control are appropriately allocated.
(ii)

Whether personnel capable of conducting the following processes have been secured with regard to therelevant business.
A. Compilation and management of account documents and reports.
B. Disclosure
C. Segregated management of customer assets
D. Risk Management
E. Computer system management
F. Trading management, customer management
G. Processing of complaints and disputes
H. Internal audits(iii)

Whether the financial institution’s staff includes two or more permanent officers or employees with morethan three years of experiences regarding securities-related businesses. Financial institutions which engage inover-the-counter sales of government bonds without undertaking underwriting and those which engage inbrokerage for clearing of government bonds without undertaking underwriting shall be deemed to meet thisrequirement, if their staff include two or more persons with sufficient knowledge and experience to conduct
the relevant business operations properly. It should be noted that in cases where a financial institution, after485

obtaining registration, starts securities-related businesses which it did not initially undertake, compliance withthis requirement shall be checked again.
(iv)

Whether the financial institution ensures that at sales branches handling any of government bond dealing

operations in general, short-term securities trading operations in general, or asset finance-type securities
trading operations in general, the organization, responsibilities and authorities regarding the said operations
are clearly separated and independent from those regarding trading of these securities for the investment
purpose and loan business, and whether it ensures that at such sales branches, employees handling the said
operations do not concurrently engage in loan business or securities trading for the purpose of investment.
(v)

Regarding a financial institution engaging in futures brokerage service:
A. Whether the financial institution prevents inappropriate use of information concerning trading of
securities futures, such as government bond futures, by the proprietary trading division. In this case,whether the financial institution ensures that at sales branches handling futures brokerage operations ingeneral, the organization, responsibilities and authorities regarding the said operations are, in principle,
clearly separated and independent from those regarding other businesses (including businesses otherthan those specified under Article 2(8)(ii) and (iii).
B. Whether the financial institution ensures that sales branches engaging in futures brokerage operations
are organized in ways to prevent the solicitation of customers through a promise to provide convenienceto them in loans and loan guarantees.

(vi)

In cases where the financial institution offers financial instruments intermediary services, whether itmakes sure to prevent exchanges of non-disclosure information regarding loans and other matters concerning
securities-issuing customers between employees engaging in financial instruments intermediary services andthose engaging in loan operations. For example, whether the financial institution strives to ensure theeffectiveness of the prevention of exchanges of non-disclosure information regarding loans and other matters,
by establishing internal rules that provide for the separation of the financial instruments intermediary service
operations and loan operations, the clarification of persons in charge of those operations, or other similararrangements.
(vii) III-3-1(9)(ii) shall be applied mutatis mutandis to the notification of a change in the total capital amountof a shinkin bank.
(3) Points of Attention Regarding Registered Financial Institutions That Do Not Have Plans to Join Any Financial
Instruments Firms’ Association
Supervisors shall notify the following points and request appropriate responses to registered financial
institutions who do not have plan to join any Financial Instruments Firms' Association at the time of submission ofa registration request.
(i)That supervisory responses in accordance with VIII-1-4 shall be taken if the operator fails to introduce
internal rules that are in line with Rules Set by Associations, etc. or a system to ensure compliance with suchrules after registration(ii)

That failure to revise internal rules in accordance with revisions in Rule Set by Associations, etc., may
486

constitute a situation that corresponds to (i)VIII-2-2 Approval and Notification
III-3-2 (excluding III-3-2(4)), IV-4-2-4, IV-4-3 and VI-3-2 (excluding VI-3-2-3(1)(ii), (2)(vi)E., and (2)(viii)B.)
shall be applied mutatis mutandis.
VIII-2-3 Account Documents Related to Business Operations
III-3-3 shall be applied mutatis mutandis to the compilation and storage of account documents related to business
operations. Registered financial institutions may compile the account documents on the financial instrumentsintermediary service, as specified under Article 184(1)(iii) of the FIB Cabinet Office Ordinance, with the use ofcomputer systems and formats adopted by Financial Instruments Business Operators to which they entrust business
operations, or they may entrust the establishment of systems and formats necessary for the compilation of theaccount documents to the entrusted business operators. However, it should be noted that the registered financial
institutions bear the responsibility for the compilation and storage of the account documents.
VIII-2-4 Registration of Sales Representatives
IV-4-3 and V-3-2 shall be applied mutatis mutandis.
VIII-2-5 Interpretation of Article 33 of FIEA
(1) Interpretation of Article 33(1) of FIEA(i)

The following business operations undertaken by banks, cooperative structured financial institutions andother financial institutions as specified under Article 1-9 of the FIEA Enforcement Order (referred to as “banks,etc.” in VIII-2-6) shall not be deemed to fall under the category of the prohibited activities as specified under
Article 33(1) of the FIEA.
A. Providing client companies with advice useful for initial public offerings, and introducing clientcompanies with potential for initial public offerings to underwriting Financial Instruments Business
Operators.
B. Introducing customers to Financial Instruments Business Operators without conducting soliciting
activity(ii)

The act of “introducing” described in (i) B. applies to the following cases:
A. Cases where banks, etc., let Financial Instruments Business Operators display their own advertising
media at bank branches.
B. Cases where banks, etc., explain their relationships with Financial Instruments Business Operators andthe contents of the business operators’ businesses.

(2) Interpretation of Article 33(2)Regarding the brokerage with written orders as specified under Article 33(2), the following points shall be taken
487into consideration.
(i)Banks, etc., are prohibited from soliciting customers to sign contracts for securities trading and otherfinancial instruments transactions when engaging in brokerage with written orders. However, the following
activities shall not be deemed to fall under the category of solicitation activities:
A. Explaining the specifics of the brokerage with written orders to customers
B. Publicizing the specifics of the brokerage with written orders through media such as newspapers,
magazines, documents, direct mail, websites, broadcasting and movies
C. Placing order forms and documents explaining the specifics of the brokerage with written orders at
branches of banks, etc., for distribution to customers, sending them to customers, and displaying the
documents at branches for perusal by customers.
(ii)

When banks, etc., receive written orders, they must take instructions concerning the order category (sellor purchase), the ordered issue, the order volume and price with regard to each transaction.
Written orders to be received by banks, etc., for brokerage include continual orders to be executed at
predetermined dates.
VIII-2-6 Others(1) Points of Attention Regarding Segregated Management
It should be kept in mind that when registered financial institutions (limited to deposit-taking registered financial
institutions) treat cash deposits arising from transactions regarding securities-related businesses as deposits in theirprimary business, the said cash deposits are not subject to segregated management.
(2) Points of Attention Regarding Establishment of Internal Rules
Non-affiliated registered financial institutions must establish internal rules that are in line with rules set by
Financial Instruments Firms’ Associations, according to the types of business they undertake. Such institutions mustalso introduce a control environment to ensure appropriate compliance with internal rules.
In addition, they must take care to maintain appropriate business operations by revising internal rules
periodically or when relevant laws, regulations and rules are revised.

488

IX. Supervisory Evaluation Points and Various Administrative Procedures (Specially Permitted Business,
etc. for Qualified Institutional Investors, etc.)
IX-1 Appropriateness of Business Operations Related to Specially Permitted Business, etc. for Qualified
Institutional Investors, etc.
The provisions of III-2 (excluding III-2-3-1, III-2-5-2, III-2-5-3, III-2-7 to III-2-10 and III-2-12), III-3-3, III-34, V-2-1-1, V-2-6 (excluding (5)) and VI-2-5 to VI-2-7 shall be applied mutatis mutandis to the appropriateness ofthe business operations of Specially Permitted Business Operators, etc. for Qualified Institutional Investors, etc.
(hereinafter "Operators of SPBQII, etc."; meaning Specially Permitted Business Operators for Qualified
Institutional Investors, etc. (business operators engaging in SPBQII; hereinafter "Operators of SPBQII”) and/orSpecially Permitted Investment Management Businesses operators (business operators engaging in SPIMB;
hereinafter "Operators of SPIMB )). Supervisors shall examine the appropriateness by also paying attention to thefollowing points.
IX-1-1 Control Environment for Customer Solicitation and Explanations(1) Major Supervisory Viewpoints(i)Requirements of SPBQII
Since Operators of SPBQII need to check and record that the customers they solicit meet the requirements

of investor according to the attributes of the customer, supervisors shall examine by paying attention to thefollowing points, for example.
A. Whether the operator appropriately prepares and stores internal records by, for example, adequately
confirming that, as a measure to appropriately check that the customer it solicits is a “Qualified Institutional
Investor, etc.” (a Qualified Institution Investor, etc. defined in Article 63(1)(i) of the FIEA (hereinafter“QII, etc.”); the same shall apply hereinafter in IX) that corresponds to attributes such as “possessing assets(by the individual who is the customer) that are expected to amount to 100 million yen or more, reasonably
judging from the status of the transactions thereof or any other circumstances” specified in Article 2332(3)(i)A of the FIB Cabinet Office Ordinance, the amount of investment-type financial assets is estimatedto be 100 million yen or more, “reasonably judging” overall by using, for example, a self-declaration
document from the customer or materials voluntarily provided by the customer (a copy of a transaction
balance report or passbook, etc.), and managing and storing the confirmation result as well as a documentthat describes the grounds of the results (hereinafter referred to as the “confirmation result record” in (i)).
B. If a customer that the operator solicits falls under the requirements of a “person who was engaged in therelevant operations by exercising specialized abilities that are essential for the continuity of the relevant
operations” specified in Article 233-3(vii) of “Persons with Expertise and Experience in Investment
Matters” (referring to persons who fall under any of the items of Article 233-3 of the FIB Cabinet Office
Ordinance (excluding persons who fall under any of the items of Article 17-12(1) of the FIEA Enforcement
Order); the same shall apply hereinafter in IX), whether the business operator appropriately prepares and489

stores internal records by, for example, adequately confirming the facts relating to the requirements suchas the particulars of the operations in which the relevant customer was engaged (by requesting the customer
to submit an employment certificate that was prepared by the company, etc. the customer belonged to when
he/she was engaged in the relevant operations), except for cases where it is apparent that the customer falls
under the requirements, and managing and storing the confirmation result records.
C. Whether the business operator appropriately confirms that the number of investors other than QIIs
(referring to persons who fall under any of the items of Article 17-12(1) of the FIEA Enforcement Orderbased on Article 63(1)(i) of the FIEA and persons who have knowledge and experience on mattersconcerning investment; the same shall apply hereinafter in IX) does not exceed 49, and prepares and storesinternal records on the result of the confirmation.
D. Whether the operator makes efforts in conducting solicitation in an appropriate manner by examining, as
necessary, whether it does not lead customers to make a false declaration of their asset status, etc. in orderto have customers who do not meet the investment requirements invest.
(ii)

Principle of Suitability
In accordance with Article 40 of the FIEA, Operator of SPBQII, etc. must ensure that investment solicitationis conducted in an appropriate manner suited to their customer’s attributes, etc., by offering transactions withterms and contents that are commensurate with the customer’s knowledge, experience, asset status andinvestment purpose as well as his/her ability to make judgment regarding risk management.
To this end, it is important to establish a control environment for customer management that enables a precise
identification of the customer's attributes and the actual status of transactions, and the supervisor should pay
attention to the following issues, for example.
A. Efforts for Securing of an Appropriate Identification of Customer Attributes and Appropriate Managementof Customer Informationa. Whether, in order to grasp customer attributes such as investment intention and experience in a timely
and appropriate manner, the Operator of SPBQII, etc. prepares a system of customer management cards(referring to documents that state customers’ knowledge, experience and asset status as well as the
purpose of concluding a financial instruments transaction contract; the same shall apply hereinafter inA), for instance, adequately checking the investment purpose and intention of customers, and whether
the customer’s investment purpose and intention registered on the customer management cards are sharedby both the Operator of SPBQII, etc. and the customer (however, the preparation of customer
management cards is not automatically required if the customer’s asset status and investment judgment
capability are apparent). Furthermore, whether the business operator makes sure all directors, officers
and employees recognize the need to conduct investment solicitation in an appropriate manner suited tothe customer attributes, such as, in cases where, based on the request of a customer, the business operator
identifies that the customer’s investment purpose and intention has changed, makes changes to theregistered details on the customer management cards, and the modified registered details are shared byboth the Operator of SPBQII, etc. and the customer.
b. Whether the operator strives to keep track of how customer attributes are identified and how customer490

information is managed, and establish an environment that ensures the effectiveness of customer
information management by, for example, checking whether solicitation is conducted in an appropriatemanner suited to the customer attributes and revising the method of customer information management
when necessary.
B. Transfer to a Professional Investor upon Request of an Ordinary Investor
In a case where a customer as an “ordinary investor” requests to transfer to a “Professional Investor”
pursuant to the provision of Article 34-3 (1) of the FIEA, whether the Operator of SPBQII, etc.
determines the acceptability of such request after having judged whether it is appropriate to treat thecustomer as a “Professional Investor” in consideration of his/her knowledge, experience, asset status andpurpose of investment.
C. Points of Attention Regarding Solicitation Targeting Elderly Customers
Even when they have ample investment experience, elderly customers can be physically weak and theirability to make investment decisions may change quickly. As such, whether the business operator ensuresa discreet solicitation and sales structure in soliciting investment targeting elderly customers, based on the
Principle of Suitability. In addition, whether the business operator follows up carefully after sale ofproducts.
D. Points of Attention Regarding Solicitation of Electronically Recorded Transferable Rights That Must Be
Indicated on Securities, etc.
Whether the Operator of SPBQII, etc. pays attention to the following matters regarding solicitation ofelectronically recorded transferable rights that must be indicated on securities, etc.
a. Whether the Operator of SPBQII, etc. continuously conducts appropriate examination regarding therisks involved in the networks, such as the blockchain, used for the electronically recorded transferable
rights that must be indicated on securities, etc. by, for example, undergoing an examination by experts
as necessary, in light of the importance of the risks.
b. In conducting purchase and sale or other transactions of electronically recorded transferable rights thatmust be indicated on securities, etc., whether the Operator of SPBQII, etc. takes into consideration not
only customers' investment experience and status of property, but also the degree of understanding of
the scheme of holding and transferring electronically recorded transferable rights that must be indicatedon securities, etc. and the risks involved therein, and the experience in transactions of products using asimilar scheme.
(iii)

Control Environment for Providing Explanations to Customers

A. Whether the business operator explains to customers other than QII in an easy-to-understand manner thebasic nature of the products of the businesses eligible for investment, the details, types and fluctuation
factors of risks, and that SPBQII is a system originally meant for QIIs (so-called professionals) and thatthose qualified to invest are limited.
B. In a case where an Operators of SPBQII “conducts SPBQII that are specified by Cabinet Order as
especially requiring the protection of investors” specified in Article 63(9) of the FIEA, whether the
Operator of SPBQII issues a document to investors stating matters set forth in Article 17-12(2)(i)A and B491

as well as (ii) and (iii) of the FIEA Enforcement Order, such as to the effect that more than 80% of theassets under management will be invested in unlisted stocks, etc. before the conclusion of a contract, andprepares and stores a record relating to that document and the issue date.
C. Whether the business operator provides false representations and explanations that make their products
and services appear free of charge or make fees appear markedly lower than the actual levels.
D. Whether the business operator provides false representations and explanations to the effect that theyguarantee yields or compensate for all or part of losses that may arise.
E. Whether the business operator provides false representations and explanations such as “principal
guaranteed” or “profit guaranteed” to the effect that their products and services do not involve any risks,
including the risk of customers incurring losses from transactions.
F. Whether the business operator provides false representations and explanations regarding the contents ofproducts and transactions (basic product features, the types and characteristics of the risks involved andvariable factors).
G. Whether the Operator of SPBQII, etc. provides representations and explanations that may be
misunderstood, due to the fact that the business operator has made a notification of SPBQII, that the Prime
Minister, the FSA Commissioner or other public institution guarantees the credibility of the business
operator, recommends the financial instrument or guarantees the contents of the advertisement, etc.
H.

If the scheme of the electronically recorded transferable rights that must be indicated on securities, etc.
involves risks, etc. that differ from those for ordinary securities in respect to the method of holding ortransferring the rights or the like (this includes but is not limited to the reaching of an agreement, settlement,
the method of satisfaction of the requirement for perfection, etc. relating to transfer of the rights), whether
the business operator explains this appropriately.

(2) Supervisory Method and Actions
With regard to issues regarding an Operator of SPBQII, etc. that were identified through daily supervisoryadministration or the reporting of problematic conduct, supervisors shall hold in-depth hearings and, when necessary,
require the submission of reports based on Article 63-6 of the FIEA (including cases where it is applied mutatis
mutandis pursuant to Article 63-3(2) of the FIEA or cases where it is applied pursuant to Article 48(3), (5) or (7) of
the Supplementary Provisions of the Amendment Act; the same shall apply hereinafter in IX). In addition, when it
is deemed that there is a serious issue from the perspective of public interest or investor protection, the supervisors
shall take necessary actions, including issuing an order for business improvement based on Article 63-5(1) of the
FIEA (including cases where it is applied mutatis mutandis pursuant to Article 63-3(2) of the FIEA or cases where
it is applied pursuant to Article 48(3), (5) or (7) of the Supplementary Provisions of the Amendment Act; the same
shall apply hereinafter in IX). Furthermore, when the Operator of SPBQII, etc. is deemed to have committed aserious and malicious violation of law, the supervisors shall consider necessary actions, including issuing an orderfor business suspension based on Article 63-5(2) of the FIEA (including cases where it is applied mutatis mutandis
pursuant to Article 63-3(2) of the FIEA or cases where it is applied pursuant to Article 48(3), (5) or (7) of the
Supplementary Provisions of the Amendment Act; the same shall apply hereinafter in IX) or an order for business492

abolition based on Article 63-5(3) of the FIEA (including cases where it is applied mutatis mutandis pursuant to
Article 63-3(2) of the FIEA or cases where it is applied pursuant to Article 48(3), (5) or (7) of the Supplementary
Provisions of the Amendment Act; the same shall apply hereinafter in IX).
When the Operator of SPBQII, etc. is suspected to be engaged in false notification or loss compensation toinvestors prior to the enforcement of the Act for Partial Revision of the Financial Instruments and Exchange Act(Act No. 32 of 2015), supervisors shall require the submission of reports based on Article 63-6 of the FIEA. If it isdeemed, as a result, that the relevant business operator is engaged in the relevant act, supervisors shall take necessary
actions such as warning the business operator in writing using the Attached List of Formats IX-1. Provisions of II1-4(4)(iv) will apply to responses made in the case measures such as a warning were taken.
IX-1-2 Identification of Actual State of Operator of SPBQII, etc.
(1) Points of Attention in Grasping Actual Conditions
The following points shall be taken into consideration when grasping actual conditions through monitoring
surveys, subsequent checks of reports, or checks of business reports.
Although SPBQII is basically conducted with QII, the need to grasp actual conditions is especially high when
the actual existence of QIIs is in doubt, considering situations where the investment amount and investment
percentage of q QIIs are extremely low, etc. in view of the issues and situation of damage that have been identified
in inspections, etc. by the authorities.
(i)

Whether QIIs that acquire invested business equity and QIIs that have invested business equity(hereinafter collectively referred to as “QII with Invested Equity” in (1) below) have become an investment
limited partnership existing only in name or an investment limited partnership, through which offerings orinvestments are conducted without going through the procedures required under the FIEA (cases where aperson who is not registered as a financial instruments business, etc. or notified as an Operator of SPBQII
conducts offerings or investments).
(ii)

Whether a situation has arisen in which a QII with Invested Equity could be judged as not actually having

acquired or being in possession of invested business equity as a QII, such as by reason of receiving
remuneration as compensation for mostly insubstantial work from, for instance, an Operator of SPBQII, or ofbeing insubstantial such as a subsidiary or affiliate of the Operator of SPBQII.
(iii)

Whether private offerings or investments that do not satisfy the requirements of SPBQII are being

conducted, such as the Operator of SPBQII, or other funds managed by the Operator of SPBQII is the only
QII with Invested Equity.
(iv)

Whether solicitation of acquisition of fund equity is made to persons other than persons who wereappropriately confirmed to be a QII, etc. In addition, in cases where all QIIs with Invested Equity are an
investment limited partnership, whether an investment limited partnership that corresponds to “those expected
to have 500 million yen or more in cash and other assets that will be managed for the counterparty of theinvestment limited partnership agreement, minus the amount of borrowings” as stipulated in Article 2342(1)(i) of the FIB Cabinet Office Ordinance exists.
493

(v)

Whether the investment ratio of “Closely Related Persons” (referring to persons set forth in Article 233-

2(1)(ii) (excluding parent company, etc.) to (vi) (excluding persons who fall under any of the items of Article
17-12(1) (except for (vi)) of the FIB Cabinet Office Ordinance); the same shall apply hereinafter in IX) and“Persons with Expertise and Experience in Investment Matters” to the total investment amount of the fund is
50% or more.
(vi)

Whether the number of investors other than QIIs exceeds 49.

(vii)

Whether false notification, loss compensation, appropriation of customers’ assets or false reports

concerning investment details are conducted.
(2) Supervisory Method and Actions
With regard to issues regarding an Operator of SPBQII, etc. that were identified through daily supervisoryadministration or the reporting of problematic conduct, supervisors shall hold in-depth hearings and, when necessary,
require the submission of reports based on Article 63-6 of the FIEA. In addition, when it is deemed that there is aserious issue from the perspective of public interest or investor protection, the supervisors shall take necessary
actions, including issuing an order for business improvement based on Article 63-5(1) of the FIEA. Furthermore,when the Operator of SPBQII, etc. is deemed to have committed a serious and malicious violation of law, thesupervisors shall consider necessary actions, including issuing an order for business suspension based on Article63-5(2) of the FIEA or an order for business abolition based on Article 63-5(3) of the same Act.
When the Operator of SPBQII, etc. is suspected to be engaged in false notification or loss compensation toinvestors or in acts that are problematic from the viewpoint of protecting investors, such as appropriation ofcustomer assets, prior to the enforcement of the Act for Partial Revision of the Financial Instruments and Exchange
Act (Act No. 32 of 2015), supervisors shall require the submission of reports based on Article 63-6 of the FIEA. If
it is deemed, as a result, that the relevant business operator is engaged in the relevant act, supervisors shall takenecessary actions such as warning the business operator in writing using the Attached List of Formats IX-1 or IX2. Provisions of II-1-4(4)(iv) will apply to responses made in the case measures such as a warning were taken.

494IX-2 Various Administrative Procedure
IX-2-1 Confirmation Matters to be Notified(1) Major Supervisory Viewpoints(i)Whether there are any omissions, etc. with regard to matters required to be notified.

(ii)

Whether there are any omissions, etc. with regard to documents required to be attached. Furthermore,whether there are any discrepancies, etc. between the notified matters and the contents of the attacheddocuments.
(iii) Whether the applicant falls under any of the items of Article 63(7) of the FIEA (including cases where it
is applied pursuant to Article 48(3) or (7) of the Supplementary Provisions of the Amendment Act; the same
shall apply hereinafter in IX), such as not having passed five years since the day when registration of afinancial instrument business was cancelled.
(iv) Whether the notified QII falls under the category of a QII prescribed by Article 10(1) of the Cabinet Office
Ordinance Regarding Definitions. In addition, in cases where all QIIs with Invested Equity are an investment
limited partnership, whether an investment limited partnership that corresponds to “those expected to have
500 million yen or more in cash and other assets that will be managed for the counterparty of the investment
limited partnership agreement, minus the amount of borrowings” as stipulated in Article 234-2(1)(i) of the
FIB Cabinet Office Ordinance exists.
(v)

Whether the notified QII really exists as a QII prescribed in Article 10(1) of the Cabinet Office OrdinanceRegarding Definitions. (In cases where the real existence cannot be confirmed, supervisors shall request
presentation of a certificate of registered matters pertaining to said QII or a document in lieu thereof. However,in cases where the reference number obtained through the use of the Registration Information Provision
Services is attached, attachment of a certificate of registered matters may be omitted.)(vi) Whether the investment ratio of “Closely Related Persons” and “Persons with Expertise and Experiencein Investment Matters” to the total investment amount of the fund is 50% or more.
(vii) In cases where the person making the notification is a juridical person, whether it is possible to makecontact with a Representative in Japan of the said juridical person. In cases where the person making thenotification is an individual with an address in a foreign country, whether it is possible to make contact withan Agent in Japan of the said individual in Japan.
(viii) Whether the principal business office or office and business office or office where SPBQII, etc. areconducted is a so-called virtual office. (In cases where, such as where the notified business office, etc. is arental office based on a short-term contract, it is feasible that the SPBQII, etc. are conducted at a place otherthan said business office, supervisors shall strive to grasp the actual conditions through hearings andrequesting the submission of relevant materials.)(ix) When there has been a notification of abolition of SPBQII, etc. based on Article 63-2(3)(ii) of the FIEA
by an Operator of SPBQII, etc., supervisors shall check whether customer transactions by said Operator of
SPBQII, etc. has been completed and properties that were deposited by customers as well as properties495

occupied in its calculation have been returned.
(x) In a case where an Operator of SPBQII “conducts SPBQII that is specified by Cabinet Order as especiallyrequiring the protection of investors” specified in Article 63(9) of the FIEA, supervisors shall check thefollowing matters:
A. Whether requirements set forth in Article 17-12(2)(i)A and B as well as (ii) and (iii) of the FIEA
Enforcement Order, such as that the business will be managed as an investment of more than 80% of assets
under management in unlisted stocks, etc. are satisfied.
B. Whether a document stating that the business meets requirements set forth in Article 17-12(2)(i)A and B
as well as (ii) and (iii) of the FIEA Enforcement Order, such as that the business will be managed as aninvestment of more than 80% of assets under management in unlisted stocks, etc., is issued to investors
before the conclusion of a contract, and a record related to said document and the issue date is preparedand stored.
C. Whether a copy of the contract related to the businesses eligible for investment is submitted within threemonths from the day when notification based on provisions of Article 63(2) of the FIEA or from the day
when there was a change related to the notification pursuant to Article 63(8) of the FIEA (within six months
if notification stipulated in Article 239-2(4) of the FIB Cabinet Office Ordinance has been made).
D. Whether all matters set forth in all items of Article 239-2(1) of the FIB Cabinet Office Ordinance arestated in the copy of the contract submitted by the Operator of SPBQII.
E. With regard to the rights that were notified to the effect that a contract stipulated in Article 239-2(6) of the
FIB Cabinet Office Ordinance cannot be concluded, whether private offerings or investments are still
conducted with “Persons with Expertise and Experience in Investment Matters” as the counterparty evenafter said notification(2) Supervisory Method and Actions
With regard to SPBQII, in cases where notification of SPBQII has been received, supervisors shall confirm thematters to be notified as required. As a result, with respect to the matters to be notified, if deficiencies or doubts
about the content of the notification are recognized, where necessary, the supervisors shall require submission ofreports based on Article 63-6 of the FIEA, grasp the correction status, and consider necessary actions, in accordancewith the status, including business improvement orders and business suspension orders.
If no specific corrective measures are presented or it is deemed that any of the reasons for disqualification
specified in the items of Article 63(7) of the FIEA applies, a business abolition order pursuant to Article 63-5(3) of
the FIEA shall be issued, in principle.
IX-2-2 Preparation and Publication, etc. of the List of Notifiers of SPBQII, etc.
(1) Preparation and Publication, etc. of the List of Notifiers of SPBQII
In order to enable investors to acquire information on respective Operators of SPBQII, etc., supervisors shallprepare and publish on the FSA website a list of information regarding respective Operators of SPBQII, etc. that are
496

subject to public inspection based on Article 63(5) of the FIEA (including cases where it is applied mutatis mutandis
pursuant to Article 63-3(2) of the FIEA or cases where it is applied pursuant to Article 48(3), (5) or (7) of the
Supplementary Provisions of the Amendment Act) (defined in paragraph (4) of this section, hereinafter referred toas the “List of Notifiers of SPBQII, etc. information items”) (hereinafter referred to as the “List of Notifiers of
SPBQII”)
To this end, the FSA shall, for each month, after confirming the status of receiving notifications at Local Finance
Bureaus, prepare, update and publish on the FSA website the List of Notifiers of SPBQII.
(2) Preparation and Publication, etc. of the List of Notifiers of SPBQII, etc., whom our Authority issued Order for
Abolition of Business Operation
To provide investors information on Operators of SPBQII, etc. who have been issued with an order for abolitionof business operation pursuant to Article 63-5(3) of the FIEA, the FSA shall prepare and publish on the FSA website
the List of Notifiers of SPBQII, etc., whom our Authority issued Order for Abolition of Business Operation.
As such, when an order for abolition of business operation is issued pursuant to Article 63-5(3) of the FIEA toOperators of SPBQII, etc., the FSA shall remove such operators from the “List of Notifiers of SPBQII, etc.” or the“List of Notifiers of SPBQII, etc., whom our Authority cannot make contact nor able to identify the location ofbusiness office (defined under paragraph (3) below)” and enter them on the “List of Notifiers of SPBQII, etc., whom
our Authority issued Order for Abolition of Business Operation” and publish it on the FSA website.
(3) Preparation and Publication, etc. of the List of Notifiers of SPBQII, etc., whom our Authority cannot makecontact nor able to identify the location of business office
To provide investors information on Operators of SPBQII, etc. with whom supervisory authorities cannot makecontact or locate the business place or office, such operators shall be recorded on the “List of Notifiers of SPBQII,
etc., whom our Authority cannot make contact nor able to identify the location of business office” (hereinafterreferred to as “List of Notifiers of SPBQII, etc., whom our Authority cannot make contact)” which shall be publishedon the FSA website.
As such, If the FSA finds, through day-to-day supervisory work, any Operators of SPBQII, etc. with whom our
Authority cannot make contact nor able to identify the location of business place or office, they shall remove suchoperator’s information items from the “List of Notifiers of SPBQII, etc.” and enter them on the “List of Notifiers of
SPBQII, etc., whom our Authority cannot make contact” and publish it on the FSA website. In making the entry andin publication, supervisors shall clearly indicate that the notified business place or office cannot be identified, that
notice shall be made to the Local Finance Bureau having jurisdiction within 30 days from the day when the failureof ascertainment was published on the FSA website, and that an order for abolition of business operation may be
issued if supervisors receive no notice during said period, after conducting separate administrative procedures suchas a hearing, etc.
Operators of SPBQII, etc. whose business place or office was identified shall be removed from the “List of
Notifiers of SPBQII, etc., whom our Authority cannot make contact,” and entered on the “List of Notifiers of
SPBQII, etc.” Operators of SPBQII, etc. who have been issued with an order for abolition of business operation497

based on Article 63-5(3) of the FIEA shall be removed from the “List of Notifiers of SPBQII, etc., whom our
Authority cannot make contact,” and entered on the “List of Notifiers of SPBQII, etc., whom our Authority issued
Order for Abolition of Business Operation.”(4) List of Notifiers of SPBQII, etc. Information Items(i)

List of Notifiers of SPBQII, etc. information items are provided below. (Note, however, item N shall be
excluded from the “List of Notifiers of SPBQII, etc., whom our Authority cannot make contact” and item V
shall apply to the “List of Notifiers of SPBQII, etc., whom our Authority cannot make contact” only.)
A. Name of Notifier and corporate number
B. Jurisdiction of Local Finance Bureau
C. Name and position of representative, other officers and employees specified under a Cabinet Order
D. Type of employees specified under a Cabinet Order
E. Type of business
F. Name, address and phone number of principal business place or office
G. Name, address and phone number of business place or office where SPBQII is conducted
H. URL of website
I. Type of other business conducted
J. Amount of capital or total contribution
K. Existence or nonexistence of registration as a financial instruments business operator, etc.
L. Existence or nonexistence of notification prior to the enforcement date of the Act for Partial Revision of
the Financial Instruments and Exchange Act (Act No. 32 of 2015)
M. Date of notification of Article 63(2) of the FIEA or the most recent date of notification based on provisionsof Article 63(8) of the FIEA
N. Status of administrative dispositions
O. Name of invested business equity
P. Type of invested business equity
Q. Details of the invested business
R. Type and number of QII
S. Existence or nonexistence of investors other than QII
T. Existence or nonexistence of persons specified under the items of Article 233-3 of the FIB Cabinet Office
Ordinance
U. Name of certified public accountant or auditing firm
V. Date that the FSA published the fact that it cannot confirm the related operator’s business place or office(ii)

On the Listing of the Status of Administrative Dispositions Defined in (i)N above
A. With regard to Operators of SPBQII, etc. who have been issued with an order for business improvement
based on Article 63-5(1) of the FIEA or a business suspension order based on Article 63-5(2) of the same
Act, the status of these administrative dispositions shall be entered on the “List of Notifiers of SPBQII,
etc.”
498

B. With regard to Operators of SPBQII, etc. who have been issued with a warning based on this supervisory
guideline and Operators of SPBQII, etc. with recognized problems such as the failure to respond to orders
pursuant to Article 63-6 of the FIEA, the details of the problem shall be entered on the “List of Notifiersof SPBQII, etc.”
IX-2-3 Points of Attention Regarding Business Operators Which Fail to Make Necessary Notifications
When supervisors have recognized cases where a business operator is engaging in SPBQII, etc. without fulfillingthe obligation to make a notification under Article 63(2) of the FIEA, as a result of a complaint from customers, aninquiry from investigative authorities, the provision of information by Financial Instruments Business
Operators/Financial Instruments Firms’ Associations, etc. or a newspaper advertisement, etc., they shall warn thebusiness operator in writing to suspend the business or immediately make the necessary notification.
IX-2-4 Extension, etc. of Submission Deadline of Copy of Contract Related to Invested Business(1) Notification of Extension of Period
In a case where an Operator of SPBQII “conducts SPBQII that are specified by Cabinet Order as especiallyrequiring the protection of investors” specified in Article 63(9) of the FIEA, the Operator of SPBQII must submit a
copy of the contract related to Invested Business within three months from the day when notification based onprovisions of Article 63(2) of the FIEA was made or the day when there was a change related to the notification
pursuant to Article 63(8) of the FIEA, in principle.
However, attention shall be paid that the submission deadline for the copy of the contract will be extended forthree months (up to a maximum of six months) if there was notification that a copy of the contract cannot be
submitted within the period above.
(2) Notification that a Contract Cannot Be Concluded
If an Operator of SPBQII cannot conclude a contract related to Invested Business during the period stipulatedin (1), the operator must notify the fact and reasons without delay after said period has passed.
(3) If Neither a Copy of Contract Related to Invested Business nor a Notification to the Effect that a Contract Cannot
Be Concluded is Submitted
If neither a copy of the contract related to Invested Business nor a notification to the effect that a contract cannot
be concluded is submitted within three months from the day when notification based on provisions of Article 63(2)of the FIEA was made or the day when there was a change related to the notification pursuant to Article 63(8) of
the FIEA (within six months if notification of the latter part of (1) above is made), supervisors shall take thenecessary actions, including the issuance of a business abolition order based on Article 63-5(3) of the FIEA, in viewof the fact that said violation of laws and ordinances cannot be revoked even if a copy of the contract, etc. issubmitted after the period has passed.

499

IX-2-5 Points of Attention Concerning Supervisory Actions for Operators of SPBQII, etc.
(1) Points of Attention in Cases Where Business Operation is Suspected of Not Being Qualified as SPBQII, etc.
Supervisors shall strive to publicize that in cases where the business conducted by an Operator of SPBQII, etc.
does not meet the requirements for SPBQII or SPIMB (in the case of SPBQII, including instances where, forexample, a QII required for the formation of a scheme could be judged as not actually having acquired or being inpossession of invested business equity as a QII, such as by reason of receiving remuneration for mostly insubstantial
work from an Operator of SPBQII, etc.), such business operator shall be required to obtain registration under Article
29 of the FIEA.
If supervisors suspect, through day-to-day supervisory work, that an Operator of SPBQII, etc. fails to meet therequirements mentioned above, they shall require such business operator to make a report based on Article 63-6 of
the FIEA, and shall take necessary actions including the issuance of a business abolition order based on Article 635(3) of the FIEA, when they find it necessary to do so based on such report. In addition, the same response shall betaken when it is deemed that the business operator does not meet the requirements mentioned above in on-the-spot
inspections, etc.
(2) Points of Attention in Cases Where Business No Longer Falls Under SPBQII
In cases where the business conducted by an Operator of SPBQII no longer falls under SPBQII (including cases
where it has come to no longer satisfy requirements of “cases where conducting SPBQII that are specified by
Cabinet Order as especially requiring the protection of investors” specified in Article 63(9) of the FIEA) due toreasons such as withdrawal of QIIs and an increase in investors other than QIIs, supervisors shall take the following
actions from the perspective of investor protection:(i)Order Based on Article 63(12) of the FIEA
“When a business commenced as SPBQII under item (ii) of paragraph (1) by an Operator of SPBQII has
come to no longer satisfy the requirement to be regarded as SPBQII” as specified under Article 63(12) of the
FIEA (including cases where it is applied mutatis mutandis pursuant to Article 63-3(2) of the FIEA), refers tocases where although the business satisfied the requirements for SPBQII when the business was commenced,
it no longer satisfy those requirements, for a reason not attributable to the responsibility of the Operator of
SPBQII. In such cases, supervisors shall order the Operator of SPBQII to transfer the relevant business
operations to another Financial Instruments Business Operator.

(ii) Cases Other than (i)In cases other than (i) above, a special clause specified under Article 63 of the FIEA shall not apply, so the
Operator of SPBQII will engage in investment management business without being registered under the FIEA.
Therefore, against the said business operator, supervisors shall take necessary actions including the issuanceof a business abolition order based on Article 63-5(3) of the FIEA.
(3) Points of Attention Concerning Actions toward Operators of SPBQII, etc. whose Business Place or Office Cannot
Be Ascertained500

If supervisors find, through day-to-day supervisory work, any Operators of SPBQII, etc. with whom supervisory
authorities cannot make contact nor able to identify the location of business place or office, supervisors shall, in
accordance with IX-2-2(3), include such operator on the “List of Notifiers of SPBQII, etc., whom our Authority
cannot make contact”, clearly indicating the fact that the notified business place or office cannot be ascertained, etc.,
and publish it on the FSA website. If supervisors do not receive any notice from said business operator after 30 days
have passed since the day of the publication, supervisors shall issue an order for abolition of business to said business
operator based on Article 63-5(3) of the FIEA.
(4) Points of Attention in Issuing a Business Abolition OrderWith regard to issues concerning the appropriateness of business operations of an Operator of SPBQII, etc., if
the impact on investors, etc. and maliciousness of the conducted act are severe or serious, but improvement of the
problem related to said business operator cannot be expected even if a business improvement order based on Article63-5(1) of the FIEA or a business suspension order based on Article 63-5(2) of the same Act is issued, supervisors
shall issue a business abolition order pursuant to Article 63-5(3) of FIEA.
In addition, “cases where the purpose of supervision cannot be achieved by another method,” as specified in
Article 63-5(3) of the FIEA, do not necessarily mean to require the issuance of a business improvement order orbusiness suspension order prior to the business abolition order based on provisions of the said Article. For example,
when an Operator of SPBQII, etc. is deemed to have committed a serious violation of the law that may lead tocancellation of registration if the business operator was a financial instruments business operator, etc., supervisors
shall immediately issue a business abolition order since the case falls under a “case where the purpose of supervision
cannot be achieved by another method.”
In the event a business abolition order has been issued against an Operator of SPBQII, etc., supervisors shallcheck whether customer transactions by said business operator has been completed and properties that were
deposited by customers as well as properties occupied in its calculation have been returned, before requiring
notification of the abolition of SPBQII, etc. stipulated in Article 63-2(3)(ii) of the FIEA.

501

X. Supervisory Evaluation Points and Various Administrative Procedures (Foreign Securities Companies)
X-1 Basic Concept for Foreign Securities Companies
X-1-1 Basic Concept on Laws and Regulations Regarding Foreign Securities Companies
Foreign securities companies are not allowed to engage in the activities specified under each item of Article
28(8) of the FIEA (hereinafter referred to as “activities concerning securities-related businesses”) with persons
located in Japan as their transaction counterparts, unless their main Japanese sales branches or main business offices
engaging in securities-related businesses are registered.
Meanwhile, unregistered foreign securities companies with no business base in Japan are allowed to engage inactivities concerning securities-related businesses with persons in Japan as their transaction counterparts, if theytake orders from the said persons without conducting solicitation regarding activities concerning securities-related
businesses or take orders through agency and brokerage services provided by Financial Instruments Business
Operators (limited to Type I Financial Instruments Business Operators).
Furthermore, foreign securities companies may, with the permission of the authorities based on Article 60(1) of
the FIEA, engage in trading at financial instruments exchanges in Japan. Supervisors shall perform supervision of
the said companies with due consideration of the points of attention indicated in X-2-1.
X-1-2 Foreign Securities Companies’ Cross-Border Transactions Using Internet
The posting by foreign securities companies of advertisements regarding activities concerning securities-related
businesses on Web sites shall in principle be deemed to constitute a solicitation.
However, it shall not be deemed to constitute a solicitation aimed at investors in Japan as long as reasonablemeasures are taken to prevent the advertisement from leading to activities concerning securities-related businesswith investors in Japan as their transaction counterparts.
(1) Disclaimer
A disclaimer to the effect that the advertised service is not targeted at investors in Japan must be indicated.
In judging whether an adequate disclaimer is properly indicated, attention shall be paid to the following points:(i)

Any particular computer operation other than viewing the advertisement should not be necessary forreading and understanding the disclaimer.
(ii)

The disclaimer must be indicated in language reasonably deemed to be readable and understandable forinvestors in Japan who are accessing the website.
(2) Measures to Prevent Transactions
Measures to prevent transactions regarding activities concerning securities-related businesses must be in place.
In judging whether adequate measures are in place, attention shall be paid to the following points:(i)

When making transactions, the foreign securities company checks the location of the investors byrequiring them to provide information regarding their residence location, mail address, e-mail address,
payment method and other items.
(ii)

Care must be taken to avoid taking orders from the investors in cases where there is a reasonable reason502

for believing that the orders obviously concern activities concerning securities-related businesses involving
investors in Japan.
(iii)

Care must be taken to avoid inducing investors in Japan to conduct activities concerning securities-related

businesses by, for example, refraining from establishing a call center targeted at customers in Japan andestablishing links to web pages targeted at investors in Japan.
The above-mentioned measures are merely examples, so if measures equivalent thereto or more effective
measures have been implemented, the posting of advertisements by foreign securities companies shall not be
deemed to constitute a solicitation.
(3) It should be noted that in cases where the above-mentioned reasonable measures are not in place, the said postingof advertisements is highly likely to constitute a solicitation aimed at investors in Japan. Therefore, in such cases,
the foreign securities companies should bear the burden of proving that they do not engage in activities concerning
securities-related businesses involving solicitation aimed at investors in Japan.

503

X-2 Appropriateness of Business Operations
X-2-1 Appropriateness of Business Operations (Authorized Transaction-At-Exchange Operators)(1) III-2-1 (excluding (1)(v)), III-2-5 (excluding III-2-5-2 and III-2-5-3), III-2-7, III-2-8, III-2-9, IV-3-1-1, IV-3-15 and IV-3-2 (excluding IV-3-2-2, IV-3-2-3(2) and (3), IV-3-2-4 and IV-3-2-5) shall be applied mutatis mutandis tothe examination of the appropriateness of the business operations of foreign securities companies that conducttransaction-at-exchange operations (referring to the business operations prescribed in Article 60(1) of the FIEA; thesame shall apply hereafter) with the permission of the authorities (hereinafter referred to as “authorized transactionat-exchange operators”). Based on the fact that authorized transaction-at-exchange operators are basically under thesupervision of overseas authorities, in cases where the authorized transaction-at-exchange operator is deemed to
conduct business operations that are effectively equivalent to those required in Japan, it should be kept in mind thatthe specific methods of business operations do not matter.
(2) Supervisory Response to Problematic Conduct
Supervisory responses to problematic conduct (referring to an act in violation of the law prescribed in Article
223(x) of the FIB Cabinet Office Ordinance; the same shall apply in (2) below) shall be treated as follows.
(i)

In cases where notification pertaining to problematic conduct is submitted by an authorized transaction-

at-exchange operator, the supervisor shall check the following points.
A. Whether the authorized transaction-at-exchange operator has promptly reported to the internal control
and internal audit divisions as well as to the board of directors, etc. in accordance with compliance rules.
B. Whether a division independent of the division involved in the conduct (e.g. the internal audit division)
has investigated the conduct.
(ii)

The supervisor shall, based on the following viewpoints, examine the relationship between the

problematic conduct and the appropriateness of the authorized transaction-at-exchange operator’s business
operations.
A. Whether an officer has been involved in the conduct and whether there has been any institutional
involvement.
B. What impacts the conduct is expected to have on Japan’s financial instruments market.
C. Whether the internal checking function is properly functioning.
D. Whether the authorized transaction-at-exchange operator has formulated improvement measuresintended to prevent the recurrence of the conduct, is equipped with a sufficient self-rectification function
and has clarified the allocation of responsibilities.
E. Whether the authorized transaction-at-exchange operator acted appropriately immediately after the
conduct came to light.
(3) Supervisory Method and Actions
When supervisors have, through daily supervisory administration or the reporting of problematic conduct,504

recognized an issue of operational or financial concern regarding an authorized transaction-at-exchange operator,
they shall identify and keep track of the status of voluntary improvement made by the authorized transaction-atexchange operator by holding in-depth hearings such as through representative persons in Japan, and, whennecessary, requiring the submission of reports based on Article 60-11 of the FIEA. Furthermore, supervisors shallalways strive to promptly ascertain and resolve any issues regarding an authorized transaction-at-exchange operator,
such as by actively exchanging information with financial instruments exchanges with which the authorizedtransaction-at-exchange operator is a member and with overseas authorities with which agreements for the exchange
of information have been concluded. When the authorized transaction-at-exchange operator is deemed to havecommitted a serious and malicious violation of law, the supervisors shall consider necessary actions, including
issuing an order for business improvement or an order for business suspension based on Article 60-8(1) of the FIEA.
X-2-2 Appropriateness of Business Operations (Authorized Service Providers of Electronic Over-the-Counter
Derivative Transactions)(1) III-2-1 (excluding (1)(v) ), III-2-4, III-2-5 (excluding III-2-5-2 and III-2-5-3), III-2-6, III-2-7, III-2-8, III-2-9,
III-2-11, IV-3-1-1, IV-3-1-5, IV-3-1-6, IV-3-3-4(4) shall be applied mutatis mutandis to the examination of theappropriateness of business operations by providers of electronic over-the-counter derivative transaction services(referring to the services prescribed in Article 60-14(1) of the FIEA; the same shall apply hereinafter) upon
permission from authorities that engage in over-the-counter derivative transactions etc. in foreign countries incompliance with local laws (hereinafter referred to as "authorized provider of electronic over-the-counter derivativetransaction service"). It should be noted that authorized providers of electronic over-the-counter derivativetransaction service are basically under the supervision of overseas authorities, and they shall not be examined on
specific ways they operate as long as their business is operated at levels deemed virtually equal to those required inJapan.
(2) Supervisory Response to Problematic Conduct
Supervisory responses to problematic conduct (referring to an act in violation of the law prescribed in Article
232-8(x) of the FIB Cabinet Office Ordinance; the same shall apply in (2) below) shall be treated as follows.
(i) In cases where notification pertaining to problematic conduct is submitted by an authorized provider ofelectronic over-the-counter derivative transaction service, the supervisor shall check the following points.
A. Whether the authorized provider of electronic over-the-counter derivative transaction service has
promptly reported to the internal control and internal audit divisions as well as to the board of directors,
etc. in accordance with compliance rules.
B. Whether a division independent of the division involved in the conduct (e.g., the internal audit section)
investigates the conduct.
(ii) Relationship between problematic conduct and the appropriateness of business operations by the authorized
provider of electronic over-the-counter derivative transaction service shall be examined by paying attention
to the points listed below.
505

A. Whether an officer has been involved in the conduct and whether there has been any institutional
involvement.
B. What impacts the conduct is expected to have on Japan's financial instruments market.
C. Whether the internal checking function is properly functioning.
D. Whether the authorized provider of electronic over-the-counter derivative transaction service has
formulated improvement measures intended to prevent the recurrence of the conduct, is equipped with asufficient self-rectification function and has clarified the allocation of responsibilities.
E. Whether the authorized provider of electronic over-the-counter derivative transaction service acted
appropriately immediately after the conduct came to light.
(3) Supervisory Method and Actions
When supervisors have recognized issues regarding business operations and finances at authorized providers ofelectronic over-the-counter derivative transaction service through daily supervisory administration and the reportingof problematic conduct, they shall keep track of the status of their voluntary efforts to improve the situation throughin-depth hearing conducted through representatives in Japan or by requiring, if necessary, the submission of reports
based on Article 60-11 of the FIEA, applied mutatis mutandis pursuant to Article 60-14(2) of the same act. In
addition, supervisors shall actively exchange information on a daily basis with overseas authorities underinformation exchange agreements to help detect issues faced by authorized providers of electronic over-the-counter
derivative transaction service and resolve such issues early. When the provider is deemed to have committed aserious and malicious violation of law, the supervisors shall consider necessary actions, including the issuance ofan order for business improvement or suspension based on Article 60-8 (1) of the FIEA, applied mutatis mutandis
pursuant to Article 60-14(2) of the same act.

506

X-3 Various Administrative Procedures (Authorized Transaction-At-Exchange Operators)
X-3-1 Various Administrative Procedures (Authorized Transaction-At-Exchange Operators)
X-3-1-1 Permission
III-3-1 shall be applied mutatis mutandis to the treatment of applications for permission based on Article 60-2of the FIEA, and attention shall also be paid to the following points.
(1) Permission Procedures(i) Documents to be attached to the application for permission
A. The abstract of residence certification to be submitted shall contain the following items:
a. address,
b. name, andc. date of birth.
B. A copy of the residence card or a copy of the special permanent resident certificate submitted by a foreign
resident living in Japan, and a copy of residence certification of the home country submitted by aforeigner living outside Japan, or any other documents equivalent thereto (a Japanese translation shallbe attached to all documents in English, etc.) shall fall under the “documents in lieu thereof” pursuant
to the provisions of Article 221(vi) of the FIB Cabinet Office Ordinance.
(ii)

Points of attention during the period up until permission is granted
A. Applicants shall be reminded to abstain from conducting any transaction-at-exchange operations until
they are granted permission.
B. In the case where an applicant for permission is engaged in another business related to laws andregulations under the supervision of the Financial Services Agency and an administrative reprimand
concerning the said business has been issued, the details of such a reprimand shall be confirmed and,
when necessary, the progress of improvement measures shall be verified through hearings and othermeans.
In cases where the said disposition is related to legal compliance, attention shall also be paid to III2-1 as applied mutatis mutandis pursuant to X-2-1.

(iii)

Notification to applicants for permission
When permission under Article 60(1) of the FIEA has been granted, notification of permission shall be

issued to the applicant for permission.
(iv)

Conditions of permission
With regard to foreign securities companies that apply for permission under Article 60(1) of the FIEA toengage only in proprietary trading, supervisors shall examine whether the foreign securities companies canappropriately conduct the business operations for which permission is being sought. However, once the said
foreign securities company has been granted the said permission, if it intends to start conducting brokerage
services for orders on consignment for overseas customers, supervisors will need to re-examine whether the507

foreign securities company can appropriately conduct the said business operations. Therefore, when granting
permission to a foreign securities company that will engage only in transaction-at-exchange operations using
its own accounts, a condition shall be attached to the said permission to the effect that advance approval needs
to be obtained from the authorities in cases where the applicant intends to conduct business operations otherthan those for which permission was sought at the time of application.
(v)

Refusal of permission (Refer to II-5-6)
A. When permission is refused, a notification of refusal of permission shall be issued to the applicant. The
notification shall include the grounds for refusal and state that the applicant is entitled to request
examination to the Commissioner of the FSA and to file a suit to seek the rescission of disposal, with thegovernment as the counterparty.
B. The notification of refusal of permission shall specifically indicate the grounds for refusal and which of
the items set out in Article 60-3(1) of the FIEA correspond to the grounds for refusal, or shall specificallyindicate the parts of the application for permission or attached documents which contain misstatements
on important matters or which have material facts missing.

(2) Matters for Examination(i)

Items regarding corporate form
When examining whether or not a foreign securities company is a juridical person of the same type as acompany with board of directors as specified under Article 60-3(1)(i)(a) of the FIEA, supervisors shall checkthe following points based on the application for permission and the attached documents, as well as hearings:
A. Whether the foreign securities company has established a consultative body comprised of two or more
officers and employees to act as a decision-making body.
B. Whether consideration has been given to the structure of the decision-making body so that the respective
checks by each participant are functioning and so that management of the foreign securities company is
not being influenced by the wishes of any specific officers.
C. Whether representative persons are determined by counsel or other means comprised of two or more
officers and employees.
D. Whether the foreign securities company has arrangements and procedures to ensure that checks by theinternal control division on the sales and other divisions function properly.
E. Whether the foreign securities company has arrangements and procedures for audits to be conductedeffectively by an independent internal audit division, external auditors or the like.
(ii)

Items regarding examination of staffing level
When examining whether or not a foreign securities company is sufficiently staffed to properly conducttransaction-at-exchange operations, as specified under Article 60-3(1)(i)(k) of the FIEA, supervisors shallcheck the following points based on the application for permission and the attached documents, as well as
hearings:
A. Whether it can be confirmed that officers or employees with sufficient knowledge and experience havebeen secured and a sufficient organization has been established to conduct the relevant business508

operations in light of the following requirements:
a. Top managers and managing directors must be sufficiently qualified to conduct financial instruments
business in a fair and appropriate manner, in terms of their backgrounds and capabilities.
b. The foreign securities company must secure permanent officers and employees who understand theviewpoints regarding the appropriateness of business operations indicated in the FIEA and otherrelevant regulations, as well as supervisory guidelines, and who have the knowledge and experience
necessary for exercising such viewpoints, and sufficient knowledge and experience regarding
compliance and risk management to conduct transaction-at-exchange operations in a fair andappropriate manner.
c. The foreign securities company must be staffed and organized so that it can execute business
operations appropriately, including having personnel necessary for conducting transaction-atexchange operations in an appropriate manner allocated to appropriate divisions, and having
managers in charge of internal control and other matters appropriately allocated to divisions
independent from sales divisions.
d. The foreign securities company must have at each transaction-at-exchange office (referring to thebusiness sites or offices conducting transaction-at-exchange operations, prescribed in Article 602(1)(iii) of the FIEA; the same shall apply hereafter), two or more permanent officers and employees
who have each conducted business operations pertaining to transactions of the same type astransactions at exchange for a period of no less than three years.
e. Staff capable of conducting the following processes should be secured with regard to the transactionat-exchange operations.
i) Compilation and management of account documents, reports and other documents.
ii) Computer system managementiii) Trading managementiv) Processing of complaints and resolution of disputesv) Internal auditsvi) Training
f. In cases where the foreign securities company intends to conduct brokerage transactions, it must havearrangements and procedures for order management and transaction screening to prevent illegal
practices such as insider trading and market manipulation.
g. From the perspective of preventing activities concerning securities-related businesses with investors
in Japan, the foreign securities company must have arrangements and procedures for implementing
the measures listed in X-1-2(2).
h. Representative persons in Japan must be designated from among persons who are able to coordinate
appropriately with transaction-at-exchange offices and the head office and who are able to respond
appropriately to requests by supervisory authorities for the submission of reports and so forth.
B. Whether, as a result of examining the following matters in a comprehensive manner, there is a risk thatpublic confidence in the authorized transaction-at-exchange operator could be damaged because of the509

inclusion of persons with inappropriate qualifications for managing transaction-at-exchange operations
among its officers or employees who conduct transaction-at-exchange operations.
a. Officers and employees should not have the experience of being sentenced to a fine for violation of
the FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent
thereto.
b. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or
regulations equivalent thereto). (Particular attention should be paid to the case of an officer or
employee being accused of committing crimes specified under Articles 246 to 250 of the Penal Code(fraud, fraud using computers, breach of trust, quasi fraud and extortion, as well as attempts at thesecrimes).)(iii)

OthersA. Supervisors shall use “documents describing measures implemented for the purpose of preventing unfair
trading” as prescribed in Article 221(x) of the FIB Cabinet Office Ordinance, to check whether theforeign securities company has measures for preventing insider trading, measures for limiting orders,
and, in cases where the foreign securities company conducts brokerage transactions, arrangements andprocedures for order management and transaction screening to prevent unfair trading.
B. When conducting examinations under Article 60-3(1)(i)(b) of the FIEA, supervisors shall confirm thatthe foreign securities company is registered in all the countries where its head office and transaction-atexchange office are located, by using such means as attached documents and, as necessary, agreementswith overseas authorities on the provision of information.
C. When conducting examinations under Article 60-3(1)(ii) of the FIEA, supervisors shall confirm theeffectiveness of the assurance given by overseas authorities that they will respond to requests forcooperation in investigations conducted by Japan, such as by liaising with the overseas authorities.
D. When conducting examinations under Article 60-3(1)(iii) of the FIEA, supervisors shall request Japan’s
financial instruments exchanges to confirm the effectiveness of agreements made with establishers of
foreign financial instruments exchange markets on the provision of information.
It should be kept in mind that the “agreements on the provision of information” are not limited toagreements between individual exchanges. As long as the provision of information among theIntermarket Surveillance Group (ISG) and other exchanges is being conducted appropriately,
frameworks for the exchange of information between two or more exchanges may also be acknowledged.

X-3-1-2 Notification
III-3-2(3) shall be applied mutatis mutandis to notifications made by authorized transaction-at-exchange
operators, and attention shall also be paid to the following points.
(1) Points of Attention Regarding Notifications of Change, etc.
When a notification pursuant to Article 60-5(1) and (2) of the FIEA is received from an authorized transaction510

at-exchange operator, supervisors shall ascertain and confirm the content and appropriateness thereof, by holding
in-depth hearings with the said authorized foreign securities company such as through representative persons inJapan, and, when necessary, requiring the submission of reports based on Article 60-11 of the FIEA. Furthermore,when the authorized transaction-at-exchange operator is deemed to have committed a serious and malicious
violation of law, the supervisors shall consider necessary actions, including rescinding permission or issuing anorder for business suspension based on Article 60-8(1) of the FIEA.
(2) Points of Attention Regarding Notification of Additional Transaction-at-Exchange Offices, etc.
In cases where notification is received from an authorized transaction-at-exchange operator in accordance with
Article 60-5(1) of the FIEA regarding an additional transaction-at-exchange office or an additional financial
instruments exchange at which it has trading participant rights, supervisors shall confirm the appropriateness of thepersonnel structure and business operations of the said transaction-at-exchange office, and confirm that no reasons
exist for the refusal of permission under each item of Article 60-3(1) of the FIEA.
X-3-1-3 Account Documents Related to Business Operations
III-3-3 shall be applied mutatis mutandis to the compilation and storage of account documents related to business
operations. It should be noted that the term “branch office” in III-3-3 shall be replaced with “transaction-at-exchange
office.”X-3-2 Various Administrative Procedures (Authorized Service Providers of Electronic Over-the-Counter
Derivative Transactions)X-3-2-1 Permission
III-3-1 shall be applied mutatis mutandis to the treatment of registration applications based on Article 60-2 ofthe FIEA applied mutatis mutandis pursuant to Article 60-14(2) of the same act, and attention shall also be paid tothe following points.
(1) Permission Procedures(i)Documents to be attached to the application for permission
A. The abstract of residence certification to be submitted shall contain the following items:
a. Address
b. Name, andc. Date of birth
B. A copy of the residence card or a copy of the special permanent resident certificate submitted by a foreign
resident living in Japan, and a copy of residence certification of the home country submitted by a foreigner
living outside Japan, or any other documents equivalent thereto (a Japanese translation shall be attached
to all documents in English, etc.) shall fall under the "documents in lieu thereof" pursuant to the provisionsof Article 232-5(vi) of the FIB Cabinet Office Ordinance.
511

(ii) Points of attention during the period up until permission is granted
A. Applicants shall be reminded to abstain from conducting any electronic over-the-counter derivativetransaction service until they are granted permission.
B. In the case where an applicant for permission is engaged in another business related to laws andregulations under the supervision of the Financial Services Agency and an administrative reprimand
concerning the said business has been issued, the details of such a reprimand shall be confirmed and,
when necessary, the progress of improvement measures shall be verified through hearings and other means.
In cases where the said disposition is related to legal compliance, attention shall also be paid to X-2-2
as applied mutatis mutandis pursuant to X-2-1.
(iii) Notification to applicants for permission
When permission under Article 60-14(1) of the FIEA has been granted, notification of permission shallbe issued to the applicant for permission.
(iv) Refusal of permission (Refer to II-5-6)
A. When permission is refused, a notification of refusal of permission shall be issued to the applicant. The
notification shall include the grounds for refusal and state that the applicant is entitled to request
examination to the Commissioner of the FSA and to file a suit to seek the rescission of disposal, with thegovernment as the counterparty.
B. The notification of refusal of permission shall specifically indicate the grounds for refusal and which of
the items set out in Article 60-3(1) of the FIEA applied mutatis mutandis pursuant to Article 60-14(2) of
the same act correspond to the grounds for refusal, or shall specifically indicate the parts of theapplication for permission or attached documents which contain misstatements on important matters or
which have material facts missing.
(2) Matters for Examination(i)

Items regarding corporate form
When examining whether or not a foreign securities company is a juridical person of the same type as acompany with board of directors as specified under Article 60-3(1)(i)(a) of the FIEA, applied mutatis
mutandis pursuant to Article 60-14(2) of the same act, supervisors shall check the following points based on
the application for permission and the attached documents, as well as hearings.
A. Whether the foreign securities company has established a consultative body comprised of two or more
officers and employees to act as a decision-making body.
B. Whether consideration has been given to the structure of the decision-making body so that the respective
checks by each participant are functioning and so that management of the authorized provider of electronic
over-the-counter derivative transaction service is not being influenced by the wishes of any specificofficers.
C. Whether representative persons are determined by counsel or other means comprised of two or more
officers and employees.
D. Whether the foreign securities company has arrangements and procedures to ensure that checks by the512internal control division on the sales and other divisions function properly.
E. Whether the foreign securities company has arrangements and procedures for audits to be conductedeffectively by an independent internal audit division, external auditors or the like.
(ii) Items regarding examination of staffing level
When examining whether or not an authorized provider of electronic over-the-counter derivativetransaction service is sufficiently staffed to properly conduct its service, as specified under Article 603(1)(i)(k) of the FIEA, applied mutatis mutandis pursuant to Article 60-14(2), supervisors shall check thefollowing points based on the application for permission and the attached documents, as well as hearings:
A. Whether it can be confirmed that officers or employees with sufficient knowledge and experience havebeen secured and a sufficient organization has been established to conduct the relevant business operations
in light of the following requirements:
a. Top managers and managing directors must be sufficiently qualified to conduct electronic over-thecounter derivative transactions services in a fair and appropriate manner, in terms of their backgrounds
and capabilities.
b. The foreign securities company must secure permanent officers and employees who understand theviewpoints regarding the appropriateness of business operations indicated in the FIEA and otherrelevant regulations, as well as supervisory guidelines, and who have the knowledge and experience
necessary for exercising such viewpoints, and sufficient knowledge and experience regarding
compliance and risk management to conduct electronic over-the-counter derivative transactions in afair and appropriate manner.
c. The foreign securities company must be staffed and organized so that it can execute business operations
appropriately, including having personnel necessary for conducting electronic over-the-counter
derivative transaction services in an appropriate manner allocated to appropriate divisions, and having
managers in charge of internal control and other matters appropriately allocated to divisions
independent from sales divisions.
d. The foreign securities company must have at each electronic over-the-counter derivative transaction
office (referring to the electronic over-the-counter derivative transaction office, prescribed in Article60-2(1)(iii) of the FIEA, applied mutatis mutandis pursuant to Article 60-14(2) of the same act; thesame shall apply hereafter), two or more permanent officers and employees who have each conductedbusiness operations pertaining to transactions of the same type as electronic over-the-counter derivativetransactions for a period of no less than one year.
e. Staff capable of conducting the following processes should be secured with regard to electronic overthe-counter derivative transaction service.
i)Compilation and management of account documents, reports and other documents.

ii)

Computer system managementiii)

Customer management

iv)

Processing of complaints and resolution of disputesv)Internal audits
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vi)

Training

f. Representative persons in Japan must be designated from among persons who are able to coordinate
appropriately with electronic over-the-counter derivative transaction office and the head office and whoare able to respond appropriately to requests by supervisory authorities for the submission of reports
and so forth.
B. Whether, as a result of examining the following matters in a comprehensive manner, there is a risk thatpublic confidence in the authorized provider of electronic over-the-counter derivative transaction service
could be damaged because of the inclusion of persons with inappropriate qualifications for managing
electronic over-the-counter derivative transaction service among its officers or employees who conduct
such a service.
a. Officers and employees should not have been previously sentenced to a fine for violation of the FIEA
or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
b. Officers and employees should not have been previously sentenced to imprisonment with work or more
severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion, as well as attempts at these crimes).)(iii) Others
A. When conducting examinations under Article 60-3(1)(i)(b) of the FIEA, applied mutatis mutandis
pursuant to Article 60-14(2), supervisors shall confirm that the foreign securities company is registered in
all the countries where its head office and electronic over-the-counter derivative transaction offices arelocated, by using such means as attached documents and, as necessary, agreements with overseas
authorities on the provision of information.
B. When conducting examinations under Article 60-3(1)(ii) of the FIEA, applied mutatis mutandis pursuant
to Article 60-14(2), supervisors shall confirm the effectiveness of the assurance given by overseas
authorities that they will respond to requests for cooperation in investigations conducted by Japan, suchas by liaising with the overseas authorities.
X-3-2-2 Notification
III-3-2(3) shall be applied mutatis mutandis to notifications made by authorized provider of electronic over-thecounter derivative transaction services, and attention shall also be paid to the following points.
When a notification pursuant to Article 60-5(1) and (2) of the FIEA, applied mutatis mutandis pursuant to Article
60-14(2) of the same act, is received from an authorized provider of electronic over-the-counter derivativetransaction service, supervisors shall ascertain and confirm the content and appropriateness thereof, by holding indepth hearings with the said authorized provider of electronic over-the-counter derivative transaction service suchas through representative persons in Japan, and, when necessary, requiring the submission of reports based on Article
60-11 of the FIEA, applied mutatis mutandis pursuant to Article 60-14(2) of the same act. Furthermore, when theauthorized provider of electronic over-the-counter derivative transaction service is deemed to have committed a514

serious and malicious violation of law, the supervisors shall consider necessary actions, including rescinding
permission or issuing an order for business suspension based on Article 60-8(1) of the FIEA, applied mutatis
mutandis pursuant to Article 60-14(2) of the same act.

X-3-2-3 Account Documents Related to Business Operations
III-3-3 shall be applied mutatis mutandis to the compilation and storage of account documents related to business
operations. It should be noted that the term "branch office" in III-3-3 shall be replaced with " electronic over-thecounter derivative transaction office."515

XI. Supervisory Evaluation Points and Various Administrative Procedures (Financial Instruments
Intermediary Service Providers)
XI-1 Appropriateness of Business Operations (Financial Instruments Intermediary Service Providers)
III-2 (excluding III-2-5-2, III-2-5-3 and III-2-6), IV-3-1 (excluding IV-3-1-2(2), IV-3-1-3(1) and (2) and IV-31-6), IV-3-3-2(3) and (6) (limited to the sections related to the sale of complex structured bonds and investment
trusts that are similar to over-the-counter derivative transactions)and IV-3-4-2 and IV-3-6-2 shall be applied mutatis
mutandis to the examination of the appropriateness of the business operations of financial instruments intermediaryservice providers, and regarding the Explanation Documents as specified under Article 66-18 of the FIEA,
supervisors shall instruct financial instruments intermediary service providers to keep the documents available atany time for inspection by customers upon their request. On that occasion, supervisors shall encourage them todisplay the documents using the internet wherever possible.
Regarding theoretical prices mentioned in IV-3-1-2(6)(iii)A. and B. and internal rules mentioned in IV-3-12(6)(iii)B. and C., financial instruments service providers may use prices calculated and rules established by
Financial Instruments Business Operators to which their business operations are entrusted.
XI-2 Various Administrative Procedures (Financial Instruments Intermediary Service Providers)XI-2-1 Registration
III-3-1 (excluding (2), (4) and (10)(iii)) shall be applied mutatis mutandis to the treatment of registration
applications based on Article 66-2 of the FIEA, and attention shall also be paid to the following points. It should be
noted that terms used in the relevant formats specified in the Attached List of Formats shall be replaced as necessary.
(1) Registration Procedures(i)

The registration numbers to be recorded in a registry of financial institutions shall be specified as follows:(Example) Director-General of XX Local Finance Bureau (Financial Instruments Intermediary Service
Providers) No. XX(ii)

Proxy Application for Registration
Regarding registration application concerning financial instruments intermediary service providers, it

should be kept in mind that proxy application may be made by the primary Financial Instruments Business
Operators and other entities, based on their examination of the applications for the purposes of facilitating theconvenience of the applicants and their proxies, streamlining the applicants’ clerical work, ensuring the
preciseness of the items specified in the application and speeding up the processing of the application.
When supervisors have received a proxy registration, they shall examine the letter of proxy in order tocheck the validity and scope of the proxy. It should be kept in mind that when the scope of the proxy includes
the authority to revise the application and receive the notice of registration, supervisors may request the proxyapplicant to make revision and give the notice thereto.

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(2) Matters for Screening(i)Regarding an applicant service provider which undertakes service on behalf of two or more primary

Financial Instruments Business Operators under Article 258(iii) of the FIB Cabinet Office Ordinance,
supervisors shall check whether the following requirements are met in judging whether the names of the
primary Financial Instruments Business Operators responsible for compensating for losses that may arise fromproblematic conduct are properly indicated.
A. Whether possible problematic conduct is categorized and whether the name of the primary Financial
Instruments Business Operator responsible for compensating for losses in the event of each category ofproblematic conduct is clearly specified.
B. Whether the name of the primary Financial Instruments Business Operator responsible for compensating
for losses in the event of problematic conduct that does not fall under any category or that cannot beclearly put into any category is clearly specified.
(ii)

Supervisors shall check whether the contents and methods of business operations as specified under

Article 259 of the FIB Cabinet Office Ordinance include the following items:
A. Service area
B. Business style (e.g., whether the business involves physical contact with customers, is conducted
through a computer system linked to a telecommunications network and, in the case of an applicant who
is an individual person, whether the service provider employs persons engaging in financial instrumentsintermediary service)
C. Types of sales branch (manned branches, unmanned branches)
D. Types of securities handled by the service provider
E. Types of domestic and foreign market derivatives transactions for which the service provider acts as a
broker (the types of transactions and as specified under each item of Article 2(21) and Article 23 of the
FIEA)
F. In cases where the service provider intends to act as a broker for investment advisory contracts or
discretionary investment contracts, the intention must be indicated.
(3) Others
When examining whether officers and employees of a financial instruments intermediary service provider havesufficient knowledge and experience to properly conduct financial instruments intermediary services, supervisors
shall check the following points in reference to the submitted applications and documents attached thereto. It should
be noted that when the applicant is a foreign corporation, they shall check the status of officers and employees
stationed in Japan with regard to (i) below and the corporation’s status in Japan with regard to (ii) and (iii).
(i)

Whether persons engaging in financial intermediary services (officers and employees engaging in

financial intermediary services and managers in charge of internal control and other matters) have passed asales representative qualification examination conducted by a financial instruments firms association related
to such services and have a prescribed level of knowledge regarding relevant laws, regulations and rules.
(ii)

In cases where the applicant is a corporation or an individual person who employs persons engaging in
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financial instruments intermediary services, whether the applicant has a staff and an organization that ensure
an appropriate allocation of personnel necessary for conducting the relevant service in an appropriate mannerand managers in charge of internal control, according to the nature and scale of the relevant service.
(iii)

In cases where the applicant is a corporation or an individual person who employs persons engaging in

financial instruments intermediary services, whether the applicant has established arrangements andprocedures necessary for the following matters. (Regarding A. and B., the intermediary service provider may
entrust the compilation of accounts and other documents to the primary Financial Instruments Business
Operator while managing the compiled documents itself. C. to E. may be disregarded in cases where theprimary Financial Instruments Business Operator has established appropriate arrangements and procedures.)
A. Compilation and management of account documents, reports, etc.
B. Customer due diligence
C. Computer system management
D. Processing complaints and disputes
E. Internal audits
XI-2-2 Notification
III-3-2(1) shall be applied mutatis mutandis to notifications made by financial instruments intermediary service
providers. It should also be noted that when receiving a notification for discontinuation of business based on Article
66-19(1) of the FIEA from a financial instruments intermediary service provider, supervisors shall make sure,through a hearing with the service provider, for example, that no reason exists for the rescission of registration as
specified under Article 66-20(1) of the FIEA.
XI-2-3 Account Documents Related to Business Operations
III-3-3 (excluding III-3-3(4) and (5)) shall be applied mutatis mutandis to the treatment of the compilation andstorage of account documents related to business operations. Financial instruments intermediary service providers
may compile the account documents on the financial instruments intermediary service, as specified under Article
282 of the FIB Cabinet Office Ordinance, with the use of computer systems and formats adopted by the primary
Financial Instruments Business Operators or entrust the establishment of systems and formats necessary for thecompilation of the account documents to them. However, it should be noted that the financial instrumentsintermediary service providers bear the responsibility for the compilation and storage of the account documents.

XI-2-4 Registration of Sales Representatives
IV-4-3 and V-3-2 shall be applied mutatis mutandis.

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XII. Supervisory Evaluation Points and Various Administrative Procedures (Securities Finance Companies)
XII-1 Governance (Securities Finance Companies)
III-1 (excluding (1)(ii) F) shall be applied mutatis mutandis to the examination of the governance of securities
finance companies. In addition, IV-1-2 shall be applied mutatis mutandis to the examination of whether officers andemployees are sufficiently qualified to conduct securities finance business.
XII-2 Appropriateness of Business Operations (Securities Finance Companies)
III-2 (excluding III-2-3-1, III-2-3-3, III-2-3-4, and III-2-4(2)(i) and (ii), and XII-2-15)), IV-3-1-6 and IV-3-1-7
shall be applied mutatis mutandis to the examination of the appropriateness of the business operations of securities
finance companies. Regarding descriptions of “3. Status of Measures Implemented in Relation to Protection of
Personal Information,” as specified under Article 3-4(1) of the Cabinet Office Ordinance Regarding Securities
Finance Companies (hereinafter referred to as the “Finance Companies Cabinet Ordinance”), attention shall be paid
to the following points:(1) Status of Implementation of Safety Control Measures
Regarding a securities finance company’s safety control system concerning information related to individual
customers, supervision of employees responsible for safety control and, in cases where the safety control is entrusted
to an outside entity, supervision of the said entity, supervisors shall require a report regarding the following measures,
which are appropriate and necessary from the viewpoint of preventing the said information from being leaked, lostor damaged.
(Necessary and Appropriate Measures Regarding Safety Control)(i)

Measures based on Article 8 of the Financial Sector Guidelines(ii)

Measures based on Section I and Attachment 2 of the Practical Guideline(Necessary and Appropriate Measures Regarding Supervision of Employees)(i)Measures based on Article 9 of the Financial Sector Guidelines(ii)

Measures based on Section II of the Practical Guideline(Necessary and Appropriate Measures Regarding Supervision of Entrusted Entity)(i)

Measures based on Article 10 of the Financial Sector Guidelines(ii)

Measures based on Section III of the Practical Guideline(2) Status of Implementation of Measures to Prevent Use of Specified Non-Disclosure Information for NonPrescribed Purposes“Other specified non-disclosure information” as specified in Note 3(2) refers to items (i)-(vii) below, while“assurance of appropriate business operations and other purposes deemed to be necessary” refers to the cases
described in each item of Article 5(1) of the Financial Sector Guidelines.
(i)

Information regarding labor union membership(ii)

Information regarding ethnicity
519

(iii)

Information regarding sexual orientation(iv)

Information regarding provisions under Article 2(iv) of the Order for the Enforcement of the Personal
Information Protection Act(v)

Information regarding provisions under Article 2(v) of the Order for the Enforcement of the Personal
Information Protection Act(vi)

Information regarding the fact that the related customer has been a victim of crime(vii) Information regarding social status
XII-3 Various Administrative Procedures (Securities Finance Companies)
XII-3-1 License Screening Criteria(1) Staffing
The appropriateness of the staffing as specified under Article 156-25(1) shall be judged in light of the following
criteria:
Whether the securities finance company has allocated personnel necessary for conducting the(i)business specified under Article 156-24(1) of the FIEA (hereinafter referred to as “debt-credit transaction
business”) to individual divisions.
(ii)

Whether the securities finance company’s staff includes officers and employees with three or more yearsof experience regarding securities-related business as well as those adept in the debt-credit transaction system.
(iii)

Whether officers and employees secured by the securities finance company are deemed to have sufficientknowledge and experience to conduct the relevant business in an appropriate and efficient manner in light of
the following criteria:
A. Managing directors must understand the viewpoints regarding governance indicated in the FIEA andvarious other laws and regulations, and have sufficient knowledge and experience to conduct
governance and sufficient knowledge and experience regarding compliance and risk management to
conduct financial instruments business in a fair and appropriate manner.
(iv)

When the qualifications of employees and officers are examined in a comprehensive manner in relation

to the following criteria regarding organized crime members and financial crimes, whether there is the riskthat public confidence in the securities finance company could be damaged because of the inclusion of officers
and employees with inappropriate qualifications among its staff.
A. Officers and employees should not be current or former members of organized crime groups.
B. Officers and employees should not have close relationships with organized crime groups.
C. Officers and employees should not have the experience of being sentenced to a fine for violation of the
FIEA or other domestic financial laws and regulations or foreign laws and regulations equivalent thereto.
D. Officers and employees should not have the experience of being sentenced to a fine (including similar
punishments imposed under foreign laws and regulations equivalent thereto) for violation of the Act on
Prevention of Unjust Acts by Organized Crime Group Members (excluding the provisions of Article
52032-2(7) of the same act) or other foreign laws and regulations equivalent thereto, or for committing acrime prescribed under the Penal Code or under the Act on Punishment of Physical Violence and Others.
E. Officers and employees should not have the experience of being sentenced to imprisonment with workor more severe punishment (including similar punishments imposed under foreign laws or regulations
equivalent thereto). (Particular attention should be paid to the case of an officer or employee being
accused of committing crimes specified under Articles 246 to 250 of the Penal Code (fraud, fraud using
computers, breach of trust, quasi fraud and extortion, as well as attempts at these crimes).)(2) Credit Status and Fund-Raising Capability
The appropriateness of a securities finance company’s credit status and fund-raising capability shall be judged
in light of the following criteria:(i)Whether the securities finance company can be objectively deemed to have sufficient stock-procurement
and fund-raising capabilities for conducting the debt-credit transaction business.

(ii)

Whether the securities finance company has established arrangements and procedures for obtaining

information regarding credit transactions in the exchange-based financial instruments market and the overthe-counter securities trading market at any time, and procurement and settlement systems which link it withFinancial Instruments Business Operators and transactions counterparties, and which are deemed to becapable of responding quickly to procurement and settlement needs.
XII-3-2 Notification
The revisions of the contents and methods of business operations as specified under Article 1-2(2)(ii) of the
Finance Companies Cabinet Ordinance refer to those revisions of the contents of methods of business operations,excluding revisions of terms of transactions, which involve revisions of internal rules and which must be
communicated to all transaction counterparties.
XII-3-3 Approval
In granting approval based on Article 156-27(3) of the FIEA, supervisors shall pay attention to the following
points:(1) Approval should not be granted in cases where the business for which approval is sought is deemed to undermine
public interests or where an excessive amount of securities held by the securities finance company could lead tosignificant price change risk, for example.
(2) Whether the revenue projection document as specified under Article 2(1)(i) of the Finance Companies Cabinet
Ordinance indicates that the business will turn profitable within three years from its commencement and whether
the projection can be objectively deemed to be feasible.

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XII-3-4 Authorization(1) Revision of Contents and Methods of Business Operations
When receiving an application for authorization of a revision of the contents or methods of business operations
as specified under Article 156-28(1) of the FIEA, supervisors shall pay attention to the following points:
Whether the revision of the contents could undermine the smooth conduct of debt-credit transaction(i)business.
(ii)

Whether it is ensured that the revision of the contents is quickly communicated to all necessary parties(2) Reduction of Capital Amount
When receiving an application for authorization of reduction in the capital amount, supervisors shall pay
attention to the following points:(i)

Whether the capital amount after the reduction will be lower than the minimum level prescribed under
Article 156-23 of the FIEA.

(ii)

Whether the capital reduction could undermine the smooth conduct of debt-credit transaction business.

(iii)

Whether the reason for the capital reduction can be deemed to be one essential to continuing business,such as a need to eliminate a deficit.
(3) Resolution for Discontinuance or Dissolution of Business
When receiving an application for authorization of the resolution for discontinuance or dissolution of businessas specified under Article 156-36(i) of the FIEA, supervisors shall pay attention to the following points:(i)

Whether no reason exists for the rescission of a license as specified under Article 156-32(1) of the FIEA.

(ii)

Whether the securities finance company has a positive net worth and is ready to proceed with theliquidation process smoothly.
(iii)

Whether measures, both institutional and physical, have been taken to avoid causing disruptions to credit

transactions in the exchange-based financial instruments market and the over-the-counter securities market
after the discontinuance or dissolution of business.
(4) Merger or Transfer or Acceptance of Business
When receiving an application for authorization of the merger or transfer or acceptance of business as specified
under Article 156-36(ii) of the FIEA, supervisors shall pay attention to the following points:(i)

Whether no reason exists for the rescission of a license, as specified under Article 156-32(1) of the FIEA,
with regard to the company set to be dissolved as a result of the merger or business transfer.

(ii)

Whether measures, both institutional and physical, have been taken to prevent the merger or transfer or

acceptance of business from causing disruptions to credit transactions in the exchange-based financial
instruments market and the over-the-counter securities market.

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XII-4 Measures to Ensure the Effectiveness of Stay Decision in Agreements Governed by Foreign Laws
XII-4-1 Background
The amendment of the Deposit Insurance Act (hereinafter referred to as the “DIA”) in June 2013 has provided
the Prime Minister with a power to make a decision that a “Clause on Specified Cancellation, etc.” in an agreement,
meaning a clause which provides Specified Cancellation (“Specified Cancellation, etc.” defined in Article 137-3(2)of the DIA) that is to be triggered by an application of “Related Measures, etc.” defined in Article 137-3(1) of the
DIA, is null and void for a period set out in Article 137-3 (1) of the DIA (such a decision is hereinafter referred toas a “Stay Decision”). In the above conjunction, the 2013 amendment revised the provisions in Article 131 of the
DIA with respect to special provisions for procedures of creditor protection. In order to avoid a severe disruption to
Japan’s financial system, securities finance companies to which Specified Confirmation set out in Article 126-2 (1)of the DIA is applicable are required to ensure that the effectiveness of Stay Decisions and special provisions forprocedures of creditor protection set out in Article 131 of the DIA (hereinafter collectively referred to as the“Effectiveness of Stay Decision”) extend to agreements governed by laws other than Japanese law.
XII-4-2 Main Supervisory Focus
In light of the development at the global level aimed at ensuring the effectiveness of temporary stay on earlytermination rights in agreements governed by foreign laws, the FSA expects to set the following items as its
supervisory focus in examining the firms’ controls on agreements governed by laws other than Japanese law, taking
into account the circumstances of individual transactions.
(1) Supervisory Focus with respect to Conclusion of an Agreement
The FSA expects to examine whether a Financial Instruments Business Operator, etc. has taken necessary actions
to ensure, regardless of the counterparties’ jurisdictions, that the Effectiveness of Stay Decision applies to anagreement governed by laws other than Japanese law, where the Financial Instruments Business Operator, etc.
concludes or materially amends the agreement or enters into a transaction based on the existing agreement, provided
that the new or the existing agreement, as the case may be, contains a Clause on Specified Cancellation; is agreed
with any counterparty other than central counterparties (CCPs); and is with respect to “Subject Transactions” whichrefers to, among the transactions listed in Article 35-18 of Ordinance for Enforcement of the Deposit Insurance Act
as “transactions of instruments that have a market price at an exchange or other markets and their equivalenttransactions” over-the-counter derivative transactions, financial and other derivative transactions, the sale orpurchase of securities on condition of repurchase or resale, the lending and borrowing of securities, the trading ofbonds with options, forward foreign exchange transactions, over-the-counter commodity derivative transactions,and similar transactions, including transactions entered into for the purpose of collateralizing these transactions.
(Note) Actions to comply with the requirements above include:(i)

Adhering to an internationally common protocol aimed at ensuring the Effectiveness of Stay Decision onagreements governed by laws other than Japanese law and confirming that the counterparty has adhered tosuch a protocol; and
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(ii)

Indicating clearly in the agreement that the Effectiveness of Stay Decision applies to the Subject

Transactions.
(2) Supervisory Focus with respect to Existing Contracts
Firms that are required to take the actions set out in (1) are also expected to take those actions, as necessary,with respect to existing contracts of Subject Transactions which include a Clause on Specified Cancellation and aregoverned by laws other than Japanese law (excluding the cases where the firm enters into a new transaction basedon the existing agreement), taking into account the significance of the potential systemic impact that may be causedby the non-enforceability of the Effectiveness of Stay Decision to the agreement.
XII-4-3 Supervisory Approaches and Actions
Based on the supervisory focus above, the FSA expects to conduct in-depth reviews on the relevant management
and control of securities finance companies. Where necessary, the FSA also expects to require securities financecompanies to submit a report to the FSA, pursuant to Article 156-34 of the FIEA and Article 136 of the DIA.
If any material impediment to ensuring smooth execution of orderly resolution is identified as a sequel ofrequiring the submission of a report, the FSA expects to consider issuing, a business improvement order pursuant
to Article 156-33 of the FIEA and an order pursuant to Article 137-4 of the DIA to securities finance companies.

524