Financial Reform in Japan Update #1: Investment Management Business for Qualified Investors Only
This Client Alert is the first in a series of alerts concerning amendments (the "Amendments") to the Financial Instruments and Exchange Law ("FIEL") of Japan passed by the Japanese Diet on May 17, 2011 and promulgated on May 25, 2011. The amendments were adopted expressly for the purpose of expanding the Japanese financial market and making it more attractive to international and domestic financial firms, and to create new business opportunities in Japan's financial sector.
This first alert concerns the expansion of asset management opportunities through the creation of an exception to the FIEL's provisions regarding the investment management business registration that will facilitate a new business model for investment managers who focus only on "Qualified Investors", ("Qualified Investor Investment Management Business").
Under the Amendments, the registration requirements to conduct an investment management business will be relaxed for investment managers who obtain mandates only from "Qualified Investors" and who manage assets the total amount of which is less than an amount to be specified by regulation. Informal discussion with the Financial Services Agency of Japan ("FSA") suggest that the upper limit will be somewhere between JPY 3 billion (US$37.5 million) and JPY 5 billion (US$62.5 million), although a lower figure remains possible.
The term "Qualified Investors" has yet to be clearly defined in the Amendments. However, according to the reference material issued by the FSA ("FSA Material"), "Qualified Investors" will include (i) Qualified Institutional Investors ("QIIs") (which are already defined under current law and include a large number of statutory QIIs (mostly financial intermediaries) and some other registered QIIs) (ii) companies listed on Japanese stock exchanges; (iii) Japanese stock corporations (kabushiki kaisha) that have a stated capital of not less than 500 million yen; (iv) tokutei mokuteki kaisha ("TMKs"), a form of legal entity that is extensively used in real estate structured finance); (v) foreign companies; (vi) legal entities which have specified level of financial assets; (vii) certain high net worth individuals; (viii) funds that are managed by registered investment managers; (ix) officers and employees of registered investment managers under the exception for Qualified Investor Investment Management Business ("Qualified Investor Investment Managers"); or (x) parent firms of Qualified Investor Investment Managers.
According to the FSA Material, under this exception, the capital and net asset requirements for the Qualified Investor Investment Management Business will be relaxed from the current minimum of JPY 50 million (US$625,000) to JPY 10 million (US$125,000). In addition, the requirement for a Board of Directors will be eliminated and a Qualified Investor Investment Manager will be required to have only one director and one statutory auditor.
Under the FSA Material, the operational requirements for Qualified Investor Investment Management Businesses are also expected to be minimized. Thus, it is anticipated that required organizational functions (e.g., compliance) will be able to be streamlined under the new regulations. Another key liberalization under this new exception is that the Qualified Investor Investment Manager will be able to market funds that they manage themselves to Qualified Investors without holding a Type 1 (securities) financial instruments business registration. For these purposes, the Qualified Investor Investment Manager will be treated as being engaged in "self-offering" of fund interests and regulated as a Type 2 financial instruments firm. Therefore, if the Qualified Investor Investment Manager concurrently holds a Type 2 financial instrument business registration, the Qualified Investor Investment Manager may distribute fund interests under its sole management to investors in Japan without holding a Type 1 financial instrument business registration.
The Amendments are general in nature and delegate a great deal to delineation in subordinate regulations that are currently being drafted by the FSA. Although it is unclear when the relevant Amendments and final regulations will actually become effective, the Amendments must become effective not later than one year from the promulgated day (i.e., May 25, 2011).
The new exception for investment managers who focus on Qualified Investors has been long desired by the global asset management community. The Amendments will offer significant planning opportunities for financial firms around the world to access the Japanese market at less cost. The Tokyo Financial Services Group has been at the forefront of lobbying for this liberalization and will continue to provide updates as details of the new registration exception become public.
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