Update on the Qualified Investor Investment Management Business Registration

December 2011
Christopher P. Wells, Koichiro Ohashi, Thomas LaMacchia, Tomoko Fuminaga

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This Client Alert provides supplemental information regarding the new exception for the investment management business registration (the "Qualified Investor Investment Management Business") for investment managers who limit their clients to "qualified investors" (tekikaku toushika, "Qualified Investors") as set forth in the amendments (the "Amendments") to relevant Cabinet Order and Cabinet Office Ordinance of the Financial Instruments and Exchange Law of Japan (the "FIEL") issued by the Financial Services Agency of Japan (the "Japan FSA") on November 4, 2011. This Client Alert provides further details of the Qualified Investor Investment Management Business registration as described in the amendments to the Supervisory Guidelines on Financial Instruments Dealers promulgated on November 22, 2011 (the "Guidelines") and to become effective April 1, 2012.

Personnel Requirements for Qualified Investor Investment Manager

In the Guidelines, the Japan FSA provided details on the personnel requirements for applicants seeking to be registered to engage in a Qualified Investor Investment Management Business ("Qualified Investor Investment Managers") as follows:

1. at least one asset manager who has at least one year experience in giving investment advice on or managing the type of asset that the applicant seeks to manage;
2. with respect to establishing an independent compliance department, at least one individual in the compliance department who has at least one year of experience working in a compliance department in a financial institution; and
3. at least one individual who will be responsible for the establishment of the infrastructure of the applicant.

With respect to 2 above, the Guidelines specifically permit the delegation by the Qualified Investor Investment Manager of its compliance functions to an affiliated company or a law firm. If the applicant will be delegating its compliance functions, the Guidelines state that the Qualified Investor Investment Manager must have a delegation policy regarding the manner and selection process for such delegate. Furthermore, when the delegation is to a law firm, the relevant delegation agreement must contain certain provisions including items ensuring proper understanding and review of the actual business operation of the Qualified Investor Investment Manager by the delegate from a compliance perspective, the drafting and periodic updating of its compliance manual, periodic compliance training and periodic reporting to the Qualified Investor Investment Manager.

With respect to 3 above, the Guidelines requires that an individual be responsible for, among other things, book keeping, custody of records and disclosures. The Guidelines state that this individual may concurrently act as the compliance officer of the Qualified Investor Investment Manager.

In addition, if the department that makes investment decisions and the department that engages in the trades are not separate departments, appropriate measures are required to be implemented for the purpose of preventing the Qualified Investor Investment Manager from engaging in certain prohibited activities under the FIEL.

Other Requirements of a Qualified Investor Investment Manager

The Guidelines provide further details regarding the ongoing requirements for Qualified Investor Investment Managers. First, the Qualified Investor Investment Manager must establish a system to prevent its total assets under management from exceeding 20 billion Japanese yen.

Furthermore, a Qualified Investor Investment Manager must restrict any party other than a Qualified Investor from being a client through certain methods set forth in the Guidelines including:

1. the preparation of internal rules regarding the confirmation of the status of the client and the providing of explanations to the client regarding assignment restrictions which may be applicable to the security being held, subsequent remedial measures to address situations where there is a breach of any of the foregoing duties by the Qualified Investor Investment Manager;
2. the continuous monitoring ensuring that the necessary status confirmations and explanations are being made in accordance with the internal rules;
3. the continuous monitoring to confirm that the clients of the Qualified Investor Investment Manager are and continue to be Qualified Investors in accordance with the internal rules;
4. in the event that there is a breach by the Qualified Investor Investment Manager of the above methods, i.e. a client is not a Qualified Investor, the undertaking and completion of subsequent remedial measures in accordance with the internal rules; and
5. the confirmation that steps (1) through (4) above have been properly implemented through the use of an internal audit.

Monitoring the Status of Clients by a Type 2 Financial Instruments Dealer

One of the significant features of the Qualified Investor Investment Management Business registration is that, when used concurrently with a Type 2 Financial Instruments Dealer business registration, this registration will permit the Qualified Investor Investment Manager to engage in limited self offering activities and placement agent activities of funds that it manages. Specifically, under the Amendments, a Type 2 Financial Instruments Dealer may distribute fund interests to Qualified Investors (even if the interests of the fund are categorized as securities prescribed in Article 2 (1) of the FIEL which would normally require a Type 1 Financial Instruments Dealer registration); provided that:

• (i) the Type 2 Financial Instruments Dealer is also registered as a Qualified Investor Investment Manager and is acting as the investment manager of the fund in question; and
• (ii) the investment management agreement between the fund and the Qualified Investor Investment Manager provides it with exclusive discretionary investment management authority over the assets of the fund.

For the purposes of engaging in this type of capital raising activity, it is anticipated that many Qualified Investor Investment Managers will also seek to be concurrently registered as a Type 2 Financial Instruments Dealer.

In the case of the foregoing capital raising model, the Guidelines require each Type 2 Financial Instruments Dealer confirm the following with respect to the status of each potential subscriber:

1. that the client is a Qualified Investor;
2. that the solicitation made according to the terms of a private placement under the FIEL;
3. that the proper documents regarding the client status confirmation have been prepared and maintained;
4. that the relevant transfer restrictions have been included in the relevant agreements;
5. that there has been no breach in the transfer restriction set forth in (4) above;
6. that periodic internal audits have been undertaken to confirm that the Qualified Investor Investment Manager is properly performing its duties with respect to (1) through (5) above; and
7. that the processes described above in (1) through (6) above have been properly set forth in the corporate rules of the Qualified Investor Investment Manager.

Soliciting Public Comments

The Japan FSA is soliciting comments from the public with respect to all aspects of the Guidelines with respect to the Qualified Investor Investment Manager. The official deadline for the acceptance of comments is 12:00 noon as of December 26, 2011 and the Tokyo Financial Services Group would be pleased to assist any party wishing to submit comments to the Japan FSA.

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