- Major Changes to the Fund Distribution Exemption in Japan: The Amendment to the FIEA’s Article 63 Exemption
- July 22, 2016 | Authors: Makoto Koinuma; Koichiro Ohashi; Yukari Sakamoto
- Law Firm: Greenberg Traurig, LLP - Tokyo Office
- An amendment to the Financial Instruments and Exchange Act1 (the FIEA) was promulgated on June 3, 2015, and went into effect on March 1, 2016 (the Amendment). One of the main purposes of enacting the Amendment was to tighten regulations on fund distribution and management businesses with an Article 63 exemption (the Exemption). Such funds are generally known as Article 63 exempt businesses (the Exempt Businesses).
Under the FIEA, any investment fund intending to market securities to Japanese residents or to manage assets contributed by Japanese residents is generally required to register as a Financial Instruments Business Dealer (FIB Dealer). Yet, under the Exempt Business structure, a general partner (the GP) may manage and market a limited partnership-structured investment fund without obtaining an FIB Dealer’s registration, so long as the fund meets certain requirements. Such requirements include subscribing at least one qualified institutional investor (QII) and placing certain limitations on the number of non-QIIs invested in the fund, among others.
The Exemption has gained popularity among fund managers, because under the Exempt Business structure, an Exempt Business GP receives minimal supervision by Japanese regulators. Further, the Exempt Business GP is only required to provide a mere notification (the Notification) to Japanese regulators containing minimal information about the Exempt Business, and maintain minimal ongoing regulatory requirements.
However, despite the benefits of the Exempt Business structure, there has been some controversy. In recent years, reports have surfaced of Exempt Business GPs engaging in fraudulent marketing and other improper business activities resulting in investor losses. Such misconduct led to the Amendment, which intends to strengthen investor protections by tightening regulations on Exempt Businesses. Exempt Businesses are now subject to regulations and reporting obligations that are, while still moderate, more akin to the full regulations and reporting requirements of FIB Dealers.
Key Features of the Amendment
Some of the key features of the Amendment include additional requirements concerning Notifications, reporting, disclosures, and eligibility of Exempt Business GPs and investors. An overview of some of the new requirements under the Amendment is provided below.
Notifications, Reporting, and Disclosures
The new form also requires additional attachments demonstrating that funds and GPs fulfill the requirements of Exempt Businesses. Attachments include written oaths of GPs, directors and senior officers pledging they meet certain eligibility requirements; résumés of directors, and other relevant employees; documents evidencing the ratio of amounts invested by certain non-QIIs; and others.
Eligibility of GPs
The Amendment includes certain eligibility requirements an Exempt Business GP needs to satisfy in order to obtain an Exemption. One requirement is that a GP intending to file an Exempt Business Notification must not fall under any of the causes for disqualification included in the Amendment. For example, a person or entity that was ordered to abandon an Exempt Business or was subject to criminal punishment within the most recent five (5) years is disqualified from engaging in an Exempt Business as a GP.
An additional requirement is that a foreign GP must designate a “representative in Japan.” A representative in Japan must be a Japanese resident who is able to contact both the relevant authorities and the GP. The representative does not need to be an individual employed by the GP, and according to the FSA, it is possible for the GP to appoint an outside attorney or accountant in Japan to fill that role.
Eligibility of Non-QIIs
Prior to the Amendment, there was no limitation on the types of non-QIIs eligible to invest in an Exempt Business. However, the Amendment imposes new limits on the types of non-QIIs that may invest. Eligible non-QIIs include, but are not limited to, the following:
(i) Listed companies;
(ii) Foreign corporations;
(iii) Domestic corporations with JPY 50 million or more of stated capital; and
(iv) Individual investors with JPY 100 million or more of financial assets who have held a securities account at a broker for more than a year.
- Venture Funds
Administrative Sanctions and Penalties
Relevant Japanese regulators have the authority to order improvements, suspensions, or the abolishment of an Exempt Business. Moreover, for any GP who either fails to file the necessary Notification or amendment notification, or files a fraudulent one, a maximum penalty of five (5) years imprisonment may now be imposed under provisions of the Amendment.
1 Act No. 25 of 1948, as amended.