August 7, 2012
SMBC Nikko Securities Inc.

Release of the Investigation Report by the Investigation Committee and Formulation of
Our Improvement Measures

SMBC Nikko Securities Inc. (hereafter, “Nikko”) express our deep regret in connection with
the indictment against a former executive officer of Nikko filed with the Yokohama District
Court on a charge of violating the Financial Instruments and Exchange Act (violation of
restriction on insider trading). We hereby apologize to our customers and all related parties
for concerns and inconveniences we have caused.
We have received an investigation report (“Investigation Report”) from the Investigation
Committee established upon the resolution of Nikko’s board of directors meeting held on
June 25, 2012 (the Investigation Committee is chaired by Tomoyoshi Arita, former
Superintending Prosecutor of Fukuoka High Public Prosecutors Office, Attorney at law).
We have taken the incident with utmost seriousness, and today formulated improvement
measures (“Improvement Measures”) based on the Investigation Report. We will further
enhance our internal controls through the steady implementation of the Improvement
Measures, and do our best to recover the confidence of our customers and all relatedparties.

Attachment:
REPORT by the Investigation Committee (Summary)
Measures by Nikko###

This material is an English translation of Japanese announcement made on August 7, 2012. Although the company
intended to faithfully translate the Japanese document into English, the accuracy and correctness of thistranslation are not guaranteed and thus you are encouraged to refer to the original Japanese document.

English Translation

August 7, 2012
To: SMBC Nikko Securities Inc.

REPORT (Summary)Investigation Committee
ChairmanTomoyoshi Arita
Commissioner Osamu Sudo
Commissioner Michinori Ando

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

INDEX

I

Overview of the investigation ......................................................................................... 1
1.

Facts .......................................................................................................................... 1

2.

Background and purpose of setting up the Investigation Committee ......................... 2

3.

Composition of the Investigation Committee .............................................................. 3

II

Method and scope of investigation ................................................................................ 3
1.

Method of investigation .............................................................................................. 4

2.

Scope of Investigation ................................................................................................ 5

III

Facts discovered by the investigation ............................................................................ 5
1.

Facts related to the Information Leakage ................................................................... 52.

The Target ................................................................................................................ 103.

How corporate related information was managed .................................................... 10

4.

Arrangements to supervise the activities of Executives including the Target ........... 11

5.

Education and training system for insider trading and similar regulation ................. 12

6.

Whether there was any organizational involvement and Similar Cases (leak of

information by someone other than the Target) ............................................................... 14
IV

Analysis of the cause of Information Leakage ............................................................. 14
1.

The perspective for analysis of cause ...................................................................... 14

2.

Analysis of the cause of Information Leakage.......................................................... 16

V

Measures to prevent recurrence .................................................................................. 20
1.

Enhancement of training to those seconded from SMBC ........................................ 20

2.

Enhancement of supervision of action towards executives ...................................... 20

3.

Sharing of human resources information ................................................................. 21

4.

Maintenance and improvement of the arrangement to manage corporate related

information ...................................................................................................................... 21

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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I

Overview of the investigation
1. Facts(1)

On June 25, 2012, a former executive officer (“Target”) of SMBC Nikko
Securities Inc. (“Nikko”) was arrested on the charge of violating Financial
Instruments and Exchange Act (violation of restriction on insider trading)by Yokohama District Public Prosecutors’ Office, and was indicted to
Yokohama District Court on July 15, 2012. The Target was also
re-arrested on the charge of violating Financial Instruments andExchange Act (violation of restriction on insider trading) by Yokohama
District Public Prosecutors’ Office and was indicted to Yokohama District
Court on August 5, 2012.
According to the press release and other sources, the facts constituting
the offence charged for both of the indictments above were as follows:(i)

The Target obtained knowledge about the facts related to theimplementation of tender offer of shares of Company X, which
was listed on the Tokyo Stock Exchange, colluded with an
executive of a finance company (“Tippee”), and without statutory
grounds for exemption, on February 22 and 23 of 2011, which
was before the fact was made public, purchased 20 shares ofCompany X, with the total purchase price of 2,401,000 yen,under the name of a third person, at Tokyo Stock Exchange,
through a securities company other than Nikko.

(ii)

The Target obtained knowledge about the facts related to theimplementation of tender offer of shares of Company Y, which
was listed on the Tokyo Stock Exchange, colluded with the
Tippee, and without statutory grounds for exemption, from March
29, 2011 to September 2, which was before the fact was madepublic, purchased 247 shares of Company Y, with the totalpurchase price of 18,609,500 yen, under the name of a third
person, at Tokyo Stock Exchange, through a securities company

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

1other than Nikko.
(iii)

(2)

The Target obtained knowledge about the facts related to theimplementation of tender offer of shares of Company Z, which
was listed on the Tokyo Stock Exchange, colluded with the
Tippee, and without statutory grounds for exemption, from June
1, 2011 to July 29, which was before the fact was made public,
purchased 66,900 shares of Company Z, with the total purchaseprice of 43,256,900 yen, under the name of a third person, at
Tokyo Stock Exchange, through a securities company other than
Nikko (the three brands of shares above shall collectively bereferred to as the “Shares”; the facts related to theimplementation of the tender offer of the Shares shall be referred
to as the “Information”; and the fact that the Target
communicated the Information to the Tippee shall be referred toas the “Information Leakage”).

The Target has been seconded from Sumitomo Mitsui Banking
Corporation (“SMBC”) to Nikko, but was removed from secondment as of
May 22, 2012, and was punitively dismissed as of May 23, 2012, basedon violation of internal rules (leak of client information) during Target’s
tenure with SMBC.

2. Background and purpose of setting up the Investigation Committee
Since the special investigation on September 28, 2011 by the Securities
and Exchange Surveillance Commission regarding the Information
Leakage, Nikko has voluntarily refrained from conducting its own internal
investigation so as not to affect the investigations etc. by the relevant
authorities, while, cooperating with their investigation etc., however,started its internal investigation from June 1, 2012, under the direction ofInternal Administration Supervisor, Michinori Ando, within a scope that do
not interfere with the investigation etc. of the relevant authorities, after
reporting it to the relevant authorities. Four outside legal counsels that do
not have any interest with Nikko, SMBC, Target or the Tippee, joined thesaid internal investigation. These four counsels later composed theThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

2

committee or its supporting staff.
Later, following the Target’s arrest, it was resolved at the board of directors
meeting of Nikko on June 25, 2012, to establish an investigationcommittee with the purpose of conducting investigation of the facts,
analyzing the cause, and making proposal etc. of the improvement
measures in relation to the Matter, and the investigation committee(“Committee”) was established on the same day (“The Arrest of Former
Executive Officer and Establishment of the Investigation Committee”;
Nikko’s News Release dated June 25, 2012).
Therefore, the purpose of this investigation report is to identify measures
Nikko should take as early as possible, and ensure that the information
control in the future should be made appropriately, based on the fact that
the Target was arrested and indicted as set forth above in 1-(1) above, but
not to make reference to the existence or non-existence of facts relating to
the said indictment.
3. Composition of the Investigation Committee
Composition of the Investigation Committee is as follows:
ChairmanTomoyoshi Arita (Attorney at law, former Superintending
Prosecutor, Fukuoka High Public Prosecutors Office)Commissioner
Osamu Sudo (Attorney at law)
Commissioner
Michinori Ando (Director and Internal Administration
Supervisor of Nikko)
The Committee appointed two outside counsels (Michio Masaki andHiroatsu Saga) as supporters and established a secretariat consisting of
12 executives and employees (“Executives and Employees”) including six
employees dedicating full time under the committee to support theinvestigation by the Committee.

II Method and scope of investigation

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

3

1. Method of investigation
The Committee inspected and analyzed the records relating to the Target
and Information Leakage and internal documents such as relevant rules
etc. of Nikko during the period of October 1, 2009, when the Target wasseconded to Nikko until September 30, 2011, when the Target effectively
ceased to be involved in the operation of Nikko by being subject to thespecial investigation by the Securities and Exchange SurveillanceCommission.
Also, after October 1, 2009, until June 25, 2012 when the Target wasarrested, we conducted a survey (“Survey”) on 8794 people 1 who
belonged to group companies of Sumitomo Mitsui Financial Group, Inc.
including Nikko and SMBC as of July 5, 2012, the day on which the Survey
was conducted, among the Executives and Employees who has ever
belonged to Nikko, in order to understand the route of information
conveyance and measures etc. in regards to the Information Leakage andwhether there were other cases by other Executives and Employees
similar to the Information Leakage (“Similar Cases”); established a hotline
to report directly to the Committee and a dedicated hotline to report within
Nikko; and sought information related to Information Leakage and Similar
Cases2. In the Survey, the Committee requested that the Executives andEmployees answered based on facts, as if it was his/her own problem andin good faith, and clearly stated Nikko’s policy that “punishment will be
exempted or reduced for those cases declared voluntarily, but in thosecases where it is unfortunately found that the declaration was false, thepunishment will be severe. Direct hotline to the Committee was operated
in a way that information which could specify the reporter was disclosed
only to attorney Commissioners and attorney supporters, and clearly
indicated reporters will not be treated unfavorably.
Also, we have interviewed total man-days of 80 people, such as
management of Nikko and Executives and Employees who had business
1

With respect to four executives, the Committee directly interviewed the content of Survey;
therefore, no additional internal survey was conducted.
2
The direct hotline within Nikko was established by continuing the use of the internal hotline
separately set up on May 1, 2012.
This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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relationship with the Target, and also conducted interview and madeinquiries to relevant department of SMBC.
One of the purposes of this Committee was to investigate the facts of the
Matter, however, we excluded from our investigation the development andbackground of the Target getting involved in the Matter, and the collusionetc. with the Tippee, because authorities were conducting investigation.
2. Scope of Investigation(1) Investigation of the facts related to the Information Leakage(2) Investigation of whether there was any Similar Case
(3) Investigation of systems related to Information Management and thestatus of their operations

III Facts discovered by the investigation
1. Facts related to the Information Leakage(1)

By what route the Target obtained the Information
The Information was reported at the regular meeting within theInvestment Banking, which the Target was a member of, and it waspossible for the Target to obtain the Information through such meetingsand meeting materials in a manner not questionable in light of theinternal rules on etc. The Target was not authorized to access electronic
files of the materials of the meetings within the said Investment Banking.

(2)

Routes and Measures etc. of the Information Leakage
A.

Target’s statement to Nikko
Before the Target was punitively dismissed at SMBC as of May 23,
2012, Executives and Employees of Nikko interviewed the Target
multiple times.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

5

The Target totally denied the Information Leakage by explaining “I
did not disclose the information to the Tippee” at the said interview.
Therefore, the route and measures etc. of the Information Leakage
was not discovered at all at the said interview.
After the special investigation by the Securities Exchange
Surveillance Commission on September 28, 2011, SMBC conducted
an interview with the Target, but the Target was denying his
involvement in insider trading.
B.

Result of investigation through the Survey etc.

(a)SurveyAs described in II-1 above, the Committee conducted a survey on all
Executives and Employees of Nikko, 8,794 people in total, andobtained answers from the total of 8,755 Executives and Employees
excluding 39 employees on leave.
Also, among the Executives and Employees above, we requested toa total of 1,828 Executives and Employees who were “Corporate
Related Executives and Employees” under the Insider Trading
Control Rules (mainly the Executives and Employees of departmentsthat are likely to obtain corporate related information in the course of
its work and Executives and Employees not belonging to suchdepartments but who handles corporate related information in thecourse of its work) to provide information regarding the route andmeasures etc. of the Information Leakage.
As a result, we obtained answer from 1,825 people (response ratio
99.8%), but there was no information regarding route and measuresetc. of the Information Leakage. Four3people provided answer thatthey have seen or heard the Target was leaking information outside
by violating laws and rules, and internal rules, but after the3

One person out of the four was not Corporate Related Executives and Employees but made a
response spontaneously.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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Committee conducted individual interviews, it was found nothing
contributed to the understanding of routes and measures etc. of theInformation Leakage.
(b)

HotlineAs described in II-1 above, the Committee set up a direct hotline to
the Committee and a hotline within the company, and sought
information related to the Information Leakage.
As a result, there was one report to the hotline within the company,
but when the Committee listened to the content of such report, it was
not something that contributed to the understanding of routes andmeasures etc. of the Information Leakage.

C.

Result of our investigation related to communication tools the Target
used within the company
The result of our investigation related to the communication tools theTarget used within the company is as follows:(a)Target’s emails sent/received in and out of the company
We investigated Target’s emails sent/received in and out of thecompany 4 (15,216 mails investigated) during October 1, 2009 to
September 30, 2011, but there was no email that leaked corporate
related information and information that inferred corporate related
information other than emails sent to people related to the deal within
the company.

(b)

Phone used by the Target
We investigated incoming/outgoing records of the land line used by

4

With respect to the emails sent/received in and out of the company in the past, as Nikko has kept
such emails after December 1, 2010, only emails sent out of the company were investigated for theperiod until November 30, 2010.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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the Target in Investment Banking (“Land Line”) and cell phone lent by
Nikko (“Cell Phone Lent by the Company”) (5,300 records
investigated), and the incoming/outgoing records of Blackberry lentby Nikko (0 record) during the period of October 1, 2009 and
September 30, 2011. As a result, we found one outgoing record to
the affiliate of the Tippee from the Land Line, one incoming record to
the Land Line from the said company, ten outgoing record to the
Tippee from the Cell Phone Lent by the Company (three of themwere short mail)D.

Investigation result of trail related to Target’s activity(a)Status of Target’s visiting outside
We confirmed Target’s calendar and daily report of company car 5(recorded by the driver of the company car) during the period of
October 1, 2009 and September 30, 2011, and 62 days on thecalendar recorded Tippee’s affiliate’s name, three days on the daily
report of company car recorded the location of Tippee’s home andaffiliate of Tippee as destination.
Based on the size of the company, the affiliate of Tippee is unlikely to
be a client of the Investment Banking of Nikko.
With respect to other destinations, names of individuals wererecorded where it should normally be the case that the name ofcompany was recorded, and number of visits to one of such person
was 48 times. As such, we found that the Target was frequently
meeting a person whose relationship with Nikko’s business was notclear.

(b)

Business entertainments and gifts made by the Target.
We investigated Target’s calendar, application for providing businessentertainments, applications for providing gifts and the status of

5

There was a report of company car only after April 1, 2010.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

8

using and applying entertainment expenditures and expenses during
the period of October 1, 2009 and September 30, 2011. As a result,
we found 133 parties, 19 golfs, 20 gifts, but none of them were
provided to the Tippee or affiliates of Tippee.
(c)Printing history of the personal computer used by Target
We investigated printing history of the personal computer used byTarget during the period of October 1, 2009 and September 30, 2011
(investigated 2,430 printouts). As a result, we found that the Target
has printed out price information of 79 brands of stock from Yahoo
Finance (http://finance.yahoo.co.jp/), company overview andinformation related to financial results.
Although we did confirm that such print outs and information related
to the said stocks were not sent by email, we were not able toinvestigate information sent by fax or by other methods because
there were no records left.

(d)Interview of Executives and Employees of Nikko
We interviewed forty-nine people who were interviewed or asked toprovide materials in the course of special investigation by the
Securities and Exchange Surveillance Commission in September
2011 (among them, Executives and Employees of Investment
Banking , where the Target was the executive officer in charge, were
25 people, and Corporate Business (formerly Corporate Business)were eight people.), and 12 people other than such 49 people who
had been a general manager at Corporate Business. We alsointerviewed 19 people who are related to the management etc. of
Nikko.
As a result, it was confirmed that, communication of corporate
related information to Target within the Investment Banking andCorporate Business were all made at business related meetings orby emails etc. Also, most of them answered that they have not

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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sensed suspiciousness, or do not know, and we investigated directlyfor other answers, but we found no information related to the routes
and measures etc. of the leakage by the Target.
2. The Target(1)

Content of the Target’s task at Nikko
After being seconded to Nikko, the Target was in charge of the entire
business of Investment Banking, without taking charge of individual
matters, to perform the role of coordinator between SMBC and Nikko.
When the Committee interviewed Executives and Employees of Nikko,
many of them explained that the Target was sufficiently performing hisrole as the coordinator with SMBC, on joint matters between Nikko and
SMBC that the Target was involved. Also, within his role of coordinationof banks and securities, the Target was coordinating with SMBC otherthan that coordination of individual cases, such as seconding twenty-fivetalented people after negotiating with SMBC etc.

(2)

Troubles during his days at SMBC which was discovered after Target’s
secondment and the background of such discovery
After the Target was seconded to Nikko, and before the discovery of thiscase, there were complaints to SMBC from two customers, thecustomers during the days Target worked for SMBC. SMBC conductedinternal investigations such as interviewing the Target and confirminginternal approval document for lending, but could not find any evidence
that proved Target conducted any wrong doing.

3. How corporate related information was managed
At Nikko, Securities Trading Supervisory Operation is the department
which controls the enhancement and reinforcement of the arrangements toprevent insider trading. The Securities Trading Supervisory Operation
promotes the development and reinforcement of the arrangements toThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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control corporate related information, develops the arrangements tocontrol management of transactions by Executives and Employees and toprevent client unfair trading.
According to the press release etc. the first leakage among the Information
Leakage was the leak of information related to the shares of company X in
December 2010. The arrangements to manage corporate related
information at the time was to establish Insider Trading Control Rule,provided definition, report, method of controlling information, restrictions
on communications, prohibited acts and sales control etc. posted the said
rule to the intranet and made it widely known to all of the Executives andEmployees through trainings etc. and prevented unfair trading and insider
trading using corporate related information.
Also, after January 2011, enhancement of monitoring and management bySecurities Trading Supervisory Operation, addition of self-audit items ateach departments, establishment of meetings to enhance themanagement of corporate related information, and implementation (or planof implementation) of improvement plans such as stating the punishments
clearly etc.
4. Arrangements to supervise the activities of Executives including theTarget(1)

Calendar management by secretary
At Nikko, all executives have secretary, appointments of each executive
are handled by the secretary in charge as a general matter, and thesecretary in charge manages the calendars of each executives. However,
the Target, according to his strong preference, took appointment byhimself and not through his secretary and managed calendar by himself,
as a general matter. Many of Target’s schedules were decided justbefore the appointment time, and the details of appointments weresometimes not entered into the calendar, therefore, the secretary incharge could not know of Target’s schedule in advance. The secretary incharge requested to Target for improvement several times, but because

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

11his task was unique, and that he was seconded from SMBC, it could nothave been requested strongly, and it was not improved.
(2)

Management of other mattersA.

The Operations Planning Department, the department in charge ofcontrolling information security, is monitoring the content of emails
extracted based on the preset key words and the address to which
they were sent, for the purpose of preventing information leakage.
The target of such monitoring includes all outgoing emails of all
Executives and Employees including the Target.

B.

Office of Statutory Auditors and the Compliance Unit monitors
whether executives including the Target uses entertainment
allowance in accordance with the internal rules.

C.

After May 2011, the Compliance monitors emails to SMBC fromthose seconded from SMBC including the Target, in light ofcompliance of firewall rules.

D.

Internal Audit verifies the status of management of corporate related
information, but executives including the Target are exempted fromthe scope of such audit, and are not verified.

5. Education and training system for insider trading and similar
regulation(1)

Education and training system at Nikko
Nikko implements continuous trainings to Executives and Employees on
the subject of appropriate management of corporate related informationand prevention of insider trading etc., and make them aware of the social
responsibility as market intermediary, and try hard to keep everyone
informed about the laws and regulations, and the internal rules.
Especially for all executives including executive officers, Management

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

12Planning & Administration, Compliance, Securities Trading Supervising
Operation and Compliance – Products & Corporate Business has
implemented trainings on subjects of Nikko’s Compliance arrangements,
audit guide, inspection manual, insider trading regulation, preventative
measures on negative effects, information privacy. The contents of the
CLS training (e learning) for all Executives and Employees taking place
during the fiscal year 2009 and 2010 which the Target also participated,
was: that violation of insider trading rule results in criminal sanction(imprisonment, fine, forfeiture of assets), charges, social punishment;
showed the actual number of advisory and indictment for each fiscal year,
and that the Securities and Exchange Surveillance Commission andstock markets were thoroughly investigating; that the content was tomake the participants to recognize that that insider trading was a crime
easily detected and easy to prove, and that it would not work out in a way
not to be detected. Other training materials also contained explanationsof past detection.
(2)

Education and training system at SMBCSMBC also regularly implements trainings on prevention of insider
trading. The status of Target’s training immediately before being
seconded by Nikko was as follows.
From July to August 2009, the regular compliance workshop on thesubject of “prevention of insider trading” was implemented at all Branch
Offices. At the time, the Target was a General Manager of one of the
Corporate Business Offices, and participated in such workshop on
August 28, 2009. The content of such training was to educate that insider
trading was a crime and that it was a crime that would inevitably be
discovered, and explain the general meaning of important informationand management of corporate related information, and rules for
managing information, based on the specific cases such as cases whereadvisory was issued by the Securities and Exchange SurveillanceCommission. After the training, an examination with a pass/fail thresholdbased on the level of understanding was implemented, and “Covenants
regarding prevention of insider trading” was collected. Also, Middle

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document.

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Market Banking Unit implemented a workshop at office targetingcompliance officers, and it was also implemented, at the Sales andAdvisory where the Target belonged, on August 25, 2009, which wasimmediately before the above workshop. The target of such workshop
was compliance officers, but such officers conveyed the content of suchworkshop at each department and offices.
6. Whether there was any organizational involvement and Similar Cases(leak of information by someone other than the Target)
The Committee implemented the (i) Survey; (ii) confirmation of whether
there was any information leakage by email with 45 brand of shares thatwere the subject of tender offer bid cases handled by Nikko after October
2009 and 18 brand stocks that were the subject of public stock offeringcases (441,417 emails extracted by search terms of brand names ofshares etc. and 227,019 outgoing emails of relevant persons); (iii)collection of information through hotlines. Facts that suggests
organizational involvement by Nikko or facts of Similar Cases by other
Executives and Employees were not confirmed by these investigations.

IV Analysis of the cause of Information Leakage
1. The perspective for analysis of cause
In this case, the Target communicated the corporate relevant informationthat he obtained in the course of his work to its counterpart by not using
communication tools that were subject to check by the company, and thatcounterpart violated the insider trading regulation. As such, the casedepends largely on the Target’s sense of compliance. Therefore, we will
analyze, whether there was sufficient education and training system (III-5)
at Nikko to develop and maintain a solid sense of ethical and legal
compliance for a person involved in securities business (2-(1)).
Next, in this Matter, Nikko was under its parent SMBC, and under its
business strategy of coordination of bank and security under the lead ofThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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SMBC, wholesale division was insufficient but expanding in the wake ofacquisition at Nikko, and it was searching for a way to develop a good
relation that realizes the efficient cooperation of operation and integrationof bank and securities, and was in the early stage. Such special
circumstance could have also been one of the reasons for the cause.
The Target was seconded from SMBC to Nikko during such days, and was
expected to act freely as a coordinator between SMBC and Nikko.
Therefore, the Target’s task included variety of coordination function inorder to promote the coordination of bank and securities. Therefore, it wasdifficult to understand the content of his task unambiguously. Also, there
were people within Nikko who thought the Target was seconded fromSMBC to supervise Nikko. Therefore, it is possible that the Target may nothave understood and learnt the pride as the person who leads the market,
which is the important environmental factor to deter violation of insider
trading. Therefore, the Target did not voluntarily grow such sense ofcompliance as a person involved in the securities business, and may havecommitted such a bold conduct. Therefore, we will analyze the status ofmanagement, and also the effect of such Target’s special status on thisMatter.
In addition, the executive have broad discretion, and it is difficult to decide
whether such discretion is appropriately used from the outside. Therefore,
we can think that such executive’s action with such broad discretion mustbe transparent to a certain range of people in order to prevent wrongful act(for example, former U.S. Supreme Court judge Louis Brandeis said
“sunlight is said to be the best of disinfectants”). Therefore, we will analyze
whether there was an action monitoring system that secures transparency
for not only actions within the business hour of such executive, but also
actions that could be regarded as conduct related to work (2-(2)).
Also, supposing the existence of an executive who performs such role insuch circumstance indispensable, we will analyze the adequacy of electing
the Target as such executive.
Also, we could have dismissed the Target from the said task, depending on
the handling at the time when the trouble related to the Target wasThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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discovered, and if done so, maybe we could have decreased the scope of
information leakage. Therefore, we will also analyze on such point (2-(3)).
The occurrence of the Matter largely depends on the sense of ethical andlegal compliance of the individual. But with respect to the issue of thesystem, in relation to the route the Target obtained information, the system
of management of corporate related information known in the course of
duty and other important information (III-3) also becomes an issue, and in
relation to the leakage route by the Target, the system to supervise not
only the action of executive within the business hour but also the action as
seen from the outside as relating to the task of such executive (III-4)
becomes an issue. Therefore, we will analyze whether there was any
problem with respect to the management system of the former and its
operation (2-(4)).
2. Analysis of the cause of Information Leakage(1)Analysis of the education and training on the TargetA.

As described in III-5 above, Nikko continuously implemented training
to Executives and Employees on subject such as appropriate
management of corporate related information and insider trading etc.,
and the Target has also participated.
In addition, SMBC also implemented workshop on subject of insider
trading for all of the Branch Offices, and implemented an
examination to test the level of understanding, collected “Covenants
regarding prevention of insider trading” from all Executives andEmployees. The Target also participated in the workshop that used
specific cases of insider trading samples, and submitted thecovenant above.

B.

However, these trainings at Nikko did not include contents based on
the cultural difference between bank and securities company.
Specifically, the contents did not take into account the difference thatthe bank promotes business by sharing information while securities

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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company limits sharing of information as much as possible, and thatbank transactions are mainly bilateral transaction but transactions atsecurities company might affect the market.
It seems as if, it was not possible to make the Target understand andlearn the pride as the person who leads the market, which is theimportant environmental factor to deter violation of insider trading.
We may think that Target’s consciousness of the uniqueness of the
securities business was not developed, was one of the cause of the
Matter.
(2)

Analysis of the status of management and effect of the uniqueness of his
status at the timeA.

After joining SMBC in October 2009, under the management
strategy of cooperation of bank and securities, Nikko promoted its
development of corporate sales. However, because there was nosystem for the mutual communication between both organization at
the time of acquisition of Nikko by SMBC, based on the needs ofboth companies, a person to coordinate both companies by referring
SMBC’s corporate customer to Nikko, and to actualize bothcompany’s efficient business cooperation and integration wasnecessary. Such person had to not only be knowledgeable of
SMBC’s corporate sales but also was able to put influence over
SMBC’s relevant department handling corporate sales. It was
decided that the Target was appropriate for such task and seconded
to Nikko. The Target was actually valued for performing suchexpected role.

B.

However, on the other hand, the role of Target was as such, and theTarget met the expectation and performed variety of coordination
function, and acted freely. Therefore, especially for Nikko’s
employees including bosses and those junior to him, it was difficult tounderstand the content of Target’s task, and appeared to be broadfrom the outside. In addition, there were also people within Nikko
who viewed that the Target was seconded from SMBC with the role

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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to supervise Nikko.
As the Target had such unique status, his unique actions, as
described in III-4 above, different from that of other Nikko Executives
and Employees were not questioned.
Environment involving such status and role of the Target isconsidered to be one of the causes of such bold action as seen in the
Matter.
(3)

Analysis of how to handle the Target in relation to human resources
A.

SMBC recommended to Nikko the Target as executive officer andSenior Deputy Head of Investment Banking, and Nikko resolved at
the board of directors meeting of the new company after given noticeof the Target’s name, resume and post. Nikko accepted a person
recommended by its parent SMBC to the post designated byfollowing the regular procedure. At the time, based on theinformation SMBC had about the Target as the electing party, it
seems as if there were no issue with respect to the process of
selection and acceptance at that time. However, Nikko was not able
to interview in advance with the person recommended by SMBC.

B.

Also, after the Target was seconded to Nikko, there were twocomplaints from the outside to SMBC with respect to the transactions
etc. that Target was in charge of while working at SMBC and SMBC
did investigate such complaint, but because no wrongful fact was
found, the information was not shared with Nikko.
If the information regarding complaints etc. related to the Target wasshared, Nikko may have enhanced supervision on the Target, andthis working as a balance, might have been able to prevent
information leakage by the Target.

(4)

Analysis regarding management system of relevant information andother important information

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

18

A.

As described in III-3 above, Nikko has established certain
arrangements for managing corporate related information at the time
the Information Leakage took place, and has enhanced thearrangement for managing corporate related information and otherinformation.
Under such circumstance, the Target, as described in III-1-(1) above,
was able to obtain, as the Senior Deputy Head of the Investment
Banking, in the course of performing his task, by measures notproblematic in light of the internal rules.

B.

Also, as described in III-1-(2) above, because we did not find thetrace of communication to the Tippee of the Information using thecommunication tools subject to check at Nikko, the route ofInformation Leakage is not discovered.

C.

Also, as described in III-3 above, there were various process andmechanism established as the management system of the corporate
related Information at the time, but it was ultimately dependent on
the relevant person’s sense of compliance, therefore, in the casewhere a person who is able to obtain corporate related information in
the course of his task abuses his status, and intentionally leak the
corporate related information to outside by not using thecommunication tool subject to monitoring at Nikko, we must say that
there is certain limit to prevent this.

D.

At the time of the Information Leakage, monitoring of outbound mailby Securities Trading Supervisory Operation (monitoring related tocommunication of corporate related information) was not
implemented. It seems possible that if such monitoring system was
implemented, it would have worked as certain diversion, and may
have prevented information leakage by the Target. Provided,
however, after February 2012, emails extracted by certain key words,
among all Executives and Employees’ outbound emails aremonitored by Securities Trading Supervisory Operation

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

19

V Measures to prevent recurrence
1. Enhancement of training to those seconded from SMBC
There is a large cultural difference between the securities company that
establish information wall for the handling of corporate related information,and the bank that promotes business by sharing information. Therefore,
when seconding from SMBC to Nikko, it is important to saturate how
securities company handles corporate related information. Therefore,
when seconding a person from SMBC to Nikko, it is advisable tocontinuously implement training etc. such as importance of the
management of corporate related information and tasks etc. related to theculture of securities company, including at the time of joining the company.
2. Enhancement of supervision of action towards executives
The Target has been acting as the cooperating role at the time when it was
just after the establishment of the Wholesale Business Unit; and we canthink that executives has been in an environment that are permitted to act
relatively freely than normal employees because they are required to act
from a broader perspective.
However, it has been discovered that the Target has visited the Tippee andTippee’s affiliate for about 62 times, therefore, if Target’s action was more
severely supervised, it may have acted as a diversion, and may have
prevented the information leakage by the Target, or may have been able todetect the Matter at issue earlier.
Therefore, it is our view that constructing arrangements that enables
monitoring of executive’s daily action leads to prevention of reoccurrence.
Also, at this time, the Internal Audit does not include executives within theirThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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scope of audit, therefore, it is advisable that the Internal Audit conduct
audit on executives including the status of management of corporate
related information.
3. Sharing of human resources information
After the Target was seconded to Nikko, complaints were reported fromTarget’s customers at the time he worked for SMBC, and SMBC conductedinvestigation of the complaint, but no wrongful fact was discovered, andtherefore, the information was not shared with Nikko. If the information
was shared with Nikko, Nikko might have been able to enhance thesupervision on the Target, and have prevented information leakage by theTarget, or might have discovered the Matter earlier.
Therefore, when the person seconded is being investigated for wrongful
fact, it is advisable that the human resource departments of SMBC andNikko share the wrongful fact information of the seconded person.
4. Maintenance and improvement of the arrangement to manage
corporate related information
In this Matter, it is strongly suspected that the corporate related information
was leaked intentionally, and no trace of using communication tools
subject to monitoring within Nikko to leak the information has been
confirmed at this point. Also, it is not confirmed that the insufficiency of thethen arrangement to manage corporate related information resulted
directly to the occurrence of the Matter. Therefore, we think it is important
to start by a steady implementation of the business improvement plansubmitted on May 18, 2012, following receipt by Nikko of theadministrative penalty on April 20, 2012, and maintain the approach ofenhancing and improving the arrangement for management.
Also, regular development of the sense related to the handling ofcorporate related information is effective to prevent the leakage ofcorporate related information.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

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Measures by Nikko
1． Improvement measures based on the Matter
Based on the recommendation by the Investigation Committee with respect tothe Matter, SMBC Nikko Securities Inc. (“Nikko”) implements its improvement
measures as follows. As for the statusofestablish

the President & CEO and consists

a new committee, chaired

by

the

implementation,

we

will

of Internal Administration Supervisor and related directors, which will verify the
progress and effectiveness of the improvement measures.
(1)

Making executives and employees who have no experience in the
securities

businessthoroughly

aware

of

the

importanceofcompliance including control over undisclosed corporate information(“Corporate Information”).
i. Prohibition in principle of the appointment of a person who has noexperience in the securities business to an executive director or an
executive officer of a unit which obtains and handles Corporate
Information (“Private Side”).

(Scheduled from September 2012)

We will not appoint, as a general rule, a person who has no experience inthe securities business to an executive director or an executive officer ofa unit of the Private Side * directly from outside Nikko. We will first
appoint such person to a unit which does not obtain and handle
Corporate Information for a period of at least three months, in order tomake them familiar with information management rules which are uniqueto securities companies. Meanwhile, people who are considered to haveadequate knowledge and are mindful of compliance requirements toperform business of securities company, such as people who haveexperience of securities business, are excluded from this rule.
* Executive Directors and Executive Officers under the control of CapitalMarkets Unit (including the Head, same hereafter), Corporate Business& Investment Banking Unit, Financial & Public Sector Business Unit,
Institutional Business Unit, Representative Managing Director of Osaka,
and Representative Managing Director of Nagoya.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

ii. Enhancement of follow-up trainings for mid-career executives andemployees. (Scheduled from September 2012)
We will provide mid-career executives and employees with follow-up
trainings for the thorough awareness of importance of compliance,
including the control of Corporate Information which is unique tosecurities companies on a continuous basis in addition to enhancementof initial trainings.
(2)

Clarification of procedures for appointing a mid-career person(including seconded person) to an executive officer and above
i. Interviews with directors (Scheduled from August 2012)

When appointing a mid-career person to an executive director or an
executive officer, management of Nikko will interview such candidates
and evaluate his/her appropriateness, even if he/she is seconded from
Sumitomo Mitsui Banking Corporation (”SMBC”) or other affiliates.
ii. Prior check on profiles (Scheduled from August 2012)

In case a candidate of an executive director or an executive officer isseconded from SMBC or other affiliates, we share the information about
his/her profile and negative information with human resources division of
those affiliates more closely than ever when we check his/her profile,although we have been checking career of candidate when we appointed
executives.
(3) Monitoring over activities of executives
i. Monitoring over executives (executive directors and executive officers)

by internal audit division (Scheduled from September 2012)
Currently, Statutory Auditors audit executive directors and executive
officers by interviewing them, checking their major corporate decisions
and use of social expenses and receiving from executives theThis material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

2

confirmation letters with respect to the appropriateness of businessexecution, etc. In addition, we expand the scope of internal audit toexecutive directors and executive officers and internal audit division willconduct audit over executive directors and executive officers with respect
to the management of Corporate Information and other aspects. We also
audit the appropriateness for the enhancement of the function to monitor
the activities of executives described in ii.
ii. Enhancement of the function to monitor activities of directors.

(Scheduled from October 2012)
We consolidate all secretaries to directors into one division instead of thecurrent organization where each secretary works under the director
himself/herself. Secretaries will report activities of the directors to thehead of the division regularly using check lists or other tools through their
daily secretarial works and report extraordinary events to the head when
they have any difficulty in grasping the activities of the directors. Uponsuch extraordinary report, the head of the division will conduct monitoring,such as checking the activities of the directors in cooperation with the
Director in charge of Compliance or other related divisions.
(4) Sharing negative information with respect to seconded executives
and employees (Scheduled from August 2012)
We share information with respect to seconded management andemployees on a semi-annually basis if there are any concerns, in addition tothe ordinary information sharing. Further, if a seconded executive or
employee from SMBC or other affiliates is under investigation for
inappropriate activities by those affiliates, we share such negative
information with the Human Resources Department of SMBC whenevernecessary so that we can prevent expand of wrongdoing.
(5) Further enhancement of awareness of compliance in order to prevent
insider trading.
i. Clarification of our policy to claim damages caused by employees who

are found to be involved in insider trading. (Scheduled from August 2012)
This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

3

To make all executives and employees thoroughly aware of importanceof compliance, we amend internal rules and clarify our policy that weshall claim damages caused by executives and employees who arefound to be involved in insider trading with specific examples. We also
explain simply and make executives and employees aware that, if they
are involved in insider trading, they will be (a) exposed, (b) dismissed,and (c) charged with compensation for damages. We enhance theirawareness of importance of compliance by the process above.
ii. Clarification of Prohibition of trying to obtain unnecessary Corporate

Information. (Scheduled from August 2012)
We amend internal rules and clarify our policy that we prohibit executives
and employees from trying to obtain Corporate Information which is
unnecessary to their business.
We also state clearly on the internal rules that executives and employees
should immediately report to internal control managers, etc. when they
are unreasonably asked to provide Corporate Information or otherinformation which is closely connected with Corporate Information by aperson inside or outside of the company. Compliance unit will check thesituation based on the report and, if necessary, deal it appropriately bymaking them stop providing information, or refuse businesses, etc.
(6) Adding recording function to mobile phones provided by thecompany (Scheduled date is under consideration)
To enhance monitoring function, we are planning to add recording
functions to mobile phones provided by the company to executives andemployees in sales unit of Public Side*. At the same time, we thoroughly
make executives and employees aware again that using private mobile
phones for business purpose is strictly prohibited.
*We defined Units which may obtain Corporate Information in thecourse of business as Private Side and other units as Public Side.

This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

4

2.

Description of the self-disciplinary actions

Shigenobu Aikyo

Chairman

30% cut of compensation for four

President & CEO

30% cut of compensation for fourmonthsEiji Watanabe
monthsNaoyuki Kawamoto Executive Deputy President

25%cut of compensation for fourmonthsTwo other executives

10% to 20% cut of compensation for threemonths###This material is an English translation of Japanese announcement made on August 7, 2012. Although thecompany intended to faithfully translate the Japanese document into English, the accuracy and correctnessof this translation are not guaranteed and thus you are encouraged to refer to the original Japanese
document.

5