Listing Requirements in Asia

11 April 2016

Akifumi Nakanishi
JICA Consultant, Daiwa Institute of Research

Listing requirements

 Listing requirements consist of 1) quantitative requirements and 2) qualitative requirements.

Typical quantitative and qualitative requirements are as follows:

Profitable for the last two consecutive years

Quantitative requirements Minimum share capital

Minimum number of shareholders

Business continuity with profitability

Quality management
Qualitative requirements
Good corporate governance and internal control

Disclosure

2
 Listing requirements: quantitative requirements by country

 Typical quantitative requirements are 1) profitability, 2) share capital, 3) number of

shareholders, and 4) Floating rate.

Total assets/ Share capital/ No. of share-

Sales Profit Market cap Floating rate
fixed assets net assets holders

Cambodia No Yes No Yes No Yes Yes

Indonesia No Yes Yes No No Yes No

Lao PDR Yes Yes No Yes No Yes Yes

Malaysia No Yes No No Yes Yes No

Philippines No Yes No Yes Yes Yes No

Singapore No Yes No No Yes Yes Yes

Thailand No Yes No Yes Yes Yes Yes

Vietnam (HCMC) No Yes No Yes No Yes Yes

Japan (Tokyo) No Yes No Yes Yes Yes Yes

Listing requirements: profitability for consecutive years

 Profitability for two years or longer is a standard as a quantitative requirement.

Philippines (3yrs) Hanoi (1yr)

Malaysia (3-5yrs) Singapore (1yr)

Thailand (2-3yrs)
Ho Chi Minh (2yrs)
Lao PDR (2yrs)
Cambodia (2yrs)
Tokyo (2yrs)
Yangon (2yrs)

4
Listing requirements: MSE - Classification 1

Listing requirements for MSE Classification 1

1. Company must have fully operated last three years.

2. The issuer must have produced last three full financial years’ statements that comply with the
“Accounting Law of Mongolia” and audited by independent auditor registered by FRC that
defined in 32.2.3 of SML. As for foreign issuer, must have produced financial statements that
comply with either IFRS or GAAP.
3. The issuer must have revenue no less than MNT10bn and MNT1bn profit in the last
financial year.
4. Issuer’s holders of controlling interest, CEO and members of Board must have no tax debt or
expired debt, if they are in debts information must be disclosed in the prospectus.
5. Authorized person of issuer must have adequate knowledge and experience and must not
have been no changes to CEO or 2/3 of management team in the last two year and no
changes have been made to holders of controlling interest in the last financial year.
6. Must be complying with principles of corporate governance that accepted in domestic and
international.
7. Issuer must have contractual agreement with underwriter.

Listing requirements: MSE - Classification 1

Listing requirements for MSE Classification 1 (cont.)

7. At the time of trading, company’s market capitalization must be more than MNT10bn.
8. No less than 25 percent of issued shares must be offered to the public.
9. No less than 2 years traded at the stock exchange.
10. Issued securities must be freely transferable and tradable and must not be in deposited.

6
Listing requirements: MSE - Classification 2

Listing requirements for MSE Classification 2

1. The issuer applying to listing at classification “II” must be meet the following requirements:
2. Must have satisfied 12.1.4 and 12.1.7 of this rule.
3. Company must have fully operated last two years.
4. The issuer must have produced last two full financial years’ statements that comply with the
“Accounting Law of Mongolia” and audited by independent auditor registered by FRC that
defined in 32.2.3 of SML. As for foreign issuer, must have produced financial statements that
comply with either IFRS or GAAP.
5. Company must have adequate working capital 12 month period of time after its listed.
6. Must be complying with principles of corporate governance that accepted in domestic and
international, or explain why it has not.
7. Authorized person of issuer must have adequate knowledge and experience.

Note 1: 12.1.4 - Issuer’s holders of controlling interest, CEO and members of Board must have no tax debt or
expired debt, if they are in debts information must be disclosed in the prospectus.
Note 2: 12.1.7 - Issuer must have contractual agreement with underwriter.

Listing requirements: profitability for consecutive years

Listing requirements for MSE Classification 2 (cont.)

7. At the time of trading company’s market capitalization must be more than MNT1bn.
8. No less than 15 percent of issued shares must be offered to the public
9. Must be satisfied 12.2.4 of this rule.

8
Listing requirements in Asia: minimum share capital (or net assets)

 Minimum share capital (or net assets) is one of quantitative requirements in many markets.

Thailand (net assets) 8.9

Tokyo (net assets) 8.1

Hochiminh 3.7

Philippines 2.2

Lao PDR 1.2

Cambodia 1.2

Hanoi 0.5

Yangon 0.4

0 2 4 6 8 10
US$m

Listing requirements in Asia: minimum share capital (or net assets) / GDP

 Minimum share capital requirements in Lao PDR and Cambodia appear to be too stringent in
terms of ratio to GDP, compared to other markets in Asia.

Lao PDR 105

Cambodia 74

Thailand 24

Hochiminh 20

Philippines 8

Yangon 6

Hanoi 2

Tokyo 2

0 20 40 60 80 100 120
ppm
10
 Listing requirements in Asia: number of minimum shareholders

 Minimum number of shareholders should be included in listing requirements for a liquidity

reason.

11

Listing requirements: qualitative requirements

Corporate governance
Business continuity Financial status etc. Management Disclosure
and others

No change in largest
Cambodia shareholder for last one year
before listing
No criminal record and no
Indonesia personal bankruptcy for
past 10 years.
No disputes that may Soundness of corporate
Preciseness of corporate
Lao PDR Going concern and profitability materially affect governance and internal
disclosure
managerial activity controls
Identifiable core business in Transactions with related
Sufficient levels of working
Malaysia which it has majority ownership parties not unfavorable to
capital for at least 12 months
and management control company
Adequate, precise, timely and
accurate information about
Appropriate quality and Integrity and capability of
Philippines issuers to be widely and
company size top management
equitably distributed to public
investors
Substantially same business Not take advantage of
and management throughout extraordinary or seasonal profits Appropriate qualities to
Singapore
period for which relevant profit to show better profit record by manage company
test applies changing financial years
Soundness of corporate
Sufficient levels of working Appropriate qualities to
governance and internal
Thailand capital. Provident fund needs to manage company controls
be established.

Soundness of corporate
Stable revenue sources for Soundness of Preciseness of corporate governance and internal
Tokyo controls
continuing operations management disclosure

12
Listing requirements: announcement of Yangon Stock Exchange, Aug 2015

Announcement of YSX’s Listing Criteria

Yangon Stock Exchange (YSX) hereby issues the following Criteria for a Public Company to list
on YSX in accordance with the Article 41- (b) of Myanmar Securities and Exchange Law

1. It shall be a registered company limited by shares in accord with the Myanmar Companies Act,
conducting the business in line with the public company’s features and procedures.
2. It shall have at least 100 shareholders and above.
3. Paid-up capital shall be the minimum of kyat 500 million on the date of application.
4. It shall have the profit at least 2 years during the period of before the date of application.
5. The business shall have the stable basic income and conduct in accordance with the existing
laws.
6. The Board of Directors and the heads of the company shall be in good character and have
had not been having any punishment by a court, in addition, have not been facing any
lawsuits. They shall perform their duties and responsibilities with well-prepared, in good-faith
and fairly in line with the laws.

13

Listing requirements: announcement of Yangon Stock Exchange, Aug 2015 – cont.

7. The Board of Directors and the heads of the company shall not act any deceptive manners by
the public for the interest of the company and self-interest.
8. Each Director of the public company shall not do any business which has the same interest
carrying out by the public company, except with the approval of Shareholder meeting.
9. The company, the Board of Directors and the heads of such company shall not be included in
the black list of any public and government organizations.
10. Book-keeping of accounts and auditing of the company shall be undertaken in accordance
with the Myanmar Accounting Standards and Myanmar Standards on Auditing.
11. The company shall fulfill tax duties in accordance with existing tax laws of Myanmar.
12. The disclosure of relevant corporate information and the facts that the public should be known,
shall be disclosed and submitted to the Securities Exchange Commission of Myanmar and
Yangon Stock Exchange, besides it shall be disclosed and announced to the public by means
of easy understandable and best suitable ways in timely manner. For disclosure of corporate
information, it shall prescribe especially and precisely on the matters which have a
considerable impact on investment decisions of the investors, such as the risk factors for the
potential loss and the basic potential business activities.

14
Listing requirements: announcement of Yangon Stock Exchange, Aug 2015 – cont.

13. It shall set up an effective system to comply with laws, rules and regulations by appointing the
compliance officer.
14. It shall have business plan containing business design, business process environment and the
risk factors.
15. It shall set up a system to prevent the insider trading.
16. It shall continuously operate and manage stably without any influence by keeping soundness
of good corporate governance, internal management and internal control system.
17. It shall have rational expectation to get a profit base upon stable revenue.

The criteria above are minimum standards to be referred as a general guideline for public
companies. YSX will grant listing permission only after YSX receives listing application submitted
by a public company and YSX confirms the company’s eligibility of listing in term of protecting
interests of general public through conducting examination.

15
Stock Exchanges in Asia

11 April 2016

Ryota Sugishita
JICA Consultant, Daiwa Institute of Research

Today’s topics

1. Ownership

2. IT system

3. Profitability

4. MSE as an SRO

2
 1-1. Ownership: now and past (1)

1878 1943 1949 2001 2013

Tokyo company by quasi- Company
Member-owned Listed
Stock five governmental limited by
organization company
Exchange shareholders organization shares

1937 1964 1976 2004 2005

Kuala Lumpur
Malayan Bursa Malaysia,
Stock Exchange,
Bursa Stock Stock Exchange company Listed
company
Malaysia Brokers’ of Malaysia limited by company
limited by
Association shares
guarantee

1977 1992 2007

Indonesia
Exchange
State-owned Privatized,
Indonesia formed by
organization member-owned
Exchange merger,
under MOF organization
member-owned
company
Source: Daiwa Institute of Research 3

1-1. Ownership: now and past (2)

1963 1975
Stock Bangkok Stock
Half member-
Exchange Exchange,
owned
of Company limited
organization
Thailand by shares

2000 2007 2016

Ho Chi Minh Expected to merge
Ho Chi Minh Stock
Ho Chi Securities Trading with Hanoi Stock
Exchange, state-
Minh Stock Center, state- Exchange, state-
owned company
Exchange owned company owned company
under MOF
under SSC under MOF

Source: Daiwa Institute of Research 4

 1-1. Ownership: now and past (3)

1991 2011
Company
State-owned
Mongolian Lao limited by
company, 100%
Stock Securities shares, 51%
government-
Exchange Exchange government-
owned
owned

2012 2015
Company
Company limited
Cambodia Yangon limited by
by shares, 55%
Securities Stock shares, 51%
government-
Exchange Exchange government-
owned
owned

Source: Daiwa Institute of Research 5

1-2. Ownership: shareholding structures (1)

JPX Stock exchanges with HKEx

Mar-15 substantial no of shareholders Dec-15
Financial institutions 23% Exchange Fund 6%
Brokers 28% PSE JPMorgan Chase & Co 5%
Mar15
Other corporates 4% Others 89%
San Miguel Corporation
10%
Overseas investors 41% Retirement Plan Total 100%
The First Resources
Individuals 3% No of shareholders 5,263
Management & 12%
Total 100% Securities Corp
Government Service Bursa
No of shareholders 15,058 9% Malaysia
Insurance System
Dec-15
Banco De Oro 9%
SGX Domestic institutions 65%
Aug-15 Lucky Securities 5%
Domestic individuals 13%
SEL Holdings 23% Papa Securities 5%
Foreign institutions 21%
Others 77% Others 49%
Foreign individuals 1%
Total 100% Total 100%
Total 100%
No of shareholders 36,885 No of shareholders 265
No of shareholders 17,702
Source: Japan Exchange Group, Singapore Exchange,
Philippine Stock Exchange, HK Exchanges and Clearing, Bursa Malaysia 6
 1-2. Ownership: shareholding structures (2)

Government-owned stock exchanges

HOSE MSE CSX

Ministry of Finance 100% Ministry of Finance 100% Ministry of Economy 55%
and Finance
No of shareholders 1 No of shareholders 1
Korea Exchange 45%
Total 100%
No of shareholders 2

HNX YSX LSX

Ministry of Finance 100% Myanma Economic
51% Bank of Lao 51%
Bank
No of shareholders 1 Daiwa Institute of Korea Exchange 49%
Research
49% Total 100%
Japan Exchange
Group No of shareholders 2
No of shareholders 3

Source: Ho Chi Minh Stock Exchange, Hanoi Stock Exchange, Mongolian Stock Exchange,
Yangon Stock Exchange, Cambodia Securities Exchange, Lao Securities Exchange 7

1-3. Ownership: changes in ownership

Stock exchange/stock Mutualization Member-owned

brokers’ association
organization
by entrepreneurs
Demutualization

Listing Company limited by

Listed company
shares

Stock exchanges with longer history

Stock exchanges established in recent years

Privatization Company limited by

State-owned company
shares

Source: Daiwa Institute of Research 8

1-4. Ownership: should MSE be privatized ?

 MSE is in the privatization list, approved by the Parliament in

2015.
 Do you think MSE should be privatized ?
 If yes, why do you think MSE should be privatized ?
 How do you think MSE should be privatized ?

Source: Daiwa Institute of Research 9

2-1. IT system: highest expense item

 Stock exchanges have been demutualized globally, and for

some cases even listed to strengthen capital base, due largely
to increasing IT system investment.
 Scripless trading, which is supported by IT system, is the
global standard. Order, matching, clearing, settlement and
depository are all done by IT system.
 IT system is highest expense item, with initial investment of
$10m or over, in addition annual maintenance cost of
equivalent to 20% of the initial investment every year.
 In the emerging economies, the private sector cannot afford IT
system cost, thus newly established stock exchanges, especially
after 2000, are supported by government funds.

10
2-3. IT system: accounts for 14-44% of total operating cost

IT system cost for major stock exchanges in Asia

JPX HKEx SGX SET IDX

Mar-15 Dec-15 Jun-15 Dec-15 Dec-14
JPY m HKD m SGD m THB m IDR bn

Depreciation 10,803 684 51 295 96

System maintenance cost 9,947 517 116 184 130

Total IT system cost 20,750 1,207 167 478 226

Total operating expense 53,473 3,290 377 3,335 812

IT system cost/total 39% 37% 44% 14% 28%

Source: Japan Exchange Group, HK Exchange and Clearing, Singapore Exchange, Stock
Exchange of Thailand, Indonesia Exchange
11

2-4. IT system: can Mongolia afford two stock exchanges?

 Mongolian Securities Exchange (MSX) was established in 2015.

According to MSX, it will be operational in the near future,
with installation of IT system by NASDAQ.
 What do you think of owning two stock exchanges in
Mongolia ?
 Assuming MSX will be operational with successful IPOs, what
do you think it is the best solution for the Mongolia’s capital
markets ?

Source: Daiwa Institute of Research 12

3-1. Profitability: a high-margin sector (1)

Pretax income margins for major stock exchanges in Asia

JPY m
JPX Mar-12 Mar-13 Mar-14 Mar-15
Operating revenue 75,539 82,504 114,052 106,486
Pretax income 20,080 25,259 54,786 54,887
Pretax income margin 27% 31% 48% 52%

HKD m
HKEx Mar-12 Mar-13 Mar-14 Mar-15
Total revenue 6,432 8,131 9,127 12,233
Pretax income 4,845 5,246 6,038 9,278
Pretax income margin 75% 65% 66% 76%

Source: Japan Exchange Group, HK Exchanges and Clearing 13

3-1. Profitability: a high-margin sector(2)

Pretax income margins for major stock exchanges in Asia

SGD m
SGX Jun-12 Jun-13 Jun-14 Jun-15
Operating revenue 648 715 687 779
Pretax income 358 404 377 410
Pretax income margin 55% 57% 55% 53%

TWD m
TWSE Dec-12 Dec-13 Dec-14 Dec-15
Total revenue 6,577 6,728 7,676 7,892
Pretax income 2,654 2,658 3,233 3,033
Pretax income margin 40% 40% 42% 38%

Source: Singapore Exchange, Taiwan Stock Exchange 14

3-1. Profitability: a high-margin sector(3)

Pretax income margins for major stock exchanges in Asia

THB m
SET Dec-12 Dec-13 Dec-14 Dec-15
Operating revenue 3,517 4,481 4,366 4,723
Pretax income 1,489 1,793 1,648 1,522
Pretax income margin 42% 40% 38% 32%

IDR bn
IDX Dec-11 Dec-12 Dec-13 Dec-14
Revenue 805 788 959 1,218
Pretax income 395 279 257 469
Pretax income margin 49% 35% 27% 39%

Source: Stock Exchange of Thailand, Indonesia Exchange 15

3-2. Profitability: other sectors (1)

Pretax income margins for other sectors

USD m
Apple Sep-12 Sep-13 Sep-14 Sep-15
Net sales 156,508 170,910 182,795 233,715
Pretax income 55,763 50,155 53,483 72,515
Pretax income margin 36% 29% 29% 31%

JPY bn
Toyota Motor Mar-12 Mar-13 Mar-14 Mar-15
Sales 18,584 22,064 25,692 27,235
Pretax income 433 1,404 2,441 2,893
Pretax income margin 2% 6% 10% 11%

Source: Apple, Toyota Motor 16

3-2. Profitability: other sectors (2)

Pretax income margins for other sectors

JPY bn
Daiwa Securities Mar-12 Mar-13 Mar-14 Mar-15
Net operating revenues 422 525 643 659
Pretax income -17 92 196 182
Pretax income margin -4% 17% 30% 28%

USD m
Starbucks Coffee Sep-12 Sep-13 Sep-14 Sep-15
Sales 13,300 14,892 16,448 19,163
Pretax income 2,059 2,554 3,160 3,903
Pretax income margin 15% 17% 19% 20%

Source: Daiwa Securities Group, Starbucks Coffee 17

3-2. Profitability: other sectors (3)

Pretax income margins for other sectors

USD m
Rio Tinto Dec-12 Dec-13 Dec-14 Dec-15
Sales 50,942 51,171 47,664 34,829
Pretax income -2,431 3,505 9,552 -726
Pretax income margin -5% 7% 20% -2%

SGD m
Singapore Airlines Mar-12 Mar-13 Mar-14 Mar-15
Sales 14,858 15,098 15,244 15,566
Pretax income 448 482 368 443
Pretax income margin 3% 3% 2% 3%

Source: Rio Tinto, Singapore Airlines 18

3-3. Profitability: turning MSE into a profitable company

 What do you think is the main reasons for MSE not being
profitable ?
 What do you think you should do first as an SRO to revitalize
MSE ?

19

4-1. MSE as an SRO (1)

 What do you think are main factors for MSE returning to

profitability?
 1) No of listed companies, and 2) liquidity are two major
earnings determinants for stock exchanges.
 MSE’s priority for its business expansion is perhaps to
increase no of listed companies. But any unfair companies that
try to exploit, deceive and damage investors are not allowed to
be listed. Self-regulation to be selective for listing candidates is
MSE’s important duty as an SRO.

20
4-1. MSE as an SRO (2)

 Managing listed companies, by monitoring if they provide

sufficient and timely disclosure with their shareholders, is also
MSE’s duty as an SRO.
 Monitoring unfair trading is another type of SRO’s job.
 Self-regulations mentioned above are all very important to
make investors confident in your stock exchange.
 If investors are not confident in your stock exchange, investors
will never put their money into your listed companies.

21
Japan Exchange Group and Recent Development of
Japanese Securities Markets

2016

Financial Literacy Support

Tokyo Stock Exchange, Inc.

Corporate Communications
Japan Exchange Group, Inc.

Copyright © 2016 Japan Exchange Group, Inc. All rights reserved.

CONTENTS

1. Stock Exchange & Market Trends in Japan

2. Establishment of Japan Exchange Group
3. Recent Developments of JPX
3-1. New Index
3-2. Expansion & Strategy
3-3. Enhancing Technology

1
 1. Stock Exchange & Market Trends in Japan

Historical Highlights

1878. 5.15 Tokyo Stock Exchange Co. Ltd. established

1949. 4. 1 Tokyo Stock Exchange(TSE)in its present form founded
1961.10. 2 Second Section for stocks opened
1973.12.18 Foreign Stock Section opened
1985.10.19 Trading in JGB futures started
1988. 9. 3 Trading in stock index futures based on TOPIX began
1989.10.20 Trading in stock index options based on TOPIX began
1990. 5.11 Trading in options on JGB futures began
1997. 7.18 Trading in equity options started
1999.10. 1 Brokerage commissions fully liberalized and become negotiable
1999.11.11 Mothers(Market of the high-growth and emerging stocks)established
2001. 7.13 Trading in ETF(Exchange Traded Funds)started
2001. 9.10 Trading in REIT(Real Estate Investment Trusts)started
2001.11. 1 TSE, Inc. demutualized and converted to a stock company
2013. 1. 1 Japan Exchange Group, Inc.(JPX)started

2
 Current Market in Japan

Nikkei 225 (JPY 10)

(JPY/USD)
TOPIX (points)

2,100 Nikkei 225 TOPIX JPY/USD Rate Trading Value(TSE 1st) 130

1,800 Abenomics 120

EU Crisis impact
110
1,500

EU&US Crisis 100

1,200

Subprime 90
loans Crisis
900
80
Lehman's fall Trading Value
600
70
JPY4tril.

Great East Japan Earthquake

300
60
JPY2tril.
¥1.2 tri. ¥2.7 tri. ¥2.6 tri. ¥3.0 tri.
Cash Equity ADV in 2012 in 2013 in 2014 in 2015
0 50
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5
5

Household Financial Assets of Japan vs US (Sept. 2014)

Japan USA

Total Asset: 1,598Trillion JPY

Total Asset: 63.9 Trillion USD
(15.6 Trillion USD)
Others Others
4% 3%

Cash &
Insurance Deposit
and Insurance 14%
Annuity and
Reserve Cash & Annuity
27% Deposit Reserve Equity
53% 32% 33%

Investment
Investment Trust
Trust Equity
Bonds 13% Bonds
5% 9%
2% 5%

• Most people prefer to keep their assets as cash & bank

• Well-balanced portfolio.
deposit, even though banks offer very low interest rates.
• People are positive and active in investment activities.
• The total ratio of equity, bonds and investment trust
• The total ratio of equity, bonds and investment trust is 53%.
reached only 15%.

6
© 2013 Japan Exchange Group, Inc. and/or its affiliates. All rights reserved

3
 Share Ownership by Investor Category

Share Ownership by Investor Category (FY2013) Trend of Share Ownership

35%
Others, 2% Domestic institutional investors

Foreign cos.
30% Business cos.

Individuals,
19% 25%

Foreign
cos., 31% 20%
Domestic
Individuals
institutional
15%
investors,
23% City & regional banks
10%
Business
cos, 21%
5%
City &
regional
banks, 4%
0%
198519871989199119931995199719992001200320052007200920112013
*Domestic institutional investors: Trust banks, life & non- (TSE statistics)
life insurance cos., and other financial institutions
*Market Value

Liquidity by Investor Type, Venue Type

 Overseas investors have had the highest participation in Japanese market but the
retail participation ratio has come back after ‘Abenomics’.
 JPX equity market still have over 90% of market share among venues in Japan.

Trading Value by Investor Type (TSE 1st Section)

(from November 30, 2009 to August 1, 2014)

70.00% Trading Value by Venue

(as of April 2014)

60.00%
Regional
Exchange PTS
s 5.62% Other
50.00% 0.01% OTC
JPX
4.03%
ToSTNeT
(Dark
40.00% Pool) JPX
4.30% (Auction
JPX
ToSTNeT )
30.00% (Non- 80.99%
Dark
Pool)
5.04%
20.00%

Source: Exchanges, JSDA

10.00% *In this statistic, dark pool share is estimated based on ToST-1 trading
value during auction trading. As such, this data may not represent
actual dark pool trading value.
0.00%

4
 Financial Performances of JPX
FY 2014 Revenue Breakdown
(JPY: Bil.)
FY 2014 Financial Results Others
10%
Operating Revenue 106.1
Information
Operating Expenses 52.8 15% Trading
45%
Operating Income 53,5 Listing
11%
Net Income 34.4
Clearing
ROE 15.6% 19%

FY2014 Operating Expenses

(JPY: Bil.)
Market Performance (30 Nov. 2015)
Others
Market Capitalization 1,059 21%
Personal
PER 27 Expenses
29%

PBR 4.2 Depreciation/

Amortization
20%
Dividend Yield 2.18 Systems Rent
Maintenance/ 11%
Operating
Expenses
19%
9

2. Establishment of Japan Exchange Group

10

5
 Consolidation in the Exchange Industry
 Since 1999, the global exchange industry has seen a wave of consolidation with some
success.
 Consolidation achieves larger scale and wider coverage for more efficient system
infrastructure investments, which are a large part of exchange operating costs.
Year Major Developments

1999 • The Stock Exchange of Singapore (SES) and the Singapore International Monetary Exchange
(SIMEX) merge to form SGX (Singapore Exchange)
2000 • Paris Bourse (France), Amsterdam Stock Exchange (Netherlands),
and Brussels Stock Exchange (Belgium) merge to form a pan-European exchange, Euronext.
2002 • Euronext merges with Bolsa de Valores de Lisboa e Porto (Portugal)
and acquires Liffe (London International Financial Futures Exchange, UK)
2004 • OMX (Sweden) implement joint trading platform on all Nordic Exchanges
2005 • Korea Stock Exchange, Korea Futures Exchange, and KOSDAQ merge to form KRX (Korea Exchange)
• 2 failed attempts by Deutsche Bourse (Germany) to acquire LSE (London Stock Exchange, UK)
2006 • LSE (UK) acquires Borsa Italia (Italy)
2007 • NYSE (New York Stock Exchange, US) merges with Euronext to form NYSE Euronext
• CME (Chicago Mercantile Exchange, US) and CBOT (Chicago Board of Trade, US) to form the CME
Group
• NASDAQ (US) and OMX Exchanges, the operator of Nordic exchanges, merge to form NASDAQ OMX
2008 • In Canada, Toronto Stock Exchange (TSX) and Montreal Exchange merge to form the TMX Group
• CME Group acquires NYMEX (New York Mercantile Exchange, US)

2011 • Plans to merge LSE (UK) and TMX Group (Canada) collapse due to opposition from TMX shareholders
• Australian regulators reject SGX’s plans to acquire ASX (Australia)

2012 • Brussels rejects merger plans between Deutsche Bourse and NYSE Euronext based on anti-trust law
• HKEx (Hong Kong Exchanges and Clearing, HK SAR) acquires LME (London Metal Exchange, UK)

2013 • ICE (Intercontinental Exchange, US) acquires NYSE Euronext

11

Establishment of Japan Exchange Group (JPX)

 The January 2013 merger combined the complementary strengths of TSE and OSE in the cash equity
and derivatives markets.
 JPX aims at market expansion and improved efficiency to improve user convenience and raise
competitiveness
【Tokyo Stock Exchange Group】 【Osaka Securities Exchange】
• A global leader boasting a • Largest derivatives market in Japan
comprehensive exchange centered on with leading Nikkei 225 futures and
the TSE 1st Section, TOPIX futures and options
JGB futures • Operates the JASDAQ venture market
• Vertically integrated group offering • Japan’s only listed exchange
listing, trading, and clearing &
settlement services
• Dominant domestic stock market with
strong brand image

Japan Exchange Group

Akira Kiyota, Group CEO

Cash Equities Derivatives Self-Regulation Clearing

Trading Trading
Tokyo Stock Exchange Osaka Exchange Japan Exchange Japan Securities
Koichiro Miyahara, Hiromi Yamaji Regulation Clearing Corporation
President &CEO President &CEO Takafumi Sato Hironaga Miyama
President President & CEO

 Change in trade/corporate names : Osaka Securities Exchange → Osaka Exchange (March 24, 2014), Tokyo Stock
Exchange Regulation → Japan Exchange Regulation (April 1, 2014)

12

6
 Generating Synergy Effect

 Successfully completed cash equity market integration and derivative market integration

FY 2012 FY 2013 FY 2014

January 1, 2013 July 16, 2013 March 24, 2014

Business Combination

Completed
Cash Equity Market Integration, etc. Completed
 Consolidated cash equities markets under TSE Derivatives Market Integration
 Consolidated self-regulatory functions under JPX  Consolidate derivatives markets under
Regulation OSE
 Consolidated clearing functions under JSCC

 Brought benefits to stakeholders

• For JPX
 Cost reduction
• For market participants/ investors
 Cost reduction
 Improved convenience via increased products tradable on single platform
• For listed companies
 Cost reduction 13

Expand Product Lineup - Asset Classes -

 JPX is expanding its products lineup to provide investors with more opportunities.
 We are working to diversify our ETF/ETN, REIT and derivatives lineups.
 We also plan to launch a listed infrastructure fund market.

Cash Equity Market Derivatives Market

More than ETF/ETNs Equity Fixed-Income

3,400 Issues
223 Issues Derivatives Derivatives
 1st Section (blue chips)  JGB Futures
 TOPIX Futures (5/10/20yr)
 2nd Section
 Markets for Emerging REITs 

TOPIX mini Futures
Nikkei 225 Futures
 Mini-JGB Futures
(10yr)
companies
52 Issues  Nikkei 225 mini  Options on 10-yr. JGB
 Nikkei/Dividend Futures Futures
 JPX-Nikkei 400 Futures etc.
 Market for Professionals Listed (Nov 2014)
Infrastructure Funds  TOPIX Options
(planned)  Nikkei 225 Options
 Equity Options
etc.

(as of end of Aug 2014)

Source: JPX

7
 JPX’s Strategy A Global Comparison

 JPX’s cash equity market is ranked third

behind NYSE and NASDAQ in terms of both  JPX’s major products are Nikkei 225
market capitalization and trading value. Futures/Options, TOPIX Futures and JGB
 About 3,400 companies are listed on our Futures.
market.

Cash Equity Market Derivatives Market

24 60 3,500

3,000
20 50
Domestic market capitalization(Left Axis)
2,500
Daily value of share trading(Right Axis)
16 40
2,000

12 30
1,500

8 20 1,000

500
4 10

0 0

15

Horizontally Expansive and Vertically Integrated Business Model

 The group provides a comprehensive range of securities services from listing and trading
to clearing and settlement, and a variety of cash equity and derivatives products.

 Listing examination Self-

and administration Japan Exchange Group Regulation
Listing  Listing rules,
Regulation

corporate code Cash Equity

Cash Equity Derivatives Pro Markets
Trading
Trading Trading
(Venture Market)
 Market operator
 Timely disclosure
Trading  Data, index calculation
 Market surveillance,
participant monitoring Tokyo Stock Exchange, Osaka Exchange

 Clearing cash
Clearing (Cash Equity, Derivatives, OTC)
equity/derivatives
Clearing
trades, and OTC Japan Securities Clearing
derivatives Corporation

 Securities Settlement (Cash Equity)

Settlement settlement Japan Securities Depository Center

Subsidiary Affiliate

16

8
 3. Recent Developments of JPX

3-1. New Index

17

JPX Nikkei 400

 Japan Exchange Group, Inc. and Tokyo Stock Exchange, Inc. and Nikkei Inc. jointly launched a new
index, JPX-Nikkei Index 400 (JPX-Nikkei 400), on January 6, 2014.
 JPX-Nikkei Index 400 uses pioneer criteria based on profitability and management perspectives to
select the 400 attractive companies which make up its constituency.
 It is expected to serve as a new investment benchmark for Japan alongside TOPIX and Nikkei 225.

JPX-Nikkei Index
TOPIX 400
(Tokyo Stock Price Index)
• 400 Stocks from the 1st/2nd Nikkei 225
Section, Mothers, or
1st Section
• All Stocks JASDAQ selected in • 225 Stocks from the 1st
(approx. 1,780) consideration of Section
• Market capitalization- profitability and • Simple average
weighted management
• Market capitalization-
weighted

18

9
 Stock prices and ROE of Japanese companies
 In 10 years from Sep 2002, Nikkei 225 fell by 5.5% while TOPIX fell by 19%
 About half of TSE-listed stocks rose despite the broad market decline.

<Stock prices and ROEs in 10 years>

(End of Sep. 2002- end of Sep. 2012) (Reference) ROEs in other countries
Stock prices Companies Ratio Av. ROEs U.S. (S&P500) 26.1
over 5x 14 0.9% 17.0% U.K. (FT100) 22.4
Rose up to 5x 181 48.3％ 11.1% 9.7% Germany (DAX) 12.0
up to 2x 593 36.3% 5.6% China (Shanghai) 14.6

No change 6 0.4% 4.7% World average (MSCI ACWI) 20.8

(Source: Bloomberg as of Feb. 20, 2013)
Fell 839 51.4% 1.5%

Total 1,633 100.0% 4.0%

Coverage: Stocks on TSE 1 st and 2nd Sections and Mothers which were listed
throughout the entire period.

ROE(%)
 Stock prices and ROEs show
Rose

some correlation
Fell

 ROEs of Japanese
companies are
comparatively lower than
those of foreign companies

Stock price change (x)

19

New Index - JPX-Nikkei Index 400

Fundamental-based “smart beta” index consisting of companies with high
investment appeal, launched on January 6, 2014.

Universe
TSE 1st TSE 2nd Mothers JASDAQ
3000+

Screening (1) Negative Screening (e.g. stocks listed for under 3 years, stocks with 3 consecutive years of
operating deficits, etc. are dropped)
TOP 1000 (2) Top 1000 by market capitalization and trading value during the most recent 3 years are selected

(2) Qualitative Factors (supplementary)

(1) Quantitative Indicators
• Outside independent directors
Scoring • 3Y average ROE
• Adoption of IFRS
• 3Y cumulative operating profit
TOP 400 • Disclosure of earnings
• Market Capitalization
information in English

• Market cap weight (free-float, 1.5% cap)

JPX-Nikkei 400 • 10,000 points on base date (August 30, 2013)
Index Constituents • Annual review in August based on June selection
• Constituents List : http://www.jpx.co.jp/english/markets/indices/jpx-nikkei400/index.html
20

10
 JPX-Nikkei 400 – Facts –

Market Division Balance based on the selected issues for FY2014

Market division No. of issues

1st Section 388 Top 10 Industrial Categories by Weight
2nd Section 1
Mothers 1 Electric Appliances & Precision
Instruments
JASDAQ 10 IT & Services, Others

Automobiles & Transportation

Equipment
Banks
Sector No. 22.7% 14.0%
11.2% Raw Materials & Chemicals
TOPIX Core30 29 5.1%
10.2%
5.3%
TOPIX Large70 63 5.3% Machinery
8.3%
5.3%
23 6.1% 6.6% Financials (Ex Banks)
TOPIX Mid400
8
TOPIX Small 58 Pharmaceutical

Transportation & Logistics

(※)based on TOPIX-17 series categories
21
Source: Japan Exchange Group, Inc.

Impact of New Index “JPX-Nikkei Index 400”

 Smooth start with numerous ETFs and mutual funds available on January 4 debut.
 Currently 4 ETFs and 19 mutual funds track the index, with combined AUM exceeding
¥200 billion (as of Aug. 7, 2014).
 Futures market scheduled for November launch on OSE.

 Started calculation and publication

Jan. 2014  Mutual funds and ETFs based on the index were set up
(2 ETFs and 5 mutual funds available on month of index launch)

 Adopted by GPIF as an additional equity benchmark for

Apr. 2014 asset management

Jul. 2014  AUM of benchmarked investments exceed ¥200 billion

Nov. 2014  JPX-Nikkei 400 Futures was listed on Osaka Exchange

22

11
 Better Governance in JPX-Nikkei 400 Constituents

 Through the JPX Corporate Governance Report, listed companies disclose data on
accountability, transparency and fairness.
 These results show that JPX-Nikkei 400 constituents score better than the broader
market across a wide range of governance-related characteristics.

 Better performance  Better board structure  Better compensation practices

10.00%
9.23% 70% 45%
65% 41%
9.00%
40%
7.79% 60%
8.00%
35%
7.00% 50% 29%

Percent of companies
30%
Percent of companies

6.00%
5.22%
40% 25%
5.00% 34%
4.20%
19%
4.00% 20%
Median

30%
3.00% 15%
20%
2.00% 10%
6%
1.00% 10% 6% 5%
0.00% 2%
3yr ROE 3yr Operating 0% 0%
Margin Company w/ At least 1 Ind. Performance-Based
*
Individual Comp
**
Committees Director Comp Disclosure
JPX400 Market
JPX400 Market JPX400 Market

* Does not include stock options 23

**Disclosure for all or a portion of the Board of Directors
Source: JPX Corporate Governance Report Data

Better Governance in JPX-Nikkei 400 Constituents

 JPX-Nikkei 400 constituents tend to offer an environment more conducive to

dialogue with foreign investors.
 They also tend to be actively engaged in activities to promote corporate social
responsibility.
 Fairer treatment for foreign shareholders  More socially conscious  More attractive shareholder structure

100% 70%
60% 57% 92% 63%
53% 90%
60%
50% 80%
50%
70%
40% 62%
Percent of companies

60%
Percent of companies

40%
Percent of companies

30% 50%
30%
40%
20%
30% 20%
12% 12%
20% 9%
10% 10% 7%
10% 2%
0% 0% 0%
Online Voting English AGM CSR Activities Controlling * Foreign ownership
*
Platform Usage Invitations shareholder >30%
JPX400 Market JPX400 Market JPX400 Market

*Includes parent company, individual/family etc. ownership of >50% of voting rights

Source: JPX Corporate Governance Report Data 24

12
 3. Recent Developments of JPX

3-2. Expansion & Strategy

25

Cash Equities

 IPOs in Japan
 AUM of JPX-Nikkei 400 ETFs
(companies) （JPY bil.）
120 TSE 1st/2nd
500
[JPX-Nikkei 400 ETFs]
Mothers 450 • Nomura AM: NEXT FUNDS JPX-Nikkei Index 400 ETF
99 JASDAQ • Nikko AM: Listed Index Fund JPX-Nikkei Index 400
100 TOKYO PRO Market 91 • Mitsubishi UFJ AM: MAXIS JPX-Nikkei Index 400 ETF
400 • Daiwa AM: Daiwa ETF JPX-Nikkei 400
Others • BlackRock Japan: iShares JPX-Nikkei 400 ETF
350
80
300
57
60 54 250
200
37
40 34
150
23
19 100
20
50
0 0
FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Source: TSE and each securities exchange

26
26

13
 Derivatives

 JPX’s Derivatives Trading Volume and  Trading Volume of Nikkei 225 Futures
Ratio of Night Session
(mil. contracts) (mil. contracts)
JGB Futures
140 40% 30
TOPIX Futures
OSE
Nikkei 225 Futures
Nikkei 225 mini
34.7% SGX
35%
120 Nikkei 225 Options 25 CME
Others
Ratio of Night Session 30%
100
20
25%
CME
80
13%
20% 15
SGX
60 20%
15%
10 OSE
40 67%
10%

5
20
5%

0 0% 0
FY2012 FY2013 FY2014 FY2012 FY2013 FY2014
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

OSE’s mini calculation factor is 1/10, SGX’s large (incl. USD denominated) is 1/2,
mini is 1/10, and CME’s USD denominated and JPY denominated contracts are1/2.

Source: Each exchange

27
27

Asian Strategy

 On 1st November 2014, the Hong Kong representative office was established, further
strengthening our outreach to investors in Asia to promote the appeal of the Japanese
market.
 On 4th December 2014, JPX and SGX entered into a Letter of Intent to collaborate in
the joint development and promotion of the markets on both exchanges. This
cooperation further deepens the exchanges’ long-standing relationship and strategic
partnership.
 On 23rd December 2014, a joint venture agreement on establishing Yangon Stock
Exchange was concluded in preparation for its launch in 2015.
 Since 2014, JPX has provided technical support for developing derivatives CCP* rules
in Vietnam, and will extend support to system development. (*Central Counter Party)

 Representative Offices  Overview of the Yangon Stock Exchange

Yangon Stock Exchange Joint-Venture Company
・ New York ・ Hong Kong (since Nov. 2014) Name
Limited (abbreviation: YSX)
・ London Suite 01, 66/F, The Centre,
Location Yangon, Myanmar
・ Singapore 9 Queen‘s Road Central
・ Beijing Contact: 852 3965 3050 Myanma Economic Bank, Japan Exchange Group,
Shareholders
Daiwa Institute of Research
Capital 32 billion Kyats (approx. JPY 3.7 billion)
Myanma Economic Bank : Three persons
(including the company president)
Directors
Japan Exchange Group : One person
Daiwa Institute of Research : One person

28
28

14
 3. Recent Developments of JPX

3-3. Enhancing Technology

29

Rapid Growth in Order Volume Backed by Technology

 Advancements in data processing technology drove a 20x rise in order volume in the
past decade.
 Exchanges race toward providing μs order processing in a constant effort to upgrade
system infrastructure.

Trading volume continues to increase at TSE Average daily trading value

No. of orders/day (mil.) (¥ tril.)
50 5
注文件数
No. of orders
45 月平均売買代金
Average trading value (monthly)

40 2nd Abe Administration 4

1st - 3rd Koizumi Administration 1st Abe Administration (Abenomics started)
35
Great East Japan Earthquake
30 3
25 1 ms order
arrowhead launch response
2 ms order response
20 2
15
10 1
5
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Increasing
CPU 1.4GHz ~7x 9.6GHz
data
processing HDD 80GB ~100x 8TB
speed and
capacity
Data transfer
(FTTH)
100Mbps ~100x 10Gbps
30

15
 Equity Trading System “arrowhead”
Market environment surrounding exchanges

［Background: Investor Needs］

Seamless connection between Algorithmic Trading
DMA Trading
investors and exchanges (Increase of High Frequency Trading )
Popularity of Internet Trading
Advanced and diversified trading Increased the number of orders (more than double in 5 year)
methods Reduced size of orders (1/3 in 10 year)

Increasing high speed transaction Enhance system processing capacity and execution speed
between securities firms
Rise of alternative markets whose execution speed surpassing
that of existing exchanges
Exchange must meet investor’s needs Increasingly selective approach to execution markets and
securities firms based on system processing capacity, and
and adapt to rapid changes in speed, etc.
environment.

Fundamental principles for arrowhead renewal

 Respond to risks from developments in

Improve reliability electronic trading
 Further enhance price formation function and
Improve convenience invigorate the market
 Increase processing speed, enhance processing
Improve processing capabilities stability, and secure appropriate capacity
31

Renewal of arrowhead and optimal tick structure

 Improve Risk Control Measures
 Order Cancellation on Abnormal Disconnection (Cancel on Disconnect)
 Order Suspension/Cancellation (Kill Switch)
 User-designated Hard Limit
 Issues for Testing (Dummy Symbol)
 Improve Processing Capabilities
Processing Capabilities Before renewal After renewal
Order Response Time About 1.0 millisecond Less than 0.5
milliseconds
Information Dissemination About 2 - 2.5 Less than 1.0
Time milliseconds millisecond
Order Processing (per day) 137,000,000 270,000,000
 Phase 3 of Tick Optimization Program

32

16
J-GATE (Derivative
Derivatives tradingSystem
Trading system)
“J-GATE”
 J-GATE is derivatives trading system built based on the system package (CLICK XT™) of
NASDAQ OMX and has been operating since its launch in February 2011.
 J-GATE is composed of Central system, which manages sessions, processes
orders/trades and publish market data, etc. and network gateway (NG) connecting to
User system (participant systems and ISV systems, etc.).
J-GATE

Central System

NG NG NG
NG NG NG NG NG NG

LB
LB

Dedicated NGs Shared NGs

E nvironment
Connection
Co -Location
O S E Proximity GAT ENET
O S E Market Information Premium Direct- ar r ownet
Ac cess

Client System Client System

Login ID Login ID Login ID Login ID Login ID Login ID

OSE will begin the construction of next generation derivatives trading system
aiming to launch in 2016
(currently selecting a vendor/vendors)
33

These materials are prepared solely for the purpose of providing information regarding Japan Exchange Group Inc., and
as such, they are not intended as any offer or sale of securities or other similar action whether inside or outside Japan.
Our securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the
“Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from
registration requirements.

These materials contain forward-looking statements. These statements are based on our assumptions and beliefs in light
of the information currently available to us and are subject to risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from
those we currently anticipate. Given these risks and uncertainties, you are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of these materials. We disclaim any obligation to update any
of the forward-looking statements contained in these materials to reflect future actual events or developments.
http://www.jpx.co.jp/

17
 International Cooperation of Japan Exchange Group

April 12 th, 2016

Japan Exchange Group, Inc.

Basic Policy for International Cooperation of JPX Group

• JPX is to absorb the know-how of advanced IT technologies and new services from the US and
European markets to take advantage to strengthen global competitiveness.
• In addition, JPX will support the infrastructure of the financial developing countries in Asia,
aimed at long-term economic growth and market development together.

【Assistance for Asian Countries】 【Study/Business with US/EU markets】

Rule/regulation High profile
Product New services for
IT infrastructure IT infrastructure
development listed companies
development development

Exchange
Investor Product
operation
education development
support

1
JPX’s International Cooperation in Asia

[China]
Seminar on JPX products
[Mongolia]
(ETF, TOPIX Futures etc)
2015/6- JICA/DIR-JERI/JPX
Technical Assistance for FRC
(SRO, Listing)
[Korea:KRX/JPX]
[Vietnam] Cross Listing on JPX’s derivatives
[Bangladesh] 2014/8- JAFTA/NRI/JPX (TOPIX Futures/Options)
2014- NRI/JPX Technical Assistance for SSC/VSD Staff Exchange
Technical Assistance for CSX (CCP)
(Infrastructure, Products) 2015/7- JICA/NRI/JPX
Technical Assistance for SSC/VSD/HNX/HoSE
(Disclosure, Surveillance, CCP etc)
[Taiwan]
[India] 2014/ TWSE/TAIFEX/TPEx/JPX
2015/1 FSA/JPX/JASDA Cross Listing (Derivatives/ETFs)
Dialogue with Japan and India Mutual Promotion
Staff Exchange

[Myanmar]
2012/ DIR/JPX(/MOF/FSA/JICA)
Technical Assistance for YSX
Development
[Philippine]
2014/ JICA/JPX
[Malaysia:Bursa Malaysia/JPX] Seminar on Capital Market Development
Mutual Promotions on JPX and BM
markets for individual investors
[Brunei]
[Singapore:SGX/JPX] 2015-
Cross Listing on JPX’ derivatives International Competition on Stock
Data Center Connection Exchange Development
Mutual Promotions

Possible Cooperative Fields on Developing Markets

Establishment/Development of Derivatives Markets and CCP

 Establishment of government bond futures market for more economic growth and stable
government bond market
 Establishment of derivative CCP function for more reduction on counterparty risk
(G20 agreement after the Lehman shock)

Development of IT Infrastructures

 More enhancement on core exchange IT system

(trading/clearing system for HFT, algorism trading, etc.)
 Development on other IT systems for gaining more market integrity
(corporate disclosure system, market surveillance system, etc.)
 Overcoming difficulties on developed IT systems by foreign countries
(more smooth/sustainable operation)

Acceleration on SOE’s privatization

 Corporate governance on (possible) listed companies

 Strengthening on enforcement such as corporate disclosure, market surveillance, market
participants’ activities
 More investors for smooth and proper price formation, and stable market conditions

2
Disclosure & Corporate Governance

April 2016
Tokyo Stock Exchange, Inc.
Listing Department

1
Disclosure

KEY NUMBERS

3,600

83,078

2
 KEY NUMBERS

3,600

83,078

Cash Equity Market Integration

【Cash Equity Market】

1st Section JASDAQ

(large companies) (various companies)
Main market consisted of major Japanese companies
（Constituents of TOPIX, the benchmark index for Market
institutional investors） that accommodates
1953 cos. (6) diverse needs
787 cos. (1)

Step-up

Mothers 2nd Section TOKYO PRO Market

(growth companies) (SMEs) (various companies)

Entry market for Entry market for stably Professional-oriented low cost market
growth companies growing companies with reduced burden on
targeting listing on targeting listing on the information disclosure, etc.
the 1st Section 1st Section 14 cos. (0)
225 cos. (1) 542 cos. (1)
※ Figures as of 24, March 2016.
Figures in parentheses are for
foreign companies.

3
 KEY NUMBERS

3,600

83,078

Two Types of Disclosure

Companies listed on TSE are required to disclose its information

by laws (mainly by Financial Instrument and Exchange Act) and
the listing rules.
Statutory Disclosure
(Required by Financial Instrument
Corporate Information and Exchange Act)

Disclosure
Timely Disclosure
(Required by TSE Listing Rules)

4
 Different Roles of Disclosure

Disclosure
Statutory Disclosure Timely Disclosure
(Required by Financial (Required by TSE Listing Rules)
Instrument and Exchange Act)
・Facts that are decided by the listed company
・Securities registration statement ・Facts that occurred at the listed company
・Annual securities report ・Information on subsidiaries
・Quarterly securities reports ・Earnings report/Quarterly reports
etc. ・Adjustments to earnings forecasts or figures
etc.

Accurate, Timely,
Complete Spreading
Supplementing each other

Investment and Disclosure

Investors’ self-responsibility
• Investors make investment upon their own decision and responsibility
⇒ Investors take risk and return resulting from the investments
• An environment where the investors can make reasonable decisions has to
be provided as a precondition of the self-responsibility.

Disclosure
Information on the securities and issuer has to be disclosed in a
precise, fair, timely manner.

10

5
 Outline of Timely Disclosure
1. Principles of timely disclosure rule
– Information that may materially affect investment decision has to be disclosed in a timely
manner.
– The Listing Rules provide minimum standards for timely disclosure.

2. Timing of disclosure
– Immediately after the decision or recognition of facts
3. Prior Explanation to TSE
– Prior to disclosure, listed company are required to explain about the information to TSE.

4. The method of timely disclosure

– Electronic filing system: “TDnet”(Timely Disclosure NETwork)

5. Response to uncertain information

– If uncertain information is spread or broadcasted, TSE may require relevant listed company
to disclose accurate information.

6. Update of disclosed information

7. Designation of corporate information handling officer

11

Outline of Timely Disclosure (2)

Information required to be disclosed

1. Management Decisions
e.g. Merger, Equity Finance, Bankruptcy…
2. Events affecting corporate situation
e.g. Disaster, Default of Debt…
3. Information on subsidiaries
4. Financial Information
e.g. Earnings Release, Changes of forecast on dividends…
5. Others
e.g. Information on unlisted Controlling Shareholder, etc.

12

6
 Outline of Timely Disclosure (3)
Timely Disclosure and Insider Trading
Regulation on Insider Trading（Financial Instruments and Exchange Act）
• An insider of a listed company must not sell/purchase relevant securities after
material information arises until the information is disclosed.

Timely Disclosure (Listing Rules)

• A listed company can prevent insider trading by disclosing material information
immediately.
• An exchange maintains fairness and creditability of the market by requiring the listed
companies to disclose such information and preventing insider trading.
• The range of information subject to Timely Disclosure is wider than that of insider
trading regulations because Timely Disclosure is designed in view of dissemination of
information contributing to investors’ decision making.

13

Timely Disclosure
Company Announcements Database Service

Company Announcements Database Service 14

7
 Timely Disclosure

15

Timely Disclosure
Company Announcements Database Service
Company name

Title

HONDA 1Q earnings report

Tick code 16
Time

8
 KEY NUMBERS

3,600

83,078

17

Approval by TSE-side staff

responsible for disclosure
TSE-side staff (Listed company services)
TDnet responsible for disclosure
Listed Company Tokyo Stock Exchange

persons

JPX HP

1
Submit

2 Company
Explain Announcements
Data Service Investors
6 7
3
Confirm

Info venders
4
Call

5
register
etc

18

9
 Guidebook
●Guidebook
＜Purpose＞
The guidebook explains practices and procedures of timely
disclosure required under the Securities Listing Regulations of TSE
It’s a practical manual organized by the Listing Department of TSE in
order to provide easy-to-understand explanation on the outline of
the related listing rules and regulations.

＜Contents＞
Chapter 1 Introduction
Chapter 2 Handling of timely disclosure of corporate information
Chapter 3 Outline of code of conduct and self-regulation
Chapter 4 Exceptions
Chapter 5 Documents to be submitted to TSE
※With more than 800 pages, it is voluminous even at a glance.

＜Target Readers＞
・Listed companies
・Service providers such as securities companies and law firms which
support listed companies in timely disclosure or submission of
documents

＜Publication＞
First publication・・・August 31, 1999
From 2008, the guidebook has been revised once a year. The current
version is the 12 edition.

19

Corporate Governance

20

10
 Laws & Regulations
What is corporate governance?
- The Cadbury Report (1992)-”Corporate governance is a system by which companies are directed
and controlled”.
- Japan’s Corporate Governance Code (2015)-“corporate governance” means a structure for
transparent, fair, timely and decisive decision-making by companies, with due attention to the
needs and perspectives of shareholders and also customers, employees and local communities.

Basic structure of laws and regulations relating to corporate governance in Japan

<Companies Act>
- General Nature
- Incorporation <Financial Instruments &
- Stocks Exchange Act>
- Bonds
- Organization - Internal Control
- Accounts <Listing Rules> - Insider Trading
- M&A - Listing Criteria - Disclosure
- Liquidation - Timely Disclosure - Solicitation
- Corporate Governance Code - Business Regulations
- Code of Corporate Conduct - TOB rule
- Delisting Criteria
21

Japan’s Corporate Governance Code

Development of a CG Code is the first action item in the “Japan
Revitalization Strategy 2014” (the Government’s growth strategy).

The FSA and the TSE established the Council of Experts to

deliberate the outline of code.

Developed over several months by a council of experts from

finance, industry, academia and think tanks, using OECD
Principles and CG codes from these countries as a reference:

OECD UK France Germany Singapore

22

11
 Key Features of the Code
 Three-Tier Structure

General Universal principles and aims prepared based on the OECD

Principles Corporate Governance Principles (5 Principles)

Principles Organize “General Principles” into each component,

and state specific measures to achieve such principle 73 Principles
and aim (30 Principles)

Supplementary Supplement “Principles” and state

Principles specific measures to achieve the
principle and aim of “General Principles”
(38 Principles)

 Principles-Based Approach
 NOT a familiar rules-based approach
 Abstract norms (principles) cited
 Specific decisions on how to respond are autonomous

 “Comply or Explain” Basis

 If any principles are not complied with, the company has to explain the reasons 23

5 Chapters of the Code

Respect for shareholder rights and IV. Defining board responsibilities

I.
ensuring fair treatment
 Develop company vision, create specific long-
 Provide necessary information for AGMs in a
term strategy with management
timely fashion
 Monitor and evaluate management, disclosure
 Provide information in a format usable for
and conflicts of interest
foreign investors
 Define auditor responsibility, promote higher
 Address capital strategy and cross-shareholdings
independence and proactivity
II. Cooperation with stakeholders
 Address social/environmental sustainability V. Encourage dialogue with shareholders
 Promote workplace diversity and develop a
robust whistleblower system  Directors should actively seek out dialogue with
shareholders
Timely, relevant disclosure and ensuring  Companies should develop and communicate
III. long-term revenue/capital goals and explain
transparency
clearly to shareholders how they plan to achieve
 Publish company philosophy, strategy, and
them.
corporate governance approach
 Disclose strategy and process for determining
compensation, appointment, and the reasons for
such for management, directors and auditors 24

12
More Companies Are Appointing Independent
Directors
1st Section Companies with # Independent Directors at
Independent Directors 1st Section Companies
100%
Largest Increase 87.0%
90%

80% +25.6% No ID
70%
61.4% 246
60%
46.9%
One ID
50%
38.8% 728
More
31.5% 34.6%
40%

30%
than
20%
one ID
10%
913
0%

2010 2011 2012 2013 2014 2015 Average: 1.8 Independent Directors
(Average board size = 8.9 directors)

25

What’s the Result?

 Optimistic reaction from both inside and  The Asian Corporate Governance
outside Japan Association now ranks Japan as 3rd in Asia,
up from 4th two years ago.
“At long last, Japanese firms seem to be coming
under proper outside scrutiny” ACGA Corporate Governance
- The Economist Ranking/Scores:
Rank Country 2010 2012 2014 Change
“I think this will be epoch-making in the
context of Japan.” 1 Hong Kong 65 66 65 -1
- Nicholas Benes, Board Director Training 1 Singapore 67 69 64 -5
Institute
3 Japan 57 55 60 5

4 Thailand 55 58 58 -
“ We believe that solid development in
corporate governance is on the horizon. This 4 Malaysia 52 55 58 3
should improve the likelihood of mid- to long-
term returns for investors in Japanese
equities.”
- Kazuhiro Toyoda, Schrodrs Investment
Management

26

13
 Governance Reform Continues
Establishment of “Council of Experts Concerning the Follow-up
of Japan’s Stewardship Code and Japan’s Corporate Governance
Code”

“Further improvements of corporate governance, e.g., making governance

function not only formally, but also effectively, continue to be a major agenda,
and we need to link such efforts to the establishment of a virtuous economic
cycle.

In this respect, for the purpose of following up with the prevalence and
adoption of JSC and JCGC as well as further improving corporate governance
of all listed companies, we hereby announce the establishment of the
“Council of Experts Concerning the Follow-up of Japan’s Stewardship Code
and Japan’s Corporate Governance Code” (the “Council”).”

27

14
 Listed Company Regulation and Supervision

- Maintaining and Enhancing

the Quality of Financial Products -

April 12, 2016

Listed Company Compliance Department
Japan Exchange Regulation

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Table of contents

• Overview of Listed Company Compliance Department (LCCD)

• Examination on Delisting

• Improvement Measures and Penalty Measures

• Examination of Information Disclosure

• Case Study

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

1
 Overview of Listed Company Compliance
Department (LCCD)

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Overview Of Regulation over Capital Market

Financial Service Agency Securities & Exchange
Entrust Supervision & Surveillance Commission
Inspection Concerning
 Development of Legal Framework  Investigation & Examination of
Trading Fairness, etc.
 Giving License Illegal Matters
Regulatory Operation by Executive Authorities

Supervision

Tokyo Stock Exchange & Osaka Exchange

JPX Group (Ruling & Market Operation)

Entrust Self-regulatory Operations

Self-regulatory Operation

Japan Exchange Regulation (JPX-R)

Maintaining & Improving Quality Preventing Unfair Trading Securing Reliability of

of Listed Companies Participants

 Listing Examination  Market Surveillance  Membership Examination

 Listed Company Supervision  Membership Inspection

Task of LCCDｌ Issuers Participants (Securities Companies) Supervision

/ Inspection
Copyright © 2016 Japan Exchange Regulation. All rights reserved.
3

2
 Self-regulation
Comparison between Regulation by Executive Authorities & Self-regulation
Regulation by Executive Authorities Self-regulation of
Stock Exchange
Purpose • Ensure fairness and transparency in the • Ensure fairness and transparency in the
securities market securities market
• Protect investors • Protect investors
• Ensure confidence of trading participants
or listed companies

Rule Laws and sub-rules Rules by Stock Exchange

Sanctions • Accusation⇒Criminal Penalties • Suspension or Revocation of License as a

• Administrative Penalties Participants or Listed company
(Suspension or Revocation of License, • Improvement Report, Financial Penalty,
Management Improvement Order,
Revision Order,
Surcharge Payment Order, etc.)

Tools Inspection, Surveillance, Search, Attachment, Inquiry, Hearing, Onsite Monitoring, etc.
etc. （by Contract between Stock Exchange and
(with Legal Force) Participants or Listed Companies）
Copyright © 2016 Japan Exchange Regulation. All rights reserved. 4

Listed Company Compliance Department (LCCD)

Organization

JPX Group

Holding Company

Tokyo Stock Exchange Japan Exchange Regulation Osaka Exchange

[ TSE ] [JPX-R ] [ OSE ]
Listing Regulation
Market Service Unit
Unit
Listing Equities Market
Listing Examination
Equities Market
Listed Company
Derivatives Market Entrust Self-regulatory Compliance Entrust Self-regulatory
Operations Operations
Information Service
Derivatives Market
Participant Examination
Clearing & Settlement Self-regulatory Operations
& Inspection
Marketing & Market Surveillance was integrated in Jul. 2013.
Self-regulatory
Promotion Unit & Compliance
Operations
IT Unit Equities market was integrated in Jul. 2013.
Derivatives market was integrated in Mar. 2014.
Copyright © 2016 Japan Exchange Regulation. All rights reserved. 5

3
LCCD Mission & Roles
Strives to maintain and enhance the quality of listed financial products in
order to ensure confidence in the financial instrument exchange market.

Exclude the financial

product which lost Examination of delisting Delisted
listing eligibility

Ensure the appropriateness Examination of Other Measures

of disclosure by issuer Information disclosure

“Security on Alert”,
Improvement Report,
Protect investors and Examination of
Financial Penalty,
compliance with
Exert proper market “Code of Corporate Public Announcement.
functions Conduct”

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 6

Types of Measures
Delisting Item Contents
H
Termination of the listing agreement between TSE and a
Improvement Penalty Measures Delisting
listed company.
Measures Designation given to cases where the listed company has
made false statements in a securities report, etc. and, in
“Security on Financial Penalty “Security on Alert”
addition, improvement of the internal management system,
Alert” etc. is deemed to be highly necessary.
Requested when improvement is deemed to be highly
LEVEL

necessary in cases of violations of timely disclosure

Improvement Report
obligations or the Code of Corporate Conduct. Available for
Improvement Public public inspection.
Report Announcement
Report on the status of execution and operation of
Improvement Status improvement measures which is requested 6 months after
Report submission of an improvement report. Available for public
inspection.
Improvement
Status Report Taken when the confidence of shareholders/investors in the
market is deemed to have been undermined in cases of the
Financial Penalty listed company violating securities listing regulations (timely
L disclosure rules and/or the Code of Corporate Conduct) or
other rules.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 7

4
 Examination on Delisting

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Summary of Delisting Criteria

Type Formal Requirements Qualitative Examination
- Based on figures and events - Based on LCCD’s discretion

Criteria  Numbers of shares listed  False statements

 Distribution of shares  Adverse opinion, etc. issued by
 Trading volume accounting firm
 Market capitalization  Violation of Listing Agreement
 Bankruptcy  Undermining public interest & investor
 Delay in filing protection
annual/semiannual reports  Inappropriate merger (backdoor
 Becoming a wholly-owned listing)
subsidiary company, etc.  Involvement of Anti-Social Forces, etc.

Means of Periodical reports by listed Disclosure, reports by listed companies,

Discovery companies, and consultation before tips, and media, etc.
disclosure, etc.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 9

5
Actual Examination of False Statements, etc.
Overview of Examination of False Statements, etc.

A listed company shall be delisted if it is found to have submitted a Securities Report,

etc. which contains "false statements" and it becomes clear that it will be
difficult to maintain order in the market if the company is not delisted
immediately.
* A company is deemed to have made false statements in its Securities Report, etc., when it falls under any of the following cases:

・when it received an order to correct its Securities Report, etc. from the Prime Minister, etc.

・when it received an order for payment of surcharge from the Prime Minister, etc.

・when it was indicted by the Securities and Exchange Surveillance Commission

・when it submitted an amendment report which was found to contain material content.
* The same shall apply to the case of “adverse opinion” or “opinions not expressed.”

• The situation where "it becomes clear that it will be difficult to maintain order in the market if the
company is not delisted immediately" means such a situation where investors’ confidence in the
TSE market is deemed to be significantly undermined if the listing is maintained.
• (Eg.) Cases where the listed company substantially circumvents the listing criteria by making false
statements on situations, etc. at the company such as liabilities in excess of assets prior to listing,
or where the listed company caused material misjudgments in investment decisions by making
false statements in which the most part of its sales were fictitious. 10
Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Actual Examination of False Statements, etc.

False Statement / Adverse Opinion, etc.

Examination by LCCD

Will order in the market be difficult to maintain? YES

* The examination will comprehensively consider matters including the period, amount,
method, and impact on the stock price.

No Delisting

Is improvement expected? No
* The examination will comprehensively consider matters including the state of the
investigation, policy to prevent similar cases, disclosure of these policies, as well as their
feasibility.

YES
YES Designation as
Securities on Alert
Is it highly necessary to improve the internal management
system?
* The examination will comprehensively consider matters including the period, amount, No
Improvement
method, impact on the stock price, and state of establishment/operation of the internal
Report, etc.
management system.

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

11

6
 Lists of Delisted Companies Due to False
Statement/Adverse Opinion etc. (Since 2004)
 List of delisted companies due to false statement in the security report
Date of Delisting Company Name Code Market Division
Sep. 25, 2010 Senior Communication Co., Ltd. 2463 Mothers
May 01, 2009 IBE Holdings, Inc. 2347 Mothers
Feb. 21, 2009 OHT Inc. 6726 Mothers
Apr. 14, 2006 Livedoor Co., Ltd. 4753 Mothers
Nov. 15, 2005 North Co., Ltd. 6732 Mothers
Jun. 13, 2005 Kanebo Ltd. 3102 1st section
Dec. 17, 2004 SEIBU Railway Co., Ltd. 9002 1st section

 List of delisted companies due to the audit firm stated “opinions are not expressed” in the audit report
Date of Delisting Issue Name Code Market Division
Sep. 25, 2010 C&I Holdings Co., Ltd. 9609 2nd section
Feb. 21, 2009 KASUGA ELECTRIC WORKS LTD. 6650 2nd section
Sep. 20, 2008 Asia Media Co., Ltd. 2149 Mothers
Oct. 13, 2007 Framework, Inc. 3740 Mothers
Jun. 24, 2007 Internet Research Institute, Inc. 4741 Mothers

 List of delisted companies due to the audit firm stated “adverse opinion” in the audit report
N/A
Copyright © 2016 Japan Exchange Regulation. All rights reserved. 12

Features of Recent “Window Dressing” Cases

 Non-core business divisions or subsidiaries that have little relationship to the

main business.

 Business divisions or subsidiaries which have unusual business models or

practices.

 Business divisions or subsidiaries whose ratio of amount of inventory assets

to sales is large.

 Business divisions or subsidiaries at which personnel reshuffles are not

conducted in an appropriate or timely manner.

 Business divisions or subsidiaries which have a particular person who wields

significant management authority.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 13

7
 Improvement measures and Penalty measures

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

“Security on Alert”
Overview of Security on Alert

A company may be designated as a Security on Alert if falls under any of the following 1 to 5 and
it is deemed highly necessary to improve its internal management system.
Matter
- when a listed company was deemed likely to fall under delisting criteria such as damage to sound transactions with
controlling shareholder, false statements, etc. violation of listing agreement, etc., or involvement of anti-social forces or
1
other cases in light of the public interest or the protection of investors (and thus designated as a security under
supervision (examination)) but later deemed not to fall under such criteria.
- when a listed company is found to have made false statement in securities reports, etc. or have been expressed an
‘adverse opinion’ or ‘opinions are not expressed’ in audit report.
- when a listed company is found to have violated the timely disclosure rules.
- when a listed company is found to have violated the Code of Corporate Conduct.
- when a listed company fails to improve the execution of improvement measures and the operation of such measures
following the submission of an Improvement Report.

⇒ A listed company designated as a Security on Alert is required to promptly submit a "Written Confirmation of
Internal Management System" which reports the improvement progress of its internal management system after
one year elapses following designation.
⇒ 特設注意市場銘柄に指定された上場会社は、当該指定から１年経過後速やかに、内部管理体制
の状況等について記載した書面「内部管理体制確認書」を提出
The designation shall be canceled if no problems are found with the internal management system, etc. after
examination by the LCCD. Compliance Department.
Copyright © 2013 Tokyo Stock Exchange Regulation. All rights reserved. 15
Copyright © 2016 Japan Exchange Regulation. All rights reserved.

8
 “Security on Alert”
Flow of Examination of Securities on Alert

Delisting
No improvement
and
Improvement is no longer
expected
No
improvement
High necessity of
improvement can be expected despite
improving the internal
problems with internal management system
management system (designation continued)
False statements, 1 year later 1.5 years later
violation of timely Examination on Examination on
Designate as a Improvement Improvement cancel
disclosure rules or cancel
Security on Period (Begins with submission
Period
Code of Corporate (Begins with submission
Conduct, etc.
Alert of "Written Confirmation of "Written
of Internal Management Confirmation of Internal
System“) Management System“)

Delisted if further No problems

Delisted at this stage Delisted if further with the internal
improvement is no longer
if improvement is not improvement is no longer management
expected during the
expected expected during the period. system
period.

Cancel the
Designation
No problems with the internal management
system

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 16

List of Listed companies designated as “Security

on Alert” (Since 2012)
Designation Company Name Code Market Cancel of Remarks
Date Division Designation
Mar. 16, 2016 Food Planet,Inc. 7853 2nd Section
Sep.15, 2015 TOSHIBA CORPORATION 6502 1st section
Apr. 01, 2015 Aisei Pharmacy Co.,Ltd. 3170 JASDAQ
Feb. 25, 2015 SJI Inc. 2315 JASDAQ
Jan. 29, 2015 Ishiyama Gateway Holdings Inc. 7708 JASDAQ - *Delisted (Aug. 1, 2015) due to public interest and for
investor’s protection.
Jan. 29, 2015 ENERES Co., Ltd. 6079 Mothers
Jul. 01, 2014 JALCO Holdings Inc. 6625 JASDAQ Sep. 26, 2015
Mar. 11, 2014 RISO KYOIKU CO., LTD. 4714 1st section Oct. 31, 2015
Feb. 8, 2014 LCA Holdings Corporation 4798 2nd section *Delisted (Dec. 1, 2015) due to no improvement of internal
management system.
May 15, 2013 MATSUYA CO., LTD. 7452 JASDAQ *Delisted (Dec. 28, 2015) due to Acquisition by a demand
for share, etc. cash-out.
Jun. 20, 2012 Princi-baru Corporation 3587 JASDAQ *Delisted (Sep. 12, 2015) due to no improvement of
internal management system.
Jan. 21, 2012 OLYMPUS CORPORATION 7733 1st section Jun. 11, 2013
Jan. 18, 2012 KEIOZU HOLDINGS COMPANY 3731 Mothers - *Delisted (May. 29, 2015) due to no improvement of
internal management system.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 17

9
Improvement Report and Improvement Status Report
～Improvement Measures～

Improvement Report
 The improvement report is a measure for cases less severe than those designated as Securities
on Alert.

 In an improvement report, the listed company describes the background, reasons, and
improvement measures regarding failure to conduct timely disclosure, etc.

 Such reports are available for public inspection.

 When the listed company does not respond to a request to submit an improvement report, the
company commits a material violation of the listing agreement and will result in a delisting.

 In cases where TSE is unable to confirm an improvement in the status of execution and
operation of improvement measures at the listed company that submitted an improvement
report, TSE is able to designate its stock as “Securities on Alert”.

Improvement Status Report

 After 6 months from the submission of such Improvement Reports, a listed company is required
to submit an improvement status report .

 LCCD normally conduct hearings and on-site examination to make sure the improvement.

 Such reports are also available for public inspection.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 18

Financial Penalty and Public Announcement

～Penalty Measures～

Financial Penalty (Listing Agreement Violation Penalty)

 Introduced in July 2008.

 TSE may request payment of the penalty in cases where it deems that
shareholder/investor confidence in the market and listed companies has been
undermined in cases of a listed company deemed in violation of the securities listing
regulations (timely disclosure rules and/or the Code of Corporate Conduct) or other
rules.

 The penalty for a violation of the listing agreement is 20 times annual listing fee.
Ex.) TSE imposed a listing agreement violation penalty JPY 91,200,000 （≒MNT 1,500,000,000） on
TOSHIBA CORPORATION（Sep.14, 2015）.

Public Announcement

 TSE may make a public announcement where it deems necessary in cases of violation
of timely disclosure rules and/or the Code of Corporate Conduct by a listed company.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 19

10
 Examination of Information Disclosure

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Examination of Information disclosure

Check Points

 The timing of disclosure is appropriate

 The details of disclosed information are false

 Disclosed information lacks information deemed important for investment decisions

 Disclosed information gives rise to misunderstandings for investment decisions

 Disclosed information lacks appropriateness of disclosure

Consideration of Aspects
 Materiality of information

 The background, the cause, and the actual state of affairs

 The state of past compliance, etc.

Measures
“Security on Alert”, Improvement Report, Financial Penalty, Public Announcement.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 21

11
 Case Study

Copyright © 2016 Japan Exchange Regulation. All rights reserved.

Case Study - Food Planet,Inc. (1)-

Company Outline

Issue Name Food Planet,Inc.

Founding 1986
Location of Head Office Tokyo
Outline of business Store operations and FC business of ice cream shop
operations
Employees 6(consolidated) 4(individual)
Amount of Capital 1,867 million yen
Listings 2st Section of TSE from 2015
(Mothers from 2003 to 2015)

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 23

12
Case Study - Food Planet,Inc. (2)-
Resolution

• Designation as a Security on Alert

• Imposition of Financial Penalty.

Reason
Food Planet,Inc. (hereinafter "the Company") disclosed an investigation report of the third
party committee concerning inappropriate accounting processing on January 20, 2016 and
disclosed corrections to the earnings reports and the quarterly earnings reports for the fiscal
year ended Sep. 2014 through to the fiscal year ended Sep. 2015 on Feb. 4, 2016.
These disclosures revealed that the Company corrected the consolidated sales for the fiscal
year ended Sep. 2014 from JPY 113 million to JPY 81 million, which was less than JPY 100
million and therefore fell under the delisting criteria of Mothers where the Company was listed
at that time.
The main correction for this case was cancelation of the sales the Company posted because it
regarded some of the sales as inappropriate to be included in the business results of the
Company. The Company made the correction to maintain its listing by counterfeiting vouchers
of transactions that had been made between third parties, whereby the Company included the
sales of the transaction that should not have been recorded through post-hoc arrangements.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 24

Case Study - RISO KYOIKU (3)-

Reason (continuation)
The Company also had presented counterfeit vouchers and made false statements to some few
inquiries about appropriateness of the sales from Japan Exchange Regulation since Sep. 2014.
In addition, due to inadequacies in the Company's disclosure framework, TSE requested the
Company to provide an improvement report in Aug. 2014, and the Company was planning its
improvement measures. Nevertheless, the Company posted fictitious sales as indicated the
above.
These acts circumvented the delisting criteria and were led by the then Representative Director
and other directors. TSE deems, in these circumstances, that there were fundamental
deficiencies in the check-and-balance function among directors, the function of auditors to
monitor the board of directors, the internal check-and-balance procedures, etc., and the
internal audit function at the Company.
Under the capital and business alliance agreement concluded by the Company in Sep. 2015, a
company with which the Company concluded the agreement became a new superior to the
Company in capital. Then in Nov. 2015, the then directors were all replaced, and the Company
operated its business under a new management team. The third party committee conducted
investigation on these corrections under the new management system, and the Company
disclosed on Jan. 2016 an announcement that it would work on the improvement. However,
TSE deemed that the internal management system of the Company was still inadequate, and
improvements were highly necessary.
Copyright © 2016 Japan Exchange Regulation. All rights reserved. 25

13
Case Study - RISO KYOIKU (4)-
Reason (continuation)
Although the Company changed its management system to a certain degree, the Company
conducted actions such as disclosing fictitious information to circumvent the delisting criteria.
As such, TSE designated the stock of the Company as a security on alert in order to facilitate a
prompt improvement to the internal management system, etc. while retaining the possibility of
delisting the stock. With the designation of the stock as a security on alert, if the internal
management system, etc. are examined, and TSE deems that there is no possibility of
improvement, or no improvement has been made after a certain period, then the stock of the
Company will be delisted.
Furthermore, this case was conducted by the then Representative Director and other directors
to maintain the listing, and as a result of these corrections the Company met the delisting
criteria in the fiscal year ended Sep. 2014. The Company also violated the listing rules by
making false statements to inquiries from Japan Exchange Regulation. TSE deemed that these
acts conducted by the Company had undermined the confidence of shareholders and investors
in the TSE market. As such, TSE imposed a listing agreement violation penalty on the Company.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 26

Contact

THANK YOU

Listed Company Compliance Department

Japan Exchange Regulation

Website: http://www.jpx.co.jp/english/regulation/index.html

This information has been written based on various sources that were believed to be reliable. However, Japan Exchange Group, Inc., Tokyo
Stock Exchange, Inc. and/or Japan Exchange Regulation does not guarantee its accuracy or integrity. The information herein is believed to
be correct at the time of printing. The purpose of this material is solely for reference, is not for sale and is not intended to solicit trading in or
selling of specific securities. This material is strictly for personal use.

Copyright © 2016 Japan Exchange Regulation. All rights reserved. 27

14
 Inspection on Trading Participants

April 13,2016
Participants Examination & Inspection
Japan Exchange Regulation

1. Framework of the supervision of

Trading Participants
FSA/SESC
Cooperation and
inspection information sharing inspection
regarding regulation

Cash
TSE market Cash &
Derivatives
Association
functioning as SRO

Derivatives JPX-R Market

OSE market
SRO

inspection
order

Trading Participant Joint

order inspection

Investor
1

1
 2.JPXR - Self-Regulatory Body of JPX
JPXR
“Quality Control Center” of the Exchange

Listing Examination Listed Company Compliance

Market Surveillance
Participant Examination and Inspection

3. Difference of Inspection & Market Surveillance

Participant Examination and Market Surveillance

Inspection
Purpose Secure qualification and credibility Secure fairness of trading on the TSE
of trading participants and OSE market
Object of Trading participants Trading on (and outside, when
examination necessary) the TSE and OSE market
Outline of Inspect trading participants’ Investigate existence of unfair
examination compliance with laws and trading, such as insider trading or
regulations, and their business and market manipulation, on the TSE
financial condition and OSE market

2
 4. Structure of the department
Inspection director
・Plans inspections
General Administration ・Conducts examinations of trading
and Planning Group qualifications etc.
・Decides the conducts of the disciplinary
action

Information Analysis ・Gathers and analyzes inspection information

Group ・Evaluates inspection results etc.
・Responds to inquires from trading
participants
・Training to trading participants

Inspection Group ・Conducts On-site inspections etc.

4

5. Overview of Inspection
Objective
In order to ensure market fairness and reliability, the JPXR investigates compliance with laws
and TSE and OSE rules, condition of business and property of trading participants, take
necessary measures based on the results.

Type of Inspection
Regular Inspection The JPXR take into consideration the results of last inspections and the number
of days elapsed since the last inspection etc. and carries out general inspections
sequentially from trading participants is deemed highly necessary to inspection.

Follow-up Inspection Follow-up Inspection is carried out within one year after the previous inspection
as needed to confirm how well the trading participant has made improvements.
Special Inspection Inspections of trading participants are conducted with a focus on specific items
based on a variety of information.

Inspection methods
On-site Inspection The JPXR selects several offices from among trading participants' headquarters
and branch offices, and conducts on-site inspections at these offices. Majority
of inspections are conducted using this method.
Document Inspection If the JPXR decides that the documents submitted by a trading participant are
sufficient, inspections are carried out based on the documents without an on-
site inspection. 5

3
 6. Statistics on Inspection
 The number of on-site inspection conducted

Number of companies
Type of inspection
FY2013 FY2014 FY2015
Regular Inspection ２８ ２９ ３１
Follow-up Inspection １ ０ １
Special Inspection ２ １ ０
Total ３１ ３０ ３２

○Average number of days spent for ○Average number of inspectors

an on-site inspection per trading engaged in an on-site inspection
participants per trading participants

（days） （persons）

7. Inspection Steps
 Select a trading participant to be inspected considering following :
Selection
latest inspection result, results of SESC inspection, interval, financial
condition, information from the outside, etc.

Pre-inspection  Request to submit documents related to examination for the trading

participant in order to analyze the documents and prioritize items for
inspection in advance.

 Based on the investigation of record books and documents,

On-site inspection understand transactions ,customers or sales stuff suspected of
violating laws, etc.
 Conduct the hearing for compliance officer, etc. , and confirm
business flow and in-house compliance management.

Analysis
 Determine the contents of the measures pertaining to the violation
of laws, TSE or OSE rules , etc.

Measures
 JPXR imposes disciplinary action ( suspension or restriction of
trading, imposition of financial penalties, etc.) or caution, if the
violation of laws, TSE or OSE rules, etc. is observed. 7

4
 8. Deficiency found in recent Inspection
(in FY 2015)
Of these, cases in which
Deficiencies Number warnings or requests were
of cases issued

１ Deficiency related to margin trading ８ ８

２ Deficiency in the management system for preventing unfair transactions ７ ２
３ Deficiency in the management system for preventing erroneous order placement ５ １
４ Deficiency related to short-selling ４ １
５ Deficiency in the management of corporate information ４ ０
６ Deficiency in the management of System Risk ３ ３
７ Deficiency in the management of margin of derivatives trading ３ ２
８ Deficiency related to net settlement transactions ２ ２
９ Deficiency related to Agreement for Setting up Trading Account ２ ０

10 Deficiency in books and documents １ １

11 Deficiency related to best execution obligation １ ０

12 Deficiency related to contract correction １ ０

13 Deficiency related to internal audit １ ０

14 Others ２ １

Total ４４ ２１

9. Disciplinary Actions and Cautions

(reference：Number in FY 2015)
Violation cases Deficiencies of internal control systems
Revocation of trading ０
qualification
Disciplinary Suspension or
０
actions restriction of trading Recommendation ０
Imposition of financial ０
penalties
Censure ０
Warning by the ０
Governor in charge
Warning by the director ２
Cautionary of Participants Request ８
notices Examination and
Inspection Department
Warning by inspection １１
staff
9

5
 10. Enforcement
If a trading participant violates laws, TSE or OSE regulation etc., JPXR can determine
disciplinary actions such as Revocation of trading qualification, Suspension or
restriction of trading, etc. for the trading participant.

 JPXR may initiate appropriate disciplinary process with the result of inspection or market
surveillance by JPXR or other organizations when a participant.
• violates the FIEL or the TSE or OSE rules , etc.
• obtains the exchange’s trading qualification unfairly or dishonestly
• rejects to report or makes false report , etc.

 After through deliberation by the Discipline Committee, JPXR will decide on the content of the
disciplinary action.
• ７～11 members from representatives of trading participants and non-trading participants
• More than half the members shall be from non-participant such as lawyers, etc.
• Approval of more than half of attended members is necessary.

 Type of Disciplinary Actions

• Censure (warnings)
• Fine up to JPY 500 million
• Limiting or suspending transaction
• Revocation of trading qualification

10

11. Enforcement steps

 Violation of laws and/ or regulations
 Acquisition of trading qualification by false means
Occurrence of event subject
 Insolvency, breach of contracts
to disciplinary actions
 Failure to pay or deposit of funds or securities
 Refusal of inspection, report, submission of
information, etc.

Trading Participant Hearing  Presentation of case subject to disciplinary

actions

Discipline Committee  Deliberation on disciplinary actions

Board of Directors  Decision on disciplinary actions

Disciplinary Disciplinary  The trading participant can lodge a objection for

actions taken actions taken TSE and/ or OSE, within 10 days from the
by the TSE by the OSE notification the disciplinary actions.

Trading Participant 11

6
12. Recent disciplinary actions
（reference：Disciplinary actions）
Trading Disciplinary
Date Violation
Participant Action
Business operation which lacks the necessary and
appropriate measures to prevent unfair trading with Fine of
SMBC Nikko
7-Aug-2012 respect to the management of corporate information,
Securities Inc. JPY 80 million
as well as inappropriate solicitation which includes
acts in violation of laws and regulations

The administration of the electronic data processing Fine of

livestar Securities
29-Aug-2012 system pertaining to financial instruments business,
Co., Ltd. JPY 3 million
etc. was deemed to be inadequate.

TAKAGI Conditions deemed lacking in necessary and Fine of

18-Sep-2012 SECURITIES CO., appropriate measures for prevention of unfair trading
LTD. in relation to management of corporate information. JPY 5 million

Not having measures necessary and proper for

Nomura Securities preventing unfair trading related to management of Fine of
31-Oct-2012
Co., Ltd. corporate information, and soliciting customers with JPY 200 million
the provision of corporate information.

12

12. Recent disciplinary actions

（reference：Disciplinary actions）
Trading Disciplinary
Date Violation
Participant Action

SANKO Act of conducting purchases, etc. of listed securities Fine of

21-Feb-2013 SECURITIES Co., with the aim of causing fluctuations in prices of such
Ltd. listed securities. JPY 12 million

Business operation which lacks the necessary and Fine of

SMBC Nikko
27-Feb-2014 appropriate measures to prevent unfair trading with
Securities Inc. JPY 10 million
respect to the management of corporate information.

Act of conducting a series of Sales and Purchase

therefor that would cause fluctuations in prices of
Musashi Securities Listed Financial Instruments, etc. in a Financial Fine of
24-Sep-2014
Co., Ltd. Instruments Exchange Market for the purpose of JPY 80 million
inducing sales and purchase of Market Transactions of
Derivatives

Bansei Securities Violation of just and equitable principles of

24-Sep-2014 Censure
Co.,Ltd. transactions

13

7
12. Recent disciplinary actions
（reference：Disciplinary actions）
Trading Disciplinary
Date Violation
Participant Action

The administration of the electronic data processing

Kabu.com
25-Sep-2015 system pertaining to financial instruments business, Censure
Securities Co.,Ltd.
etc. was deemed to be inadequate.

Not having measures necessary and proper for

Deutsche Securities preventing unfair trading related to management of Fine of JPY 60
16-Feb-2016
Inc. corporate information, and soliciting customers with million
the provision of corporate information.

14

Activities to promote compliance

COMLEC
Established for the purpose of compliance assistance to trading participants.

 Information sharing with trading participants to comply with

laws, regulations and rules
・The Information Analysis Group answers questions from trading participants
about rules and regulations regarding securities trading.

 Publication
・Compliance Case Study Handbook2014

 Seminar
・Seminar for in-house examination stuff
・Compliance seminar for securities companies
15

8
 Thank you.
Disclaimer
These materials are prepared solely for the purpose of providing information regarding
Japan Exchange Group, Inc., and as such, they are not intended as any offer or sale of
securities or other similar action whether inside or outside Japan. Our securities have not
been and will not be registered under the United States Securities Act of 1933, as amended
(the “Securities Act”), and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.

These materials contain forward-looking statements. These statements are based on our
assumptions and beliefs in light of the information currently available to us and are subject
to risks and uncertainties. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, our actual results may vary materially from
those we currently anticipate. Given these risks and uncertainties, you are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the date of
these materials. We disclaim any obligation to update any of the forward-looking
statements contained in these materials to reflect future actual events or developments.

9
 A Brief Explanation of Market Surveillance
at Japan Exchange Regulation

Market Surveillance and Compliance Department

Japan Exchange Regulation
April 13, 2016

Contents

I. Target of Our Surveillance

II. Structure of Market Surveillance
III. Market Surveillance activities
IV. Preventive Measure

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

2

1
 Ⅰ. Target of Our Surveillance

Ⅰ. Target of Our Surveillance

 The stock Exchanges in Japan have a duty to

investigate unfair trading(in Article 84)

 Unfair trading are defined by Financial

Instruments and Exchange Act(Chapter VI)
 Insider Trading(in Article 166,167)
 Market Manipulation(in Article 157-159)

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

4

2
Ⅰ. Target of Our Surveillance
［Reference］ Structure of JPX Group
Japan Exchange Group, Inc.（JPX ）

Tokyo Stock Exchange, Inc.（TSE） Japan Exchange Regulation

Osaka Exchange, Inc.（OSE） （JPX-R）

entrusted with the role

for Self-regulatory activities

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

5

Ⅰ. Target of Our Surveillance

［Reference］ Types of Unfair Trading ①

Insider Trading refers to transactions where someone with a
connection to a listed company uses information which they
acquired through their official job or based on their position, such
as a not-yet-released financial statement, etc with the potential to
have a large impact on investors, to conduct an illegal sale or
purchase of a stock.
When this kind of trade occurs, general investors who do not have
access to this information are at an unfair disadvantage. This may
result not only in unexpected losses, but may also cause investors
to lose faith in the overall reliability of the market.

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

6

3
Ⅰ. Target of Our Surveillance

［Reference］ Types of Unfair Trading ②

Market Manipulation is similar to insider trading, exploit
important company information that has yet to be released to the
public to influence the market.
For example, this includes any effort to make personal gains by
deliberately altering the market to form prices in an unnatural way.
This is done in a manner such that it mistakenly appears to others
as if it were following the natural laws of supply and demand.

This action is referred to as market manipulation and, like insider

trading, it is an unfair type of price forming action which may
have an unexpected negative impact on investors.
Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.
7

Ⅰ. Target of Our Surveillance

［Reference］ Definition of “Material Facts”

Classification Examples of Material Fact Numerical Standard
- Offering of shares for subscription Total amount of the amount paid-in under the
- Acquisition of treasury shares offering is 100 million yen or more
- Stock split None (all are material facts)
(1) Decisions - Business alliance Ratio of increase is 10% or more
- Merger
- Commercialization of new
products / new technologies

- Damage amount is 3% or more of net

- Damage arising in the course of
assets
(2) Occurrences of events business
- Forgiven amount is 10% or more of the total
- Release of a debt by creditor
debt

Significant revision of business - Variation of 10% or more

results’ projections - Variation of 30% or more, and the amount of
(3) Financial results or
- Sales the variation is 5% or more of net assets
projections
- Ordinary profit - Variation of 30% or more, and the amount of
- Current term net profits the variation is 2.5% or more of net assets

In addition to (1) to (3), material facts relating to the management, business, or

(4) Basket clause property of a Listed Company, etc. which may have a significant influence on the
investment decision of investors.
(5)～(8)
Material facts with Similar to (1)～(4)
respect to a subsidiary

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

8

4
 Ⅱ. Structure of Market Surveillance

Ⅱ. Structure of Market Surveillance

1. Organization of Market Surveillance

JPX Group Government Organization

JPX Regulation SESC FSA

Report
About
Investigation Investigation ・Investigation ・Supervision
・Inspection ・Inspection

Securities Companies (Trading Participants)

Inquiry

Investors
Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.
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5
Ⅱ. Structure of Market Surveillance
2. System and Network of Market Surveillance

TSE Market

Market Data
Timely Discloser
Market Surveillance System Information

Unusual trading data

Market Surveillance and Compliance Dept.

Other Stock Exchange

Compliance WAN network SESC

Investor’s information Investor’s information

Securities Companies (Trading Participants)

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

11

Ⅲ. Process of Market Surveillance

6
 Ⅲ. Process of Market Surveillance
1.Flow of Market surveillance
① Selection of Stocks Market Manipulation Insider Trading
Selection by market surveillance system
Issues for which material facts have been
Receive information from trading participants
announced
(securities companies)or other depts.

② Investigation ・Analysis of trends in price and trading volume

・Investigate trend in trading share of each trading participant
・Interviews with trading participants(refer to customers for which trading was conducted)

Receive reports of market surveillance results

from trading participants.

Request background of insider information

announcement from listed company.

③Selection of Stocks for Examination Request and analyze trading data of entrusting party from trading participants.

In the event that the JPX-R concludes that further in-depth investigation is required.

④ Examination Refer to trading participants for background of order placement and

execution, and detailed customer information and analyze them.

⑤ Disposition ・Reporting to Securities and Exchange Surveillance Commission

・Issue warning to the listed company/ trading participants as needed
13
Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.
13

Ⅲ. Process of Market Surveillance

2. Number of Examinations and Investigations

FY 2013 FY 2014 FY 2015

Investigation Examinations Investigation Examinations Investigation Examinations

Insider Trading 1,726 177 1,985 134 2,266 163

Market Manipulation 568 16 1,143 31 1,021 15

Others 1010 1 359 1 318 0

Total 3,304 194 3,487 166 3,605 178

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

14

7
 Ⅲ. Process of Market Surveillance
3.Example of Insider Trading Case
 An employee at Company C learned of material non-public information on business tie-up between
Company A and B.
 The employee purchased shares in Company B prior to public announcement of the business tie-up.

Purchased shares
in company B
Company A Company B Company C
Business contract

Business tie-up

Confidential info

Administrative Monetary Penalty

JPY0.68mil

denied insider trading charges.

Ⅲ. Process of Market Surveillance

4.Example of Market Manipulation Case

 Contract:
• TOPIX Futures (Expiry : 2013.09)
 Date:
• 2013.07.29 – 2013.07.31 (3 days)
• 2013.09.09 – 2013.09.11 (3 days)
 Details:
• A prop desk trader entered a small buy order to Best Bid (or Ask)
price and entered a large sell order to Best Ask (or Bid) price.
• Acquired JPY5.435 mil (approx US$50K) in profit.
• Traded volume (buy and sell) : 4,032 units
• Order volume (buy and sell) : 88,443 units

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

16

8
Ⅲ. Process of Market Surveillance
4.Example of Market Manipulation Case
1. ①
Entered small buy14:17:05.639
order A 2.
② Entered large sell order B
14:17:07.786
Trader
行為者 Vol
売数量 (S) Price
値段 Vol
買数量 (B) Trader
行為者 Trader
行為者 Vol
売数量 (S) Price
値段 Vol
買数量 (B) Trader
行為者
154 1234.0 151 1234.0
96 1233.5 96 1233.5
76 1233.0 78 1233.0
14 1232.5 100 157 1232.5
1232.0 51 10 1232.0 49 10
1231.5 68 1231.5 67
1231.0 89 1231.0 90
1230.5 126 1230.5 126

3.
③ Small buy order 14:17:07.795
A filled 4.
④ Deleted large order B
14:17:07.938
Trader
行為者 Vol
売数量 (S) Price
値段 Vol
買数量 (B) Trader
行為者 Trader
行為者 Vol
売数量 (S) Price
値段 Vol
買数量 (B) Trader
行為者
151 1234.0 151 1234.0
96 1233.5 94 1233.5
78 1233.0 85 1233.0
100 159 1232.5 100 81 1232.5
1232.0 1 29 1232.0
1231.5 66 1231.5 40
1231.0 90 1231.0 78
1230.5 126 1230.5 129

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

17

Ⅳ. Preventive Measure

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved. 18

9
Ⅳ. Preventive Measure
1. Explanation

• Explanation (After Investigation or Examination)

 If the possibility of illegal trading in the future arises, staff members of
the Market Surveillance and Compliance Department explain the
situation to persons in charge of market surveillance at trading
participants.

• Number of Explanation

概算（株価操作（委託）、（自己）の措置状況
FY2012 FY2013 FY2014
291
より計算） 345 405

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved. 19

Ⅳ. Preventive Measure
2. Investor Education(1)

(Compliance Learning Center)

• Contents
 Seminar
 E-Leaning Service
 Publication

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

20

10
Ⅳ. Preventive Measure
3. Investor Education(2)
• Seminar – How to prevent Insider Trading
 COMLEC held seminar to prevent Insider trading for listed companies.

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved. 21

Ⅳ. Preventive Measure
3. Investor Education(3)

• E-leaning – about Insider Trading

 COMLEC provide e-leaning service for staffs of listed companies, staffs of securities
companies, and investor.

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved. 22

11
Ⅳ. Preventive Measure
3. Investor Education(4)
• Publication
 “Insider Trading Regulations Q&A”
 Explains insider trading regulation for staffs of listed companies in plain
terms.
 Total circulation had exceeded a million (2010)

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved. 23

Thank you for your kind attention!!

Copyright (c) 2016 Japan Exchange Regulation. All Rights Reserved.

24

12
Listed Companies’ Disclosure for Investors

13 April 2016

Ryota Sugishita
JICA Consultant

Disclosure is listed companies’ accountability

Why is disclosure important ?

 Disclosure is costly, but it is the most important accountability for listed

companies
 Without disclosure, investors cannot know listed companies’ current status
 How could you put your money into a company that you do not know ?

How can listed companies disclose?

i. Earnings release
ii. Press release
iii. Investor meeting or telephone conference
iv. One-on-one meeting

2
Earnings release

 Semi-annually or quarterly
Earnings release frequency  Quarterly earnings release is common in recent years
 In Taiwan, monthly sales release is requested

How soon do listed companies

 Within one/two/three/four months after the results
have to report results?
 Submit to the stock exchange
How do listed companies
 Report to the financial authority
release earnings ?
 Upload on a company’s web-site
 Profit & loss
 Balance sheet
 Cash flow
What do listed companies
 No of shares outstanding and earnings per share
disclose
 Segment information
 Results overview
 Forecast
3

Parent or consolidated

Consolidated financial statements are more important

 Consolidated (group) financial statements are commonly used
 In some markets, parent company’s financial statements are also disclosed,
in addition to consolidated numbers
 Investors care about consolidated numbers, not parent company’s numbers

Consolidated

Parent Company

Subsidiary Subsidiary Subsidiary

4
What investors want to know: P/L and B/S

Additional information to profit and loss

 Sales breakdown (by segment, product, region etc)

 Cost breakdown (deprecation, personnel cost, key materials cost etc)

Additional information to balance sheet

 Depreciation method
 Inventory days
 Breakdown of bank borrowing
 Corporate bond information (amount, rate, redemption date etc)
 Equity finance history etc
5

What investors want to know: other information

Figures

 Production volume or shipment volume

 Other sales related figures (sales of property in sqm, no of shops etc)
 Prices (average selling price, average material purchase price etc)
 No of employees

Non-figure information

 Company milestone
 Management’s background
 Important contracts (mining license, profit sharing, patent etc)
 Disputes etc
6
What investors want to know: management guidance

Once investors know the current status, they want to know outlook
 Sales forecast for the next quarter/half-year/year
 Profit forecast for the next quarter/half-year/year, alternatively gross profit
margin forecast
 Production/shipment volume forecast
 Business outlook
 Industry outlook
 Company’s strategy

Investor relations

Listed companies should assign staff for investor relations

 Every listed company needs to assign IR staff
 At smaller companies, financial controllers are usually responsible for IR
 It is necessary for IR staff to receive one-on-one meetings with key
investors
 Financial statements and annual reports should be timely uploaded on
websites
 Semi-annual or quarterly investor meetings after earnings release are
recommended, not only annual shareholders’ meetings
 How can you attract investors to buy your company’s shares ?

8
APU’s website: company information

APU’s website: history

10
APU’s website: management

11

APU’s website: stock info

12
APU’s website: press release

13

APU’s website: financial statements

14
APU’s website: 3Q15 financial statements (1)

15

APU’s website:: 3Q15 financial statements (2)

16
APU’s website:: 3Q15 financial statements (3)

17

APU’s website:: 3Q15 financial statements (4)

18
APU’s website:: 3Q15 financial statements (5)

19

APU’s website: major shareholders

20
APU’s website: annual shareholders’ meeting

21

APU’s website: dividend history

22
Turquoise Hill Resources website: top page

23

Turquoise Hill Resources website: corporate information

24
Turquoise Hill Resources website: management

25

Turquoise Hill Resources website: corporate governance

26
Turquoise Hill Resources website: IR contact

27

Turquoise Hill Resources website: share price

28
Turquoise Hill Resources website: commodity prices

29

Turquoise Hill Resources website: presentation files

30
Turquoise Hill Resources website: presentation file (1)

31

Turquoise Hill Resources website: presentation file (2)

32
Turquoise Hill Resources website: presentation file (3)

33

Turquoise Hill Resources website: presentation file (4)

34
Turquoise Hill Resources website: presentation file (5)

35

Turquoise Hill Resources website: presentation file (6)

36
Turquoise Hill Resources website: presentation file (7)

37

Turquoise Hill Resources website: earnings releases

38
Turquoise Hill Resources website: 2015 earnings release (1)

39

Turquoise Hill Resources website: 2015 earnings release (2)

40
Turquoise Hill Resources website: 2015 earnings release (3)

41

Turquoise Hill Resources website: 2015 earnings release (4)

42
Turquoise Hill Resources website: 2015 earnings release (5)

43
Accounting Scandals and False Reports

13 April 2016

Ryota Sugishita
JICA Consultant, Daiwa Institute of Research

Case 1: Seibu Railway - false annual securities reports (1)

Seibu Railway is a railway company with a history

Company
of 120 years. The company’s railway network starts
background
from two of major stations in Tokyo to the northwest.

What the company Seibu Railway made false statements purposely in

did its annual securities reports for years.

Tokyo Stock Exchange imposed a penalty of fine

What Tokyo Stock
decided to delist Seibu Railway from Tokyo Stock
Exchange did
Exchange First Section.

Securities and Exchange Surveillance Commission

(SESC) under FSA filed a charge to Tokyo District
Court. The Court ordered Seibu Railway to pay a
What FSA did
fine of JPY 200m and Kokudo, its parent company,
a fine of JPY 150m. CEO of Kokudo was sentenced
to 2.5 years in prison, suspended for four years.
2
Case 1: Seibu Railway - false annual securities reports (2)

 Seibu Railway’s false reporting was mainly on its shareholder distribution. The
company wrote in its annual securities reports that a percentage share of the
aggregate number of shares held by top10 shareholders was lower than it
actually was.
 The single largest shareholder of Seibu Railway had been Kokudo, an unlisted
company. Kokudo was under full control of Yoshiyuki Tsutsumi, ex-CEO of
Seibu Railway and Kokudo.
 The 10 largest shareholders of Seibu Railway, including Kokudo, held more
than 80% of the total shares outstanding as at Oct 1982, when Tokyo Stock
Exchange implemented a new delisting rule that any listed company would be
delisted if its shareholder distribution for the top 10 shareholders exceeded
80%.
 Seibu Railway’s shareholder distribution continued violating this rule till 2004,
when the company was finally delisted.

Case 1: Seibu Railway - false annual securities reports (3)

 How did Seibu manage to hide this fact ? Part of Seibu Railway’s shares held
by Kokudo were registered as Kokudo’s employees’ names, but the
employees did not have any rights as shareholders.
 On 12 Oct 2014, after Seibu Railway’s internal control division decided to
report this to Tokyo Stock Exchange, the company was transferred to the
supervision post, then delisting was determined on 16 Nov, delisted on 17 Dec.
 What do you think Seibu Railway’s essential issue was ?
 False statements in any disclosure materials including annual securities
reports, annual reports and others cannot be acceptable. Investors presume
that information given in an annual securities report/annual report is correct.
Investors decide their investments, based on the financial numbers and other
statements in the reports.

4
Case 1: Seibu Railway - false annual securities reports (4)

 Then why did Seibu Railway falsify its annual securities reports for almost 50
years ? We think that this is attributed to Seibu’s corporate governance
problem. Seibu’s founder’s son, Yoshiyuki Tsutsumi, tried holding as many
shares as possible to control the group, despite it was a listed company since
1949.
 Kokudo, an unlisted company, held 65-82% of Seibu Railway’s shares since
1957. Kokudo’s share capital was only JPY 100m, compared to Seibu
Railway’s more than JPY 21bn.
 Almost 100% of Kokudo’s shares were held by Yoshiyuki Tsutsumi, although it
was reported 36% officially.

Case 2: Olympus - financial statement fraud (1)

Founded as a camera manufacturer, Olympus is

Company
known as the largest endoscope manufacturer in
background
the world with a global market share of 70%.

What the company Olympus falsified its financial statements on

did revaluation of its financial assets.

TSE classified Olympus as securities under

supervision, then designated as securities on alert
What TSE did
and imposed a fine of JPY 10m. TSE decided not to
delist Olympus.
SESC imposed a fine of JPY 192m, then reduced to
JPY 20m, as a result of Tokyo District Court’s order
What FSA did to Olympus to pay JPY 700m in fines for falsifying
its financial reports. Ex-CEO was sentenced to 3
years in prison, suspended for 5 years.

6
Case 2: Olympus - financial statement fraud (2)

 How did Olympus manage to hide loss of its financial assets ?

 In 1985, Olympus reportedly started to allocate its funds in the capital markets
to gain higher income. In 90’s the company faced huge valuation loss of its
financial assets as a result of weak share prices in the Japanese stock market.
 In 1998, Olympus established a fund in overseas, and transferred part of its
financial assets. The purpose of the fund was to cover its revaluation loss. It
appeared that goodwill upon Olympus’s M&A activities was added to the fund,
and higher-than-usual expensive financial advisory fees were paid the fund.
 In 1999, Olympus’s auditor found a part of the revaluation loss. The company
posted extraordinary loss of JPY 16.8bn for Mar 2000.
 I used to be an equity analyst, covering Olympus those days. I remembered
this extraordinary loss. Market had suspected that Olympus hid huge
revaluation loss. Investors and analysts, including myself, asked the company
if all of its revaluation loss was reported. The company replied, that was all.

Case 2: Olympus - financial statement fraud (3)

 In 2009, Olympus’s auditor was changed. Perhaps the former auditor and
Olympus were not able to reach agreement on its financial statements.
 In Apr 2011, Michael Woodford was assigned as Olympus’s new CEO. He was
asked to step down at the board meeting on 14 Oct 2011. Mr Woodford
apparently pointed out company’s fake financial statements.
 Mr Woodford then revealed Olympus’s financial secret to the media.
 What do you think Olympus’s problem was ?
 In Japan, CEOs of listed companies tend to be replaced by every several
years, unless they are founders. Olympus’s past several CEOs should have
known the revaluation loss issue, but all of them decided to hide.
 Perhaps the Japanese CEOs did not want to see plunging share prices as a
result of disclosure. If the company unveiled huge loss, management had to
step down. They did not want to do so. It seems that they tried to cover its loss
gradually for years.
8
Case 2: Olympus - financial statement fraud (4)

 Mr Woodford, however, is British. He should have been shocked when he

found out the fact that the company was falsifying its financial statements.
False financial statements will result in deceiving investors.
 The Olympus incident was a serious lesson to capital markets in Japan,
revealing that there are still compliance and corporate governance issues
even for a major listed company.
 Olympus hid revaluation loss of JPY 100bn or over. According to Tokyo Stock
Exchange’s delisting rule, a company that falsifying its annual securities
reports may be delisted if it gives substantial impact to the stock market.
 People had expected for Olympus to be delisted. In fact, Olympus shares
dropped substantially. Amount of financial impact of JPY 100bn appears to be
crucial. But the company was not delisted.
 Why do you think Olympus was not delisted ?

Case 3: Toshiba - financial statement fraud (1)

Toshiba is a diversified electronics company. Its

Company products include power generators, elevators,
background notebook PCs, semiconductors, consumer
electronics etc.

Toshiba falsified its financial statements on its

What the company
provisions for contract loss, sales, cost of goods
did
sold etc.

JPX designated Toshiba as securities on alert and

What JPX did
imposed a fine of JPY 91m.

SESC imposed a fine of JPY 7.3bn. Separately

Ernst & Young Shin-Nihon, Toshiba’s auditor, was
What FSA did
also imposed a fine of JPY 2.1bn. Media reports
that there is possibility of filing a charge for ex-CEO.

10
Case 3: Toshiba - financial statement fraud (2)

 For you information, an ex-CEO of Toshiba was positioned as CEO of Tokyo

Stock Exchange for 2005-2010.
 Similar to Olympus, Toshiba was also accused of its financial fraud. Toshiba
reported higher-than-actual profit in the past years, by too low provision for
construction contract loss and reporting too high sales revenue.
 On 29 May 2015, Toshiba suddenly announced that it was not able to meet
the deadline of submitting its annual securities report for Mar 2015. The
company said that it would be by the end of Aug 2015, instead of Jun 2015.
Listed companies with financial year end of Mar have to submit annual
securities reports by the end of Jun.
 Toshiba again postponed the submission date to 7 Sep 2015.
 On 14 Sep 2015, Tokyo Stock Exchange designated Toshiba as securities on
alert. At the same time, Toshiba was fined of JPY 91m by Tokyo Stock
Exchange.

11

Case 3: Toshiba - financial statement fraud (3)

 On 7 Dec 2015, SESC ordered Toshiba to pay fine of JPY 7.3bn, which is the
highest amount in SESC’s history.
 SESC also ordered E&Y Shin-Nihon, Toshiba’s auditor, to pay fine of JPY
2.1bn, which is also a substantial amount.
 In addition, SESC questioned Toshiba’s ex-CEO on a voluntary basis. Media
suspects the ex-CEO would be arrested.
 Toshiba, however, is not delisted.
 How did Toshiba falsify its financial statements ?
 It has been reported that there were two accounting frauds. First, Toshiba
manipulate its profit. It was discovered that the company’s reported pretax
income was JPY 224.8bn larger than actual on an aggregate basis for 2009-
2015. Its net profit was revised down by JPY 155.2bn for 2009-2015.

12
Case 3: Toshiba - financial statement fraud (4)

 As mentioned earlier, Toshiba’s provision for construction contract loss was

not properly reported. Although the company figured out that it was not
profitable when it received order for certain construction contracts in Japan,
the company did not realize provision on a progressive basis.
 In its notebook PC business, Toshiba also sold key components to its
Taiwanese outsourcing partners with exceptionally expensive prices, like five
times more expensive than usual. The company realized higher sales
revenue, resulted in higher profit.
 Toshiba was fined by Tokyo Stock Exchange and SESC on this issue.
 Secondly, Toshiba did not disclose the fact that its US subsidiary
Westinghouse did realize fixed asset impairment of USD 930m and USD
390m, respectively, for 2012 and 2013, due to non-order for its nuclear power
plant business. Toshiba acquired Westinghouse in 2006 for USD 2.9bn.
 Toshiba thought it was not necessary to disclose, given its Japanese
accounting policy was different from that of US. Tokyo Stock Exchange
advised Toshiba to disclose this fact in 2015. No fine was imposed on this.
13

Case 3: Toshiba - financial statement fraud (4)

 According to Tokyo Stock Exchange’s rule, any listed company that cannot
submit its annual securities report one month after the deadline may be
delisted.
 Toshiba’s submission deadline of its annual securities report for Mar 2015 was
end of Jun 2015. The company was not able to submit until 7 Sep 2015.
Literally Toshiba violated Tokyo Stock Exchange’s delisting rule. However, the
company was approved by Ministry of Finance to submit its annual securities
report later. There is a special rule that it can be postponed if there is an
unusual event. Unusual event means, disaster like earthquake, tidal wave etc.
 In fact, Tokyo Stock Exchange’s delisting rule was loosened after the Olympus
incident. It says any company may be delisted if it cannot meet the deadline of
its annual securities report, and in addition if Tokyo Stock Exchange believes
that immediate delisting is necessary to stabilize the market.
 In Toshiba’s case, Tokyo Stock Exchange did not think that immediate delisting
was necessary, without substantial impact to the stock market.

14
To be delisted or not

 Seibu Railway was delisted due to false reporting on its annual securities
reports about shareholder distribution.
 Olympus is not delisted although it violated the delisting rule of substantial
impact to the market, attributed to false reporting on its annual securities
reports about hiding revaluation loss of its financial assets.
 Toshiba is not delisted although it perhaps violated the delisting rule of
substantial impact to the market, attributed to false reporting on its annual
securities reports about excess profit.
 What do you think of these three cases ?
 Do you think which companies should be delisted from MSE ? Or do you think
MSE should not delist any of its listed companies ?

15
 Self Regulatory Function
of JSDA
April 14, 2016
(9:35-11:30)

Hajime Mitsumori
Deputy Chief Officer for Self-Regulation HQ
& Senior General Manager for
Self-regulatory Planning Division
Japan Securities Dealers Association
© Japan Securities Dealers Association.All Rights Reserved.

Self Regulatory Function of JSDA

Contents
I. History of JSDA …………………………………………………….………………………………………………2
II. Self Regulatory Organization under the Financial Instruments and Exchange Act (FIEA) .….….…4
III. Financial Instruments and Exchange Act (FIEA) and JSDA ……………………….….….….…………8
IV. Types of JSDA’s Self Regulatory Rules……………………………………….….….………………………13
V. Outline of Self Regulatory Rules………………………………………….….….….………………………14
VI. Implementation of Inspections and Monitoring Surveys…………..….….………………………………32
VII. Imposing Self Regulatory Disciplinary Action………….….….….………………………………………34
VIII. Complaints/Consultation and Mediation of Securities Transactions, etc. .….…………………… 35
IX. Additional Reference: Investment Solicitation Rules for Aged Customers .….….….…………………………38

© Japan Securities Dealers Association.All Rights Reserved. 1

1
I. History of JSDA

 1940 – 1941 33 Securities Dealers Associations

were established in local districts.

 May 1949 Japan Securities Dealers Joint

Association was established.

 May 1968 33 local securities dealers

associations were consolidated into
10 associations.

 Jul. 1973 Japan Securities Dealers

Association was newly established.
( Japan Securities Dealers Joint Association and 10 local
securities dealers associations were dissolved)

© Japan Securities Dealers Association.All Rights Reserved. 2

 Jul. 1992 JSDA was reorganized into an authorized

organization under the Securities and Exchange
Law.
 Apr.1994 Financial institutions authorized to undertake
securities business joined JSDA as special
members.
 Jul. 2004 JSDA adopted the new organizational structure
consisting of three departments

 Sep.2007 In accordance with the enforcement of the

Financial Instruments and Exchange Act, JSDA
became an authorized association under the
new act.

. © Japan Securities Dealers Association.All Rights Reserved. 3

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II. Self Regulatory Organization under the Financial
Instruments and Exchange Act (FIEA)

Financial
Services
Authority
(FSA)

Financial
Instruments
Exchanges
Type II Financial
Investment Trusts Financial Futures Japan Investment
Association, Japan Association of Japan Advisors Association Instruments Firms
SRO SRO Association
SRO SRO SRO
SRO

Exchange members All securities Investment trust

(Securities companies Type-II
companies) companies Financial futures
Registered Investment advisers Financial
Investment trust broker dealer
Listed companies financial Instruments firms
Market participants institutions distributors

Financial Instruments Firms Association

© Japan Securities Dealers Association.All Rights Reserved. 4

[ Scope of Self-Regulations for Each

Financial Instruments Firms Association ]
(Outline)
 Japan Securities Dealers Association (JSDA)
◆Securities related Business
◆OTC Derivatives Transactions (excluding Financial
Futures Transactions)

 Investment Trust Association, Japan (JITA)

◆Investment Management Business (Investment Trust
Business, etc.)

 Financial Futures Association of Japan (FFAJ)

◆Financial Futures Transactions

© Japan Securities Dealers Association.All Rights Reserved. 5

3
 Japan Investment Advisers Association
(JSIAA)
 Investment Advisory Business
 Discretionary Investment Business

 Type II Financial Instruments Firms Association

 Fund Distribution Business

※The above 5 associations hold periodically meetings to exchange views

(“Meeting for Communication and Deliberation among Financial
Instruments Business Associations”)

© Japan Securities Dealers Association.All Rights Reserved. 6

[ Structure for Application of Self-Regulations

to Securities Companies and Registered
Financial Institutions ]

FSA
Securities and Exchange
Surveillance Commission

Self Regulatory Organizations (SROs)

Financial Instruments
JSDA Exchanges (Securities Exchanges)

Inspection of compliance with FIEA and

self regulatory rules/ Surveillance &
monitoring of securities markets

Securities Companies/Registered Financial Institutions

© Japan Securities Dealers Association.All Rights Reserved. 7

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III. Financial Instruments and
Exchange Act (FIEA) and JSDA

 Authorization of Establishment (Article 67-2)

A Financial Instruments Business Operator that intends to establish an
Authorized Association shall obtain authorization from the Prime Minister
(FSA). JSDA has obtained such authorization.

 JSDA’s Purpose under FIEA (Article 67)

“Aims to ensure fair and smooth sale and purchase or other transactions of
Securities and Derivative Transactions, etc. and to contribute to the sound
development of Financial Instruments Businesses and the protection of
investors.”

© Japan Securities Dealers Association.All Rights Reserved. 8

JSDA’s Member Firms (Article 68, Para.1)

Member Firms of an Authorized Association (JSDA) shall be limited to Financial
Instruments Business Operators and Registered Financial Institutions (latter within the
scope of conducting the business of registered financial institutions). => Prescribed by
Article 5 of JSDA’s Articles of Association.

Eligibility for JSDA’s Members (Article 68, Para.2&5)

An Authorized Association (JSDA) shall stipulate in its articles of association that any
Financial Instruments Business Operator is eligible for membership as a Member Firm,
provided, however, that an Authorized Association may stipulate in its articles of
association that the Authorized Association may refuse the admission as a Member Firm
if an applicant has been expelled from membership of, or has had qualification for
trading rescinded by, an Authorized Association (JSDA) or a Financial Instruments
Exchange, on account of having violated laws and regulations. => Prescribed by Article
11and 23 of JSDA’s Articles of Association.

© Japan Securities Dealers Association.All Rights Reserved. 9

5
※For Financial Instruments Business Operator that does not become
member of the JSDA, so as not to be deficient in investor
protection, FSA shall supervise directly the business of such
Financial Instruments Business Operator, while considering JSDA’s
Articles of Association and rules. (FIEA, Article 56-4, Para.1)

© Japan Securities Dealers Association.All Rights Reserved. 10

[ Self-Regulatory Operations Required of JSDA under

FIEA ]
Self-Regulatory Operations Overview

① Rule-making ・Establish and build awareness of self-regulatory rules

(Article 67-8, Paragraph 1, Item 10) that apply to Association Members.

② Inspection and monitoring of compliance ・Inspect and monitor business activities and internal
with laws and regulations by Association control system of Association Members.
Members
(Article 67-8, Paragraph 1, Item 14)
③ Disciplinary actions given to Association ・Take actions to punish Association Members that
Members (Article 68-2) have violated laws and self-regulatory rules, such as
reprimanding members, issuing fines, suspending or
placing limitations on membership, and expelling
members.
④ Improvement in the qualities of officers and ・Hold qualification examinations for securities sales
employees of Association Members representatives and for employees responsible for
(Article 67-8, Paragraph 1, Item 9) internal administration.

⑤ Resolution of complaints from investors and ・Resolve complaints from investors concerning the
mediation operations of Association Members. Conduct
(Article 67-8, Paragraph 1, Item 11) mediation to resolve disputes between Association
Members and investors.

© Japan Securities Dealers Association.All Rights Reserved. 11

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 [ Functions Required under FIEA ]

Article 68
An Authorized Association shall stipulate the following items in its articles of
association;
 It shall endeavor to prevent fraudulent acts, market manipulation or
collection of unreasonable fees or expenses by Member Firms, as well
as to promote the fair and equitable principles of transactions. （Para.3
）
 It shall endeavor to ensure confidence of investors, by having Member
Firms establish their internal rules and control systems for the purpose of
observance of the laws and regulations and the Authorized Association’s
articles of association and other regulations. （Para.4）
=>Consequently, JSDA prescribes these items in its Articles of Association,
and prepares, if necessary, the model internal rules, etc. and requests
Member Firms to be equipped with such rules.

© Japan Securities Dealers Association.All Rights Reserved. 12

IV. Types of JSDA’s Self Regulatory Rules

 Articles of Association
 Self Regulatory Rules
 Unified Business Practice Rules
=> Rules prescribing the unified process in the securities industry regarding rights and
obligations in connection with securities transactions among Association Members.
 Dispute Settlement Rules
=> Rules prescribing actions and procedures for JSDA to resolve disputes between
Association Member and customer or among Association Members.
 Association Management Rules
=> Rules prescribing management procedures of various deliberating groups within
JSDA
 Resolutions of the Board of Governors

© Japan Securities Dealers Association.All Rights Reserved. 13

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V. Outline of Self Regulatory Rules

In order to ensure the smooth running of financial instrument markets, JSDA

formulates various kinds of self regulatory rules applicable to Association
Members, thereby striving to make the financial instrument business fair and
efficient (number of rules: approximately 50).
Self regulatory rules are roughly classified as follows;
 Investment Solicitation, Customer Management and Internal Management
 Employees and Sales Representatives
 Advertising
 Personal Information Protection
 Stocks
 Bonds
 Foreign Securities and Transactions
 Code of Ethics

© Japan Securities Dealers Association.All Rights Reserved. 14

[ List of Self Regulatory Rules (1) ]

 Relating to Investment Solicitation, Customer Management and Internal
Administration, etc. by Association Member
• Rules Concerning Solicitation for Investments and Management of Customers, Etc., by Association Members
• Rules Concerning Establishment of Confidential Corporate Information Management System by Association
Members
• Rules Concerning Change, etc. of Assessment Rates for Substitute Securities Related to Margin Transactions
• Rules Concerning Establishment of Trade Compliance Screening System for the Prevention of Unfair Trading
• Rules Concerning Proper Handling of Pre-Hearing by Association Members
• Rules Concerning Establishment of Order Management System by Association Members
• Rules Concerning Acceptance of Deposit, Etc. of Securities
• Rules Concerning Appropriate Implementation of Separate Management of Customer Assets by Regular
Members
• Rules Concerning Internal Administrators, Etc. of Association Members
• Rules Concerning Application for Confirmation, Examination, Confirmation, Etc. of Incidents
• Rules Concerning Unification of Accounting for Securities Business Related
• Rules Concerning Handling of Documents Delivery, Etc. through Electromagnetic Methods
• Rules Concerning Financial Instruments Intermediary Service Providers
• Rules Concerning Protection, Etc. of Customers from Fraudulent Withdrawal Using Counterfeit or Stolen Card
• Rules Concerning Planning, Etc. of Business Continuity Management in Case of Emergency by Regular
Members
• Rules Concerning Elimination of Relationship with Antisocial Forces

© Japan Securities Dealers Association.All Rights Reserved. 15

8
 [ List of Self Regulatory Rules (2) ]
 Relating to Employees and Sales Representatives
• Rules Concerning Employees of Association Members
• Rules Concerning Sales and Purchase, Etc. of Specified Securities , Etc. of Listed Companies, Etc.
by Employees of Association Members
• Rules Concerning Qualification and Registration, Etc. of Sales Representatives of Association
Members
• Rules Concerning Qualification Examination for Sales Representatives, Etc.

 Relating to Advertising
• Rules Concerning Representation of Advertising, Etc. and Offer of Premiums
• Rules Concerning Handling of Analyst Reports

 Relating to Protection of Personal Information

• Guideline for Protection of Personal Information
• Rules Concerning Securement of Proper Handling of Personal Information by Association
Members
• Rules Concerning Complaint Processing Operation Related to Handling of Personal Information

© Japan Securities Dealers Association.All Rights Reserved. 16

[ List of Self Regulatory Rules (3) ]

 Relating to Stocks
• Rules Concerning Over-The Counter Securities
• Rules Concerning Green Sheet Issues and Phoenix Issues
• Rules Concerning Sale and Purchase, Etc. of Listed Share Certificates, Etc. Conducted
Outside of Financial Instruments Exchange Market
• Rules Concerning Transactions Subject to Closing Price and Associated Proprietary
Transactions
• Rules Concerning Handling of Cumulative Stock Investment and Mini Investment in Stocks
• Rules Concerning Handling of Borrowing and Lending Transactions for Share Certificates,
Etc.
• Rules Concerning Underwriting, Etc. of Securities
• Rules Concerning Distribution to Customers Related to Underwriting, Etc. of Public Offering,
Etc. of Share Certificates, Etc.
• Rules Concerning Handling of Allotment of New Shares to Third Party, Etc.

© Japan Securities Dealers Association.All Rights Reserved. 17

9
 [ List of Self Regulatory Rules (4) ]
 Relating to Bonds
• Rules Concerning Publication of Over-The Counter Trading Reference Prices, Etc. and Trading Prices of
Bonds
• Rules Concerning Publication, Etc. of Over-The Counter Quotation of Corporate Bonds for Retail Customers
• Rules Concerning Solicitation, Etc. of Sale and Purchase, Etc. of Domestic CPs, Etc., and Private Placement
Corporate Bonds
• Rules Concerning Handling of Sale and Purchase of Bonds with Options
• Rules Concerning Handling of Conditional Sale and Purchase of Bonds, Etc.
• Rules Concerning Handling of Sale and Purchase of Bonds, etc. with Delayed Settlement
• Rules Concerning Handling of Short Selling, and Borrowing and Lending Transactions of Bonds

 Relating to Foreign Products and Transactions

• Rules Concerning Foreign Securities Transactions
• Rules Concerning Foreign Securities Futures Transactions, Etc.

 Relating to Securitized Products

• Rules Concerning Distributions, Etc. of Securitized Products

 Relating to Derivatives Transactions

• Rules Concerning CFD Transactions

 Relating to Code of Ethics

• Rules Concerning Maintenance of and Compliance with Ethical Code by Association Members

© Japan Securities Dealers Association.All Rights Reserved. 18

[ Rules Relating to Investment Solicitation, Customer

Management, Internal Administration, etc. (1) ]

 Rules Concerning Solicitation for Investments and Management

of Customers, Etc. by Association Members
1. Compliance with Principle of Suitability
An Association Member must endeavor to solicit investments that meet customers'
intentions and actual situation, by fully understanding the customers' investment
experience, purpose of investment, financial condition, etc.
2. Adequate Explanations of Material Facts
An Association Member must endeavor to adequately explain and have the
customer understand the essential matters of Sale and Purchase or Other
Transactions of Securities, etc.
3. Ensuring Principle of Self-Responsibility
An Association Member shall, in soliciting investments, make customers
understand that an investment should be made under their own judgment and
responsibility.

© Japan Securities Dealers Association.All Rights Reserved. 19

10
1. - (1) Maintenance of Customer Card
Association Member shall maintain a customer card containing the items related
to the customer, mainly i) occupation, ii) purpose of investment, iii) status of
customer’s assets, iv) experience of investments, and v) type of transaction.
1. - (2) Setup of Transaction Commencement Standards
Association Member must set up transaction commencement standards regarding
margin transactions, etc., and conduct transactions with customer in compliance with
such standards.
The relevant transactions are i) margin transactions, ii) transactions in share
option certificates, and iii) transactions in securities-related derivatives.
1. - (3) Sale by Solicitation to Aged Customers
In the case that an Association Member sells securities, etc. to aged customers by
solicitation, the Association Member must establish internal rules that include the
definition of the aged customers, securities, etc. subject to sale, explanation method,
and delivery method, etc. in light of its business type, size, customer distribution and
customer attributes, social conditions, and other conditions, and strive to make
proper investment solicitation. (For details, please see p38.)
© Japan Securities Dealers Association.All Rights Reserved. 20

2. - (1) Delivery of Alert Documents

When an Association Member conducts securities-related derivatives transactions,
specified OTC derivatives transactions, sale of complex structured bonds and
investment trusts with a customer, it must deliver an alert document to the customer in
advance, and make an explanation.
In such alert document must be clearly and correctly stated such items as i)
whether “no solicitation without a request” rule applies or not, ii) risks involved in a
transaction, iii) contact information of a designated dispute resolving organization,
etc.
3. - (1) Collection of the Confirmation Document from the Customer
An Association Member must collect a confirmation document from a customer
who will purchase share option certificates, covered warrant , etc. or conduct
securities-related derivatives transactions, specified OTC derivatives transactions,
etc. for the first time, in order to explain and make the customer understand i) the
risks and ii) fees involved in the financial instrument and its transaction, as well as to
confirm that the transaction is made according to the customer’s own judgment and
responsibility.

© Japan Securities Dealers Association.All Rights Reserved. 21

11
4. Others
(1) Prevention of Excessive Solicitation
An Association Member must be prohibited from recommending to its customers
the securities of specific issues or the option related to the sale and purchase of
such securities in a concentrated manner, which represents a subjective or arbitrary
supply of information.
(2) Prohibition of Solicitation of Investment in Over-The-Counter Securities
An Association Member must not solicit customers to invest in Over-The-Counter
securities other than the cases under the provision of the OTC Securities Rules.
(3) Prohibition on the Acceptance of Orders for Transactions under a Fictitious
Name
Where an order for sale and purchase or other transactions of securities, etc. is
placed by a customer, any Association Member must not accept such an order
knowing that the transaction is being made under a fictious name.

© Japan Securities Dealers Association.All Rights Reserved. 22

[ Rules Relating to Investment Solicitation, Customer

Management, Internal Administration, etc. (2) ]

 Rules Concerning Internal Administrators, Etc. of Association

Members
 Qualification, disposition, responsibilities, etc. of officer/employee that
manages legal compliance with FIEA, by Association Members
 Internal Administration Supervisor (responsible for the compliance of the
company as a whole)
 Internal Administration Assistant Supervisor
 Sales Manager (leader in charge of compliance at sales outlet level)
 Internal Administrator (employee in charge of compliance at sales outlet
level)

© Japan Securities Dealers Association.All Rights Reserved. 23

12
[ Rules Relating to Investment Solicitation, Customer
Management, Internal Administration, etc. (3) ]

 Rules Concerning Establishment of Trade Compliance

Screening System for the Prevention of Unfair Trading
 Regular Members to establish sale and purchase management system to
prevent customers’ unfair trading of listed stocks, etc.
 Establish internal rules
 Proper understanding of customers’ trend of sale and purchase and
reason for trading as well as an examination of sale and purchases
 Prepare/save internal records

© Japan Securities Dealers Association.All Rights Reserved. 24

[ Rules Relating to Employees ]

 Rules Concerning Employees of Association Members

(1) Hiring of Employees
i) An Association Member must, in hiring a person as an employee, examine
the career, etc. of the applicant to make sure his/her integrity and competence.
ii) If an Association Member intends to hire a person who used to be an
employee of another Association Member, or who is currently an employee of
another Association Member, it must refer to the Association whether or not such
person has been subject to the disciplinary action in his/her past career.
iii) As a result of such reference, if such person reveals to have been treated as
a Class-1 perpetrator of an inappropriate act, it must not hire him/her. In case
of such person having been treated as a Class-2 perpetrator of an
inappropriate act, an Association Member must not hire him/her during the
period of five years.

© Japan Securities Dealers Association.All Rights Reserved. 25

13
(2) Prohibited Acts
An Association Member must educate and supervise its employees in order not
to do prohibited acts. The main prohibited acts are listed as below;
i) To compensate a loss which a customer incurred during securities transactions
(including the act of promising the customer to compensate any loss before
transaction);
ii) To place orders for securities transaction to other Association Member
(provided, however, that there are certain exceptions such as cases authorized by
an Association Member to which the employee belongs);
iii) To engage in margin transactions, securities-related derivative transactions, or
specified OTC derivative transactions on his/her own account;
iv) To solicit a customer for sale and purchase of securities, etc. by promising to
share with the customer concerned profits or losses;

© Japan Securities Dealers Association.All Rights Reserved. 26

v) To become the counterparty of the transaction for executing an order received

from a customer for sale and purchase of securities, etc.;
vi) To allow a customer to use the employee's own name for sale and purchase of
securities, or to use the customer’s name;
vii) To lend to or borrow money or securities with a customer in connection with
sale and purchase of securities;
viii) To leak secrets that have come to his/her knowledge in the course of the
performance of his/her duties;
ix) To place an advertisement or offer premium at the employee's own discretion,
without undergoing examination by the advertising examining officer.

© Japan Securities Dealers Association.All Rights Reserved. 27

14
[ Rules Relating to Equities (1) ]

 Rules Concerning Over-The-Counter Securities

Solicitation of investments and sale and purchase of non-

listed stocks
Association Members must not solicit customers for sales of
non-listed stocks, except for the cases below;
＜Exceptional Cases＞
 Phoenix issues
 Non-listed stocks, etc. issued by listed companies
 Private Placement for professional investors

© Japan Securities Dealers Association.All Rights Reserved. 28

[ Rules Relating to Equities (2) ]

 Rules Concerning Underwriting, Etc. of Securities

Regulations concerning underwriting of securities that
Regular Members conduct in Japan
Ensure independence of underwriting examination
Underwriting examination items
Verify use of funds and request issuers to disclose this
information, request also issuers to disclose the dividend
payout and dividend policy

© Japan Securities Dealers Association.All Rights Reserved. 29

15
[ Rules Concerning Bonds ]

 Rules Concerning Publication of Over-The-Counter Trading

Reference Prices, Etc. and Trading Price of Bonds
Over-the-Counter Transactions
Disseminate “Reference Prices [Yield] for Transactions”
(every business day)
Publicize “Monthly Trading Volumes” , etc.
Ensure fair trading (trading by proper price, display of
price information to retail investors)

© Japan Securities Dealers Association.All Rights Reserved. 30

[ Rules Relating to Foreign Securities Transactions ]

 Rules Concerning Foreign Securities Transactions

Self regulatory rules for sale and purchase, and public
offerings and secondary offering of foreign securities
Requirements for foreign securities for which investment
solicitation of retail customers is possible
Reporting requirement of the status of sale and purchase
regarding foreign securities, status of underwriting, etc. to
JSDA

© Japan Securities Dealers Association.All Rights Reserved. 31

16
VI. Implementation of Inspections and
Monitoring Surveys
JSDA conducts inspections regarding compliance with laws and self regulatory rules
in such areas of Association Members’ businesses as sales activities and status of the
internal administration system.
In addition to that, JSDA conducts monitoring surveys regarding the business
management of Regular Members and their segregated administration of customers’
assets.
(1) Overview of inspections of Association Members
The inspections are conducted by JSDA’s inspectors visiting headquarters and branches of the
Member Firms. The number of the inspectors and the duration differs according to the size of
the firms.
FY 2012 FY2013 FY2014
Regular Member (Securities Company) 87 87 84
In which joint inspection with Stock Exchange (30) (28) (31)
In which inspection conducted solely by JSDA (57) (59) (53)
Special Member (Registered Financial Inst.) 53 53 48
Notes: 1. 251 Regular Members and 213 Special Members as of October 15, 2015
2. For Regular Members which are participants of stock exchanges, the inspection shall be conducted jointly by
JSDA and stock exchanges.

© Japan Securities Dealers Association.All Rights Reserved. 32

(2) Monitoring surveys regarding the status of management of Regular Members

and their separate management of customers’ assets .

 Business management of Regular Members

=> Grasped mainly through capital adequacy ratio

 Separate management of customers’ assets

=> Regular Members are required to manage separately the funds and
securities deposited by customers from their proprietary assets. JSDA verifies
the status of this administration.

JSDA requires Regular Members to report the status of their separate

management of assets every month, and monitors those reports to check the
status.

© Japan Securities Dealers Association.All Rights Reserved. 33

17
VII. Imposing Self Regulatory Disciplinary
Action
JSDA takes strict disciplinary action against Association Members and their officers and
employees for violations of laws, self regulatory rules, etc., to prevent their recurrence and
as a deterrent.

Types of disciplinary action taken by JSDA

 Over Association Members

 Expulsion
 Suspension or restriction of membership (for max. 6 months)
 Levy of negligence fine (with upper limit of 500 mil. yen regarding the portion of disciplinary
action)
 Reprimand

 Over officers and employees of Association Members

 Treatment as performer of inappropriate acts
 Revocation of Sales Representative Qualification
 Suspension of Sales Representative Qualification (for max. 2 years)
 In addition to the above, as administrative sanction;
Revocation of Registration as Sales Representative, Suspension of Duty of Sales
Representative (for max. 2 years)

© Japan Securities Dealers Association.All Rights Reserved. 34

VIII. Complaints/Consultation and Mediation

of Securities Transactions, etc.

FIEA requires JSDA to handle customers’ complaints

and requests for consultation regarding Association
Members, as well as to provide a “mediation”
service to resolve disputes over securities transactions
between customers and Association Members.
These tasks of handling complaints /consultations and
mediation are assigned to, and conducted by the
Financial Instruments Mediation Assistance Center
(FINMAC), which is an NPO.

© Japan Securities Dealers Association.All Rights Reserved. 35

18
(1) Complaints and Consultation
 Consulting staff of FINMAC responds to requests for consultation and to
inquiries from customers in connection with financial instruments or trading
methods.
 After receiving the complaints concerning a specific securities transaction or
the related solicitation or procedures, FINMAC acts as an intermediary
between the counterparty Association Member and assists in the resolution
of the dispute.

[Complaints Handling Process]

Association Members
Customers Neg otia ti o ns

(2) Intermediation of complaints

(1) Complaints/Consultation /Instruction of investigation
FINMAC
(4)Explanation of solution for (3)Submission of materials and others,
dispute, advice and others Reporting results of investigation

Neg ot iati o ns Duty to accept

mediation process

Duty to submit
Unsettled Settled materials

Use of Mediation Lawsuit

System
© Japan Securities Dealers Association.All Rights Reserved. 36

(2) Mediation
 If FINMAC does not succeed in resolving a dispute through discussions and
the customer is not satisfied with the result, it will introduce lawsuits,
arbitrage or mediation as necessary.
 In the Mediation system, a neutral and independent “Mediator (lawyer)” is
appointed by FINMAC to act as an intermediary. The Customer reapplies
for this service to FINMAC, which appoints a Mediator and takes the
necessary procedures to resolve the dispute with the counterparty
Association Member.

© Japan Securities Dealers Association.All Rights Reserved. 37

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VIII. Additional Reference: Investment
Solicitation Rules for Aged Customers
[Full implementation of new solicitation rules for sales
targeting aged customers in March 2014]
Background
 Situation in which there are an increasing number of aged customers.
 Increasing number of complaints from aged customers (in particular complaints
from their families)
Purpose
 Perform careful solicitation of and sales targeting aged customers, thereby
enabling them to fully understand and conduct transactions.
 Mitigate complaints and problems as much as possible.

Outline of Rules
 Association Members should establish internal rules prescribing the
solicitation of and sales targeting aged customers, and must strive to solicit
and conduct sales in compliance with these internal rules.
Customers over the age of 75 shall be defined as “Aged Customers.”
When soliciting aged customers over the age of 75 for the purchase of
complex securities, prior permission from an officer of the Association Member
is required.
© Japan Securities Dealers Association.All Rights Reserved. 38

 When soliciting customers over the age of 80 for the purchase of complex
securities, the order should not be taken on the same day.
The order should be taken on or after the following day. The person who
receives such an order shall be an officer of the Association Member and
not the sales staff who solicited the customer.
After an order is received and when the order is executed, the details of
the executed transaction shall be conveyed to the aged customer for
confirmation.

© Japan Securities Dealers Association.All Rights Reserved. 39

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Thank you for your attention !!

© Japan Securities Dealers Association.All Rights Reserved. 40

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 JICA: Project for Capacity Building of Capital Market in Mongolia

Outline of Qualification
Examinations, Etc.,
Implemented by JSDA
April 14, 2016
(13:30 – 14:00)

Kiyoshi Mogi
Senior General Manager
Sales Representative Examination & Registration Div.
Japan Securities Dealers Association
© Japan Securities Dealers Association.All Rights Reserved.

Contents

Ⅰ. Systems for Qualification Examination & Registration of Sales Representatives

(SRs) …………………………………………………………………………………2
Ⅱ. Types of SRs and Scopes of Qualification Exams………………………………… 3
Ⅲ. Scope of Internal Administrator Qualification Exam ……………………………… 5
Ⅳ. Conceptual Flow of Qualification Exams ……………………………………………6
Ⅴ. Verification of Qualification Exams ………………………………………………… 7
Ⅵ. Training Course for Renewal of SRs Qualification………………………………… 8
Ⅶ. Number of Registered Sales Representatives & Registrations………………… 9
Ⅷ. Implementation of Sales Representatives Qualification Exam （FY 2015）…… 10
Ⅸ. Implementation of Internal Administrators Qualification Exam （FY 2015）…… 11
Ⅹ．Implementation of Training Course for Renewal of Sales Representative
Qualification（FY2015）……………………………………………………………12

© Japan Securities Dealers Association.All Rights Reserved. 1

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I. Systems for Qualification Examination &
Registration of Sales Representatives (SRs)

JSDA
FIEA
Association Members Financial
SRs Registration Task Instruments
（Administration Entrusted
Application for SRs ・ Regular Members:
Intermediary
Securities Companies
by Government） Registration ・Specified Business (Entrust- Service
ment)
Members Providers
・ Special Members:
JSDA’s Self Regulatory Rules Banks, etc.

Obtaining SRs Qualification

（Pass SRs Qualification Exams ）
＝Prerequisite for SRs Sales Representatives
Conducting Exams Registration
（Self Regulatory Qualification Renewal （On behalf of Association Members）
Operation）
Training (every 5 years)
＝Prerequisite for maintaining
qualification as SRs
Duties of SRs
SRs Registration & （Solicitation, Acceptance of
Qualification Orders, etc.）
Administration System
SRs Registration, SRs
Qualification (Exam Customers
Results) Administration

© Japan Securities Dealers Association.All Rights Reserved. 2

II. Types of SRs and Scopes of Qualification

Exams
1.Regular Members （Securities Companies)
Class-1 SR：For Entire Range of Duties of SR
Type of SRs
Class-2 SR：Mainly for Cash Mkt. Transaction

Type of Exams Class-1 SR Qualification Exam Class-2 SR Qualification Exam

(Japanese/English) (Japanese/English)
Business Knowledge （Margin Transactions,
Futures, Options, Specific OTC Derivatives
Transactions, Complex Investment Trusts &
Structured Bonds similar to OTC Derivatives
Transactions）
Scope of
Questions Business Knowledge （Equity, Bonds, Investment Trusts）

Knowledge of Laws and Regulations （Laws such as FIEA, Rules of JSDA and TSE）
Basic Knowledge (Basic Knowledge about Securities Markets, Joint-Stock Company Act,
Economy/Finance/Public Finance, Financial Statements/Corporate Analysis, Securities Taxation, Sales
Activities）

No.of Questions １００ ７０

Timeframe (min) １６０ １２０
Passing mark ３０８/４４０ ２１０/３００
(Note) Until recently, those who have not passed the Class-2 Qualification Exam for Sales Representative were not eligible to
take the Class-1 Qualification Exam. However, such a requirement was lifted in January 2012.

© Japan Securities Dealers Association.All Rights Reserved. 3

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II. Types of SRs and Scopes of Qualification
Exams (Continued)
2.Special Members （Banks, etc.)
Special Member Class-1 SR：For entire range of duties of SR regarding business of
Type of SRs Registered Financial Institution Special Member Class-2 SR： Mainly for
Bonds and Investment Trust
S.M.Class-1 SR Qualification Exam S.M.Class-2 SR Qualification Exam
Type of Exams
(Japanese) (Japanese)

Business Knowledge （Bond Futures,

Bond Options, Specific OTC Derivatives
Transactions, Complex Investment Trusts &
Structured Bonds similar to OTC Derivatives
Transactions）
Scope of
Questions Business Knowledge （Bonds, CP, Investment Trusts）

Knowledge of Laws and Regulations （Such as FIEA, Rules of JSDA）

Basic Knowledge (Basic Knowledge about Securities Markets, Sales Activities）

No.of Questions ４５ ２６
Timeframe (min) １００ ７０
Passing mark ２３０/３２５ １４０/２００
(Notes) Until recently, those who have not passed the S.M.Class-2 Qualification Exam for Sales Representative were not
eligible to take the S.M.Class-1 Qualification Exam. However, such a requirement was lifted in January 2012.

© Japan Securities Dealers Association.All Rights Reserved. 4

III. Scope of Internal Administrator Qualification

Exam

Type of 1) Internal Administrator

Special Member Internal Administrator
Qualification 2) Special Member Internal Administrator

Internal Administrator Qualification Exam Special Member Internal Administrator

Type of Exams
(Japanese, English) Qualification Exam (Japanese)

Basic Knowledge for Internal Administration and Legal Compliance

FIEA and Related Laws and Regulations
Scope of JSDA’s Articles of Association and Rules
Questions
Articles of Association & Rules of Exchanges
Firm’s Internal Administrative Rules, etc.

No. of Questions ５０ ３０
９０ ６０
Timeframe (min)
３５０/５００ ２１０/３００
Passing Mark 1. Officers of both Regulars Members and Special
Members;or 1. Officers of Special Members;or
2. Persons for whom a Regular Member and Special 2. Persons for whom a Special Member finds it
Eligibility for
Member finds it necessary to have them take the necessary to have them take the examination, and
Exam who are qualified as Special Member’s Class-1 SR
examination, and who are qualified as Class-1 SR

© Japan Securities Dealers Association.All Rights Reserved. 5

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IV. Conceptual Flow of Qualification Exams

Association Members JSDA

- Regular Members: 1. Application
Securities Companies
- Specified Business Members: for Exam
- Special Members:
Banks, etc.
SRs Registration and
3. Exam Result Qualification
(Exam Day + 2 Administration System
Business Days) SRs Registration, SRs
Qualification (Exam
Results) Administration

Exam Venues (Exam

Officers & Operators)
2. Taking Exam
Employees

Conducted in principle every business day on

computers at around 160 venues throughout
Japan （Operation and implementation are
entrusted to outside operator）

© Japan Securities Dealers Association.All Rights Reserved. 6

V. Verification of Qualification Exam

Checks and balances provided by the “Sales Representative Examination &

Registration Div.” that produces exam questions and the “Sales
Representative Examination Monitoring Div.” that checks them ensures the
appropriateness of questions adopted in the SR Qualification Exam, etc.

SR Examination
Collecting Modifying Completion
& Registration Producing Questions
Information Questions of Questions
Div.

Identifying events Verifying When necessary,

SR Examination Collecting Influencing Appropriateness Instructing
Monitoring Div. Information Exam of Exam Suspension and
Questions Questions Modifications

© Japan Securities Dealers Association.All Rights Reserved. 7

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VI. Training Course for Renewal of SRs
Qualification
1. Registered SRs
1st day of the
Registration registration month Suspension of Revocation of
Date per every 5 years Qualification Qualification

Period in which course Allowance Period

must be taken

1 year 180 days

2. Those who will be newly registered as SRs (when more than 2 years
have passed since passing exam)
Registration Suspension of Revocation of
Date Qualification Qualification

Period in which course Allowance Period

must be taken

180 days 180 days

(Notes)
1. Previously, JSDA provided three types of training course for renewal of SRs types courses, namely training courses for
Regular Members, Special Members and Special Member Class-4 SRs respectively. Those courses were integrated into
a single course in January 2012.
2. This is conducted on computers similar to the qualification exam for SRs (Timeframe for taking course is 2 hours,
followed by a test checking the degree of understanding. Those who get over 70% pass.)
© Japan Securities Dealers Association.All Rights Reserved. 8

VII. Number of Registered Sales Representatives

& Registrations
（Unit：firm,person）

Specified
Regular Members Special Members Total
Business Members

Number of Firms
256 3 212 471
（End of March 2015）

Number of SRs
78,387 70 443,347 521,804
（End of March 2015） (Note)

Number of New
Registrations 10,488 74 34,767 45,329
（During FY2015） (Note)

(Note) Numbers of SRs and new registrations include their respective financial instruments intermediary service
providers.

© Japan Securities Dealers Association.All Rights Reserved. 9

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VIII. Implementation of Sales Representative
Qualification Exam （for FY 2015）
(person)

(Notes)
1. The numbers of Regular Members, etc. and Special Members, etc. include financial instruments intermediary service providers
with which those member firms are contracted respectively.
2. General public (namely those who are not officers nor employees) became able to take Class-2 SR Exam (since 2004) and
Class-1 SR Exam (since 2012).
© Japan Securities Dealers Association.All Rights Reserved. 10

IX. Implementation of Internal Administrators

Qualification Exams （for FY 2015）
(person)

© Japan Securities Dealers Association.All Rights Reserved. 11

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X. Implementation of Training Course for Renewal
of Sales Representative Qualification（FY2015）
(person)

(Notes)
1. The numbers of Regular Members, etc. and Special Members, etc. include financial instruments intermediary service
providers with which those member firms are contracted respectively.
2. Previously, JSDA provided three types of training course for renewal of SRs qualification, namely training courses for
Regular Member, Special Member and Special Member Class-4 SRs respectively. Those courses were integrated into
a single course in January 2012. (Consequently, there is currently only one course available.)

© Japan Securities Dealers Association.All Rights Reserved. 12

Thank you for your attention

© Japan Securities Dealers Association.All Rights Reserved. 13

7
 JICA: Project for Capacity Building of
Capital Market in Mongolia

Discoveries by Recent Member Firm Inspections

April 14, 2016
(14:45 – 15:45)
Osamu Sasaki
Deputy General Manager
Inspection Division 1, Inspection HQ
Japan Securities Dealers Association

© Japan Securities Dealers Association.All Rights Reserved.

1. Basic Approach to Inspection

 While fully respecting member firms’ own self-regulatory

endeavors, JSDA’s primary objective in any inspection is to check
out member firms’ internal administration systems and compliance
with their legal and regulatory obligations to ensure that investors
are fully protected at all times.
 Inspection methods, key points, and the areas covered are in all
cases tailored to match the particular business types, customer bases,
and risk profiles of individual member firms, thereby ensuring that
inspections are carried out in a way both thoroughly efficient and
highly effective.

© Japan Securities Dealers Association.All Rights Reserved. 1

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 2. Key Inspection Points (1)

 Increases in the tax-free investment coverage of the Nippon (Japan)

Individual Savings Account (NISA) are expected to encourage its
more widespread adoption as an investment vehicle, and given the
proposed introduction of a Junior NISA in April 2016, plus the need
for fuller, more rigorous internal administration systems, our key
inspection points in FY 2016 are as summarized in the following
slides.
 Moreover, inspections will not be confined to investigations into the
breaches of individual laws or any of the many regulatory
requirements, but will also look to ascertain such underlying
internal administration problems as may have given rise to such
breaches in the first place.

© Japan Securities Dealers Association.All Rights Reserved. 2

2. Key Inspection Points (2)

[Common to Regular Members and Special Members]
1) Inspect internal administration systems (including risk management systems)
- Check that Association Members’ internal administration systems are both robust and systematically
integrated.

2) Inspect systems for investment solicitation and sales of financial products

- For investor protection purposes, check the compliance with the principle of suitability, status of prior
verification of suitability to rationale as well as whether proper explanation is made in the solicitation of
financial products according to their features and risks and whether the systems for implementing these
points are well established, particularly in the case of elderly customers and new account holders.
- The following points shall be checked for investment trust business;
(1) Administration system for preventing transactions, etc. that slight customer’s investment purpose and
intension
(2) Status of explanation upon solicitation (particularly when soliciting a customer to make switching)
(3) Status of aftercare in the wake of sudden market fluctuation, etc. that may have seriously affected the
basic prices
(4) Status of notification regarding total returns
© Japan Securities Dealers Association.All Rights Reserved. 3

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 2. Key Inspection Points (3)

2) Inspect systems for investment solicitation and sales of financial products (cont.)

- Check the system and current status of compliance with the solicitation commencement
criteria regarding structured bonds, investment trusts, and leveraged investment trusts that
may be equivalent in complexity to OTC derivatives.
- Check arrangements for the introduction, sale, and follow-up of securitized products
targeted for individual investors by means of private placement, etc.
- Regarding NISAs and Junior NISAs, check the following points in view of their system’
design and purpose that intend to support stable household asset formation based on the tax
benefits;
(1) Administration systems for facilitating account opening, transaction, etc. designed
specifically to accommodate customers’ investment purpose and intention
(2) Explanations when soliciting or accepting new account opening
(3) Explanations pertaining to individual financial products
Checks must also be made to ensure that Junior NISAs are not used as accounts under
fictitious name by persons with parental authority, etc.

© Japan Securities Dealers Association.All Rights Reserved. 4

2. Key Inspection Points (4)

[Specific to Regular Members]
1) Inspect the segregated management of customer assets
- Check that customer assets are duly segregated and securely managed.
2) Inspect financial adequacy
- Check the financial adequacy of Regular Members whose capital adequacy ratios may have declined.
3) Inspect establishment of the trading monitoring system, etc.
- From the viewpoint of preventing unfair trading such as insider trading, check trading monitoring
system, proper arrangement of insider registration cards and administration system of corporate
information.
4) Inspect disconnection with anti-social forces
- Check arrangements for inquiring information and administration system regarding anti-social forces.
5) Inspect systems for coping with system failure
- Check systems for coping with system failure in Regular Members conducting internet trading.
6) Inspect administration system for personal information
- Check the administration of personal information (including “specified personal information” that
has recently been prescribed by the law).

© Japan Securities Dealers Association.All Rights Reserved. 5

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 3. Points Raised Following Recent Inspections

Points raised in recent JSDA’s inspections

1. Inadequate compliance with the suitability principle

2. Inadequate administration system regarding switching transactions
of investment trusts
3. Inappropriate posting of internal administrators
4. Sales activity by sales representatives during the period of
suspension of the validity of their qualification

© Japan Securities Dealers Association.All Rights Reserved. 6

3-1. Inadequate Compliance with Suitability Principle (1)

Case 1
The company in question has been dealing with the secondary offering of South African rand denominated discount

bonds, but within six months from the start of the sale, around half their customers had sold at a loss. Most cited

reasons such as “too long to maturity” and “wanting to sell such low-interest foreign bonds and revert to investment

trusts with monthly dividends.” It was recognized that the company had probably not adequately explained upon sale
of the bonds their detailed features to investors.

The company’s internal administration division had noticed a growing demand for early sales of the said bonds, and

verified application forms made by sales persons at the point of sale from the viewpoints of whether the sales were
made by customers’ intention, and confirmed that the sales were indeed done by customers’ will. However, it was

recognized that there were cases where the appropriateness at the time of sales solicitations was not well verified by

failing to recognize that their sales teams’ initial sales may not themselves have been in keeping with their customers’
investment objectives and that the bonds’ characteristics may not have been fully explained.

Moreover, whereas “internal administration supervisor (who is responsible for overall internal administration)” issued
strong instructions to sales offices to exercise restraint in face of early selling, he at no point suggested either to the

internal administration division or to local sales offices that there might actually have been a problem with the initial

solicitation.
© Japan Securities Dealers Association.All Rights Reserved. 7

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3-1. Inadequate Compliance with Suitability Principle (2)

[Internal Administration Systems]

(1) Limit in principle marketable financial products per customer by means of product-specific
compliance matrix tables.
(2) Provide upon solicitation adequate explanation about the features, etc. of financial products, and
endeavor to conduct investment solicitation that is matching with customer’s intention, knowledge,
experience, nature of funds, etc.
(3) Collect upon sale “Confirmation for Applying for Foreign Currency Bond” from customers.
(4) Require Sale Manager’s approval system for transactions with customers over 80s. Require sales
persons to make applications detailing a customer’s attributes, custody assets, etc., and describe
therein customer’s degree of understanding of the risk involved in financial products other than equities.
(5) Prohibit to solicit an early sale of foreign bonds within 360 days of purchase.
(6) In the case of early sale based on a customer order, require sales persons to prepare a “request for early
sale” and obtain the sales manager’s approval before execution.
(7) Use this “request for early sale” for company’s head office internal administration division to monitor
the situation.
© Japan Securities Dealers Association.All Rights Reserved. 8

3-1. Inadequate Compliance with Suitability Principle (3)

[Cause of Occurrence, etc.]

(1) 7-year discount bonds were sold to customers who had preferred to invest in stocks, etc.
(2) Some sales persons solicited the selling of bonds to bondholders but falsely represented these as
bondholder requests, thereby readily obtaining their sales manager’s approval.
(3) Seeing the rapid rise in loss-cutting early sales, the head office internal administration department
opted not to recognize the 1-month commissions arising from the customers for whom such sales were
conducted as a performance of the sales persons. The sales office’s priority, however, was to achieve
the targeted sales of other specific financial products, and therefore made their sales persons promote
solicitation for switching to such other financial products by doing the loss-cutting early sales.
(4) The head office internal administration department realized increase in orders for early sales being a
problem but relied solely on sale applications prepared by sales persons upon sale as evidence of their
customers’ own judgment. And although it should have been evident from the content of such “early
sale applications” that the solicitation to sell may not have been entirely in line with the prescribed
objects of marketing and the required product explanations may have been inadequate, they failed to see
a problem and took no steps to investigate the associated marketing procedures.
© Japan Securities Dealers Association.All Rights Reserved. 9

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3-1. Inadequate Compliance with Suitability Principle (4)

For reference
Financial Instruments and Exchange Act
Article 40 (Principle of Suitability)
A Financial Instruments Business Operator, etc. shall engage in his/her
business in such a manner that the state of the operation of the business does
not fall under any of the cases listed in the following items:
(i) where the Financial Instruments Business Operator, etc. conducts
solicitation with regard to an Act of Financial Instruments Transaction in a
manner that is found to be inappropriate in light of the customer’s knowledge,
experience, the status of property or the purpose of concluding a Contract for
Financial Instruments Transaction, which results in or is likely to result in
insufficient protection of investors;

© Japan Securities Dealers Association.All Rights Reserved. 10

3-2. Inadequate Administration System Regarding

Switching Transactions of Investment Trusts (1)
Case 2
Despite a rapid increase in short-term switching between investment trusts,
Company A’s heads of divisions and branch offices made no attempt to ascertain the
facts and readily approved the solicitation of short-term switching. Given additional
factors such as the audit department’s inadequate after-sale monitoring, the company
was deemed in its excessive pursuit of sales to have failed to establish adequate
systems for the administration of investment trust solicitation and sales.
Under these backdrops, circular-type transactions were detected such as the sale of
Investment Trust A and its replacement by Investment Trust B that were simply
reversed in the near term. Contradictory transactions were also found as sales
persons have enticed different buyers with contradictory market views on one and
the same day.

© Japan Securities Dealers Association.All Rights Reserved. 11

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3-2. Inadequate Administration System Regarding
Switching Transactions of Investment Trusts (2)
[Internal Administration System]
(1) Regardless of whether a customer is solicited to do so or not, if he/she sells his/her investment trust
then looks to buy into another within 30 days, the sales person must first obtain the sales manager’s
approval based on the preparation of a “confirmation document for investment trust switching” (stating
“reason for (purpose of) switching," “holding profit/loss on trust being sold," “cost of switching,“ etc.).
(2) The sales manager shall determine to approve the transaction or not, only after verifying appropriateness
of transaction based on customer’s attributes, transaction background, etc.
(3) After getting the sales manager’s approval, a sales person must use a prospectus and other sales materials
to explain matters of importance to the customer as provided for in the “confirmation document,“
and, in the case of customers “over 70” or “switching within 2 months of purchase and expected to lose
10% or more of their original investment," collect a signed/sealed “confirmation document”.
(4) On completion of the switching transaction, the sales person must report the transaction to the sales
manager with the “confirmation document” filled with notes indicating how the transaction was
explained and how the customer reacted.
(5) Following a switching transaction, the internal administrator shall make initial checks to confirm details
such as a customer’s reason for switching, age, profit/loss on the investment trust sold, the length of
holding period, etc.
(6) Investment trust switching is monitored by the company’s audit division based on daily checks on the
situation with regard to early sales and switching transactions, and monthly checks for the
scrutinizing of factors such as switching transactions, early sales, trading frequency, profit/loss,
and, in the event a particular customer stands out, it warns the managers and sales persons involved to
interview the customer in question and modify their transaction as necessary.

© Japan Securities Dealers Association.All Rights Reserved. 12

3-2. Inadequate Administration System Regarding

Switching Transactions of Investment Trusts (3)
[Cause of Occurrence, etc.]
(1) While realizing that “investment trust switching was common, often based on inappropriate solicitations designed
to boost commissions," some sales persons nevertheless made solicitations in excessive manner to secure their retail
division’s sales revenues.
(2) In the belief that “if even a small profit can be realized, then the holding period matters little” and “if short-term loss
cutting is the key to minimizing a customer’s loss, the decision is equally obvious”, head office sales managers,
among others, approved switching transactions without further verification of how the solicitation was actually made.
(3) The sales manager of Branch N, who had the best sales record in that branch, took the lead on the sales side, even
going so far as to authorize his own solicitations for switching transaction.
(4) The internal administration supervisor (who is general manager of the audit division) saw no good reason either to
issue warnings regarding investment trust switching or to investigate circular-type and contradictory transactions.
(5) Advised by the internal administration supervisor that short-term investment trust switching was on the increase, the
president and representative director of the member firm simply suggested that “the situation might be improved by
changing to an operating revenue structure that is more oriented towards the accumulation of entrusted assets”, but as
the retail division was under the control of the general manager of head office sales division, nothing was in practice
done to rectify the situation.

© Japan Securities Dealers Association.All Rights Reserved. 13

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3-3. Inappropriate Posting of Internal Administrators (1)

Case 3
Institution A set up a number of small sales outlets (hereafter, “small outlets”),
which it designated as business units, and in charge of each of which it placed
an internal administrator whose job was to conduct internal administration for
the business of registered financial institutions.

However, Institution A also expected the internal administrators of such small

outlets to make sales and it was subsequently found during the JSDA’s
inspection period that said internal administrators were actually responsible for
the sale of more than 200 investment trusts and other products.

© Japan Securities Dealers Association.All Rights Reserved. 14

3-3. Inappropriate Posting of Internal Administrators (2)

[Cause of Occurrence, etc.]

In an “incident report” submitted to the Financial Services Agency in Year X, Institution Ａ included
voluntary reference to the effect that it was planning to install non-sales internal administrators in its
branch offices, and from Month Z of Year Y onwards it adopted just such a structure. However, up until
the JSDA’s inspection it did not reserve the same treatment for its small outlets as it did for its branch
offices.
Those with decision-making power for the placement of internal administrators in small outlets, namely
the head of sales department at its head office, internal administration supervisor, and assistant internal
administration supervisor, were aware that the internal administrators in small outlets were also
responsible for sales and knew that this was not a desirable administration structure.
However, given the shortage of necessary personnel, they simply installed internal administrators in
their small outlets on the understanding that they would also be responsible for sales.

© Japan Securities Dealers Association.All Rights Reserved. 15

8
3-4. Sales Activity by Sales Representatives During the
Period of Suspension of the Validity of Qualification
Case 4
Company A had two sales representatives in need of qualification renewal training, but failed to ensure
their attendance at training seminars (*) within the prescribed period.
Moreover, although the representatives’ sales qualifications were withdrawn with effect from the day
after the end of their prescribed renewal training period, Company A allowed them to continue their sales
activity (opening new accounts, accepting margin transactions and stock index futures transactions) right
up until that very last day.
(*) Registered sales representatives are required to attend training courses in order to make the best of their capabilities.
Such courses should in principle be attended every 5 years from registration onwards.
Each time a sales representative is re-registered, they must attend the required course within 180 days.
Failure to complete a course within the prescribed period results in the suspension or withdrawal of a representative’s
qualification.
[Cause of Occurrence, etc.]
Company A’s general manager in operation department was responsible for the registration of sales
representatives, but due to his failure to fully understand the JSDA’s rules in this regard, he neglected to
keep up to date with when individual employees would need to start their qualification renewal training
or, indeed, with what the renewal status actually was.
© Japan Securities Dealers Association.All Rights Reserved. 16

9
 JICA: Project for Capacity Building of
Capital Market in Mongolia

Disciplinary Actions of JSDA

April 14, 2016
(16:00-17:00)

Masami Kinoshita
Deputy General Manager
Disciplinary Examination Division
Japan Securities Dealers Association

© Japan Securities Dealers Association.All Rights Reserved.

Table of Contents

Ⅰ. Types of Disciplinary Actions …….………………………………………………………………………. 2

Ⅱ-1. Legal Basis for Disciplinary Actions Against Association Members ……………….……………..……. 3
Ⅱ-2. JSDA Rules for Disciplinary Actions Against Association Members …………………….……….……. 5
Ⅱ-3. JSDA Disciplinary Actions Against Association Members ..………..……………………..……………. 7
Ⅱ-4. Statistical Data of Disciplinary Actions Taken Against Association Members ………………..….……. 8
Ⅱ-5. Procedure for Disciplinary Actions Taken Against Association Members ………………………..….… 9
Ⅲ-1. Disciplinary Actions Against Sales Representatives under FIEA ……………………….………..……. 10
Ⅲ-2. Process of Disciplinary Action Etc. Against Officers and Employees of Association Members …..…. 11
Ⅲ-3. Effect of Disciplinary Action Etc. Against Officers and Employees of Association Members …….…. 12
Ⅲ-4. JSDA Rules for Disciplinary Action Etc. Against Officers and Employees of Association Members .. 13
Ⅲ-5. Statistical Data of Disciplinary Actions Against Officers and Employees of Association Members … 15
Ⅳ. Case Studies: Breach of Laws and Regulations by Officer and Employees of Association Members 17
Ⅴ-1. Internal Administration System, Etc. of Association Members ……………………………….……..… 23
Ⅴ-2. Duties of Sales Managers and Internal Administrators …….…………………………………….…….. 24
Ⅴ-3. Prohibition of Posting Delinquent Sales Managers and Internal Administrators ………………………25

© Japan Securities Dealers Association.All Rights Reserved. 1

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Ⅰ. Types of Disciplinary Actions

Target of Against Association

Regarding Sales
Disciplinary Member
Representative*
Action (Against Company)

 Revoke Registration
Type of  Business Suspension  Revoke SR Registration
Disciplinary Order (up to 6 months)  Suspend duties as SR (up
Action  Business Improvement to 2 years)
Order

Applicable  Article 51, and 52 of the

 Article 64-5 of the FIEA
Law FIEA

* Because the application for registration of the Sales Representative is made by the Association
Member, any related disciplinary action regarding the said Sales Representative is taken
against the said Association Member.
© Japan Securities Dealers Association.All Rights Reserved. 2

Ⅱ- 1. Legal Basis for Disciplinary Actions Against

Association Members (i)

【Financial Instruments and Exchange Act】

(Order to Improve Business Operation to a Financial Instruments Business Operator)
Article 51 When the Prime Minister finds it necessary and appropriate for the public
interest or protection of investors, with regard to a Financial Instruments Business
Operator's business operation or the status of its property, he/she may order said
Financial Instruments Business Operator to change the methods of business or take
other necessary measures for improving its business operation or the status of its
property, within the limit necessary.

(Disposition Rendered to a Financial Instruments Business Operator for the Purpose

of Supervision)
Article 52 In cases where a Financial Instruments Business Operator falls under any of
the following items, the Prime Minister may rescind its registration under Article 29,
rescind its authorization under Article 30(1), or order suspension of all or part of its
business by specifying a period not exceeding six months:

© Japan Securities Dealers Association.All Rights Reserved. 3

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Ⅱ- 1. Legal Basis for Disciplinary Actions Against
Association Members (ii)

Article 68-2(4)
(Dispositions, etc. Rendered to Member Firms)
An Authorized Association shall stipulate in its articles of incorporation that,
when a Member Firm or a Financial Instruments Intermediary Service Provider
whose Entrusting Financial Instruments Business Operators, etc. is the Member
Firm has violated laws and regulations, dispositions rendered by government
agencies based on laws and regulations, or the Authorized Association's articles of
incorporation or other rules, or has violated the fair and equitable principles of
transactions, the Authorized Association shall impose a fine for default, order said
Member Firm to suspend or limit the rights of a Member Firm under the articles of
incorporation or shall expel said Member Firm from the Authorized Association.

© Japan Securities Dealers Association.All Rights Reserved. 4

Ⅱ-2. JSDA Rules for Disciplinary Actions Against

Association Members (i)
【JSDA’s Articles of Association (Excerpt)】
Article 28 (Disciplinary Actions, Etc. against Regular Members)
Paragraph 1 When a Regular Member is deemed to to fall under any of the Items below,
the Association may take a disciplinary action against the Regular Member by a
resolution of the Board of Governors:
(1) It joins the Association by dishonest means;
(2) It becomes insolvent and such insolvency is not readily-recoverable;
(3) It violates laws and regulations, a disciplinary action taken by an administrative
government office pursuant to laws and regulations, or the Articles of Association and
other rules, a resolution at a General Assembly or by the Board of Governors or a
disciplinary action thereunder;
(4) It commits an act in violation of the good faith principles of transactions;
(5) It fails to make the payment of money which should be paid to the Association as
prescribed by the Association;
(6) It fails to make the notification or report prescribed in Article 18 hereof, or it presents a
false notification or report;

© Japan Securities Dealers Association.All Rights Reserved. 5

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Ⅱ-2. JSDA Rules for Disciplinary Actions Against
Association Members (ii)
(7) It fails to submit the reports or data prescribed in Article 19 hereof, or it
submits false reports or data;
(8) It refuses, disturbs or evades the inspection prescribed in Article 20 hereof;
(9) It uses the Association name and the names of boards and committees
established under the Association without an approval in violation of Article
21 hereof;
(10) It violates the instructions prescribed in Article 22, Paragraph 4 hereof;
(11) A Financial Instruments Intermediary Service Provider for which the
Regular Member is an Entrusting Financial Instruments Business Operator,
etc. commits an act that falls under Items 3 or 4 of this Paragraph; or
(12) The fact that any major shareholder (which means a major shareholder
prescribed in Article 29-4, Paragraph 2 of the FIEA), officer, or employee is
an antisocial force may ruin the credibility of the Financial Instruments
Business.

© Japan Securities Dealers Association.All Rights Reserved. 6

Ⅱ- 3. JSDA Disciplinary Actions Against

Association Members

1. Disciplinary Actions
Expulsion
Suspension or Limitation of Regular Membership for 6 Months or Less
Imposition of Penalty Money up to 500 Million Yen*
Reprimand
* If an improper gain is generated, the amount of the improper gain may be added to the
maximum amount of penalty money. (Amount exceeding 500 Million Yen may be
conceived.)

2. Admonition, Warning

© Japan Securities Dealers Association.All Rights Reserved. 7

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 Ⅱ- 4. Statistical Data of Disciplinary Actions Taken
Against Association Members

FY 2010 2011 2012 2013 2014 2015*

Expulsions ０ １ ０ １ １ ０
Suspension or
Limitation of
０ １ ０ ０ ０ ０
Regular
Membership
Imposition of
１ ３ ４ １ ２ ０
Penalty Money
Reprimands ４ ２ ４ １ ０ １

Total ５ ７ ８ ３ ３ １

* Figures for FY2015 are those recorded from the beginning of April to the end of November, 2015.

© Japan Securities Dealers Association.All Rights Reserved. 8

Ⅱ- 5. Procedure for Disciplinary Actions Taken

Against Association Members
Occurrence of SESC Inspection JSDA Inspection
Internal Inspection Others
Securities Incident (FSA Inspection) (Exchange Inspection)
at Member Firm

Incident Report (Note 1)

Examination JSDA’s Internal Examination

Disciplinary Action Disciplinary

under Article 28 Measures under
Written Warning Actions, Etc. are
Article 29
Notice of Explanatory not taken
Procedure for Note
Explanation
Explanatory Note
Disciplinary Committee

Self-regulation Board
Notification of
Admonition Written Warning
Public Announcement non-disciplinary
(non-public) (non-public)
of Disciplinary Action action

Improvement Report
Notes 1. When an Association Member becomes aware of the fact that any act in violation of the laws and rules which should be observed
by an Association Member is conducted, it must immediately report it to JSDA.
2. Shaded columns show documents to be submitted to JSDA by an Association Member.
© Japan Securities Dealers Association.All Rights Reserved. 9

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Ⅲ- 1. Disciplinary Actions Against Sales Representatives
under FIEA
【Financial Instruments and Exchange Act】
(Disposition Rendered to a Sales Representative for Purpose of Supervision)
Article 64-5 In cases where a registered Sales Representative falls under any of the following items,
the Prime Minister may rescind his/her registration or order suspension of his/her business by
specifying a period not exceeding two years:
(i) when the person has come to fall under any of Article 29-4(1)(ii)(a) to (g), or is found to have
already fallen under any of the items of Article 64-2(1) at the time of registration;
(ii) when the person has violated laws and regulations concerning business to conduct acts listed in the
items of Article 64(1) among Financial Instruments Business (Registered Financial Institution
Business for Registered Financial Institutions) and its accompanying business, or the person is found
to have conducted extremely inappropriate acts concerning other Duties of Sales Representatives; or
(iii) when the person has had his/her registration rescinded under the provisions of item (iii) of the
following Article during the last five years, and it is found that the acts he/she conducted during the
period while the registration was in effect (limited to acts during said last five years) fell under the
preceding item;
(Delegation of Registration Work)
Article 64-7 The Prime Minister may have an Association (meaning Authorized Financial Instruments
Firms Associations or Public Interest Corporation-Type Financial Instruments Firms Associations
prescribed in Article 78(2); hereinafter the same shall apply in this Section) conduct work
concerning registration prescribed in Article 64, Article 64-2, and the preceding three Articles
(hereinafter referred to as “Registration Work” in this Article and Article 64-9) that pertains to Sales
Representatives of a Financial Instruments Business Operator, etc. belonging to said Association
pursuant to the provisions of a Cabinet Office Ordinance.
© Japan Securities Dealers Association.All Rights Reserved. 10

Ⅲ- 2. Process of Disciplinary Action Etc. Against

Officers and Employees of Association Members
Occurrence of SESC Inspection JSDA Inspection
Internal Inspection Others
Securities Incident (FSA Inspection) (Exchange Inspection)
at Sales Rep.

Incident Report (Note 2)

Internal Investigation and/or Internal Disciplinary Action
Report of Development and Results of the Incidents(Note 3)
Examination JSDA’s Internal Examination

Hearing Process
Notification for Hearing（or Notice for Explanation)
(or Explanation
Process) Hearing（or Submission of Explanation Document）
Sales Representative Examination Committee
Reporting to Chairman and Decision
Notification of Disciplinary Action
（or Notice of Determination of Perpetrator of an Inappropriate Act）
Notes 1. This flow is for the cases in which disciplinary actions are taken, among the cases when incident reports are submitted.
2. When an Association Member identifies the violation of laws and rules by its employee, it must immediately report it to JSDA.
3. Association Member must implement appropriate disciplinary action and report its details to JSDA.
4. In parentheses indicates the case when JSDA prepares to treat Employees, etc. of Association Member as perpetrators of an
inappropriate act.

© Japan Securities Dealers Association.All Rights Reserved. 11

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 Ⅲ- 3. Effect of Disciplinary Action Etc. Against
Officers and Employees of Association Members
Sales Representative Sales Representative Business of Sales
Registrations Qualifications Representatives
Prohibited
Administrative Revocation of Registration Revoked － （Re-registration not
Disciplinary allowed for 5Y）
Action Prohibited
Suspension of SR duties － － (Not more than 2Y)

Revoked Not hired

Treated as Class-1 － (Retrial for exam not
allowed permanently)
permanently
Perpetrator of an
Self-Regulatory Inappropriate Revoked
Disciplinary Act Class-2 － (Retrial for exam not Not hired for 5Y
Action allowed for 5Y)
Prohibited
Prohibition of SR duties － － (Not more than 5Y)
【Other Effects】
Any Association Member who intends to hire a person as its officer or employee is required to refer in advance to the SRs Registration and Qualification
Administration System which conserves disciplinary action history of the said person if he or she used to work in other member firm(s) and received any
disciplinary action.
i) If a person received an administrative disciplinary action and self-regulatory disciplinary action (excluding Perpetrator of an Inappropriate Act);
→ Although there is no restriction for Association Members on hiring the said person who received any administrative disciplinary action and self-
regulatory disciplinary action, the said disciplinary action history shall be displayed for 5 years from the date of the disciplinary action.
ii) If a person was treated as Perpetrator of an Inappropriate Act;
→ In case of Class 1 Perpetrator of an Inappropriate Act, an Association Member is prohibited from hiring the said person permanently.
→ In case of Class 2 Perpetrator of an Inappropriate Act, an Association Member is prohibited from hiring the said person for 5 years from the date
of the disciplinary action. The said person loses his/her eligibility to take the Sales Representative Qualification Exams for 5 years.
© Japan Securities Dealers Association.All Rights Reserved. 12

Ⅲ- 4. JSDA Rules for Disciplinary Action Etc. Against

Officers and Employees of Association Members (i)
【Rules Concerning Employees of Association Members】
(Prohibition of Hiring)
Article 4 An Association Member must not hire any person employed by other
Association Member as an employee of its own; provided, however, that this provision
shall not apply to the case where an Association Member hires a person employed by
another Association Member in the form of seconded worker or the case where an
Association Member is a parent financial institution etc. of the other Association
Member that is prescribed in Article 36, Paragraph 4 of the FIEA or a subsidiary
financial institution, etc. of other Association Member that is prescribed in Paragraph 5
of the same Article (hereinafter referred to as the “Parent/Subsidiary Financial
Institution, etc.”), or if the other Association Member is a Parent/Subsidiary Financial
Institution, etc. of the Association Member and the employee to be hired is an employee
thereof. .
2 An Association Member must not hire any person who has been treated as a Class-1
Perpetrator of an Inappropriate Act by the Association prescribed in the provision of
Article 12, Paragraph 1, regardless of whatever name he/she may use.
3 An Association Member must not hire any person who has been treated as a Class-2
perpetrator of an inappropriate act by the Association prescribed in the provision of
Article 12, Paragraph 1 hereof during the period of five years from the date when the
decision on such treatment is made regardless of whatever name he/she may use.

© Japan Securities Dealers Association.All Rights Reserved. 13

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 Ⅲ- 4. JSDA Rules for Disciplinary Action Etc. Against
Officers and Employees of Association Members (ii)
【Rules Concerning Qualification and Registration, Etc. of Sales Representatives of Association
Members】
(Action Prohibiting Business of Sales Representative)
Article 6 If, as the result of its examination prescribed in Article 11 of the “Rules Concerning Employees of the
Association Members” (hereinafter referred to as “Employees Rules”), the Association deems that a Sales
Representative (including those who used to be Sales Representatives; the same shall apply hereinafter in this Article)
breached laws and regulations relating to the Business of Sales Representative or the incidental business thereof, or took
a significantly inappropriate action relating to the Business of Sales Representative, the Association shall, in accordance
with the decision, take an action that prohibits the business of Sales Representative (hereinafter referred to as the
“Action Prohibiting Business of Sales Representative”) with respect to such Sales Representative, to an Association
Member to which such Sales Representative belonged at the time of such breach or inappropriate action, within a period
of five years. Provided, however, this provision shall not apply if the Association shall take a disciplinary action
pursuant to Article 11 of the Rules or regard the Sales Representative as a perpetrator of an inappropriate act pursuant to
the provision of Article 12, Paragraph 1 of the Employee Rules.

Article 11 In cases where a registered Sales Representative falls under any of the following Items, the Association may
revoke his/her registration or impose suspension from the Business of Sales Representative for a period which is set up
for not more than two years pursuant to Article 64-5, Paragraph 1 of the FIEA:
(1) When the person falls under any of Article 29-4, Paragraph 1, Item 2(a) through (g) of the FIEA, or when it is
identified that the person fell under any of the Items of Paragraph 1 of Article 9 Rules at the time of registration;
(2) When the person has violated any of laws or regulations concerning the Business of Sales Representative or business
incidental to Financial Instruments Business conducted by an Association Member (i.e. businesses conducted by the
Regular Member, OTC Derivatives Transaction Member, or Special Member set forth in each Item of Article 5 of the
Articles of Association), or when it is recognized that the person has done any other significantly improper act with
respect to the duties of Sales Representative; or
(3) When it is identified that, in case the registration of the person has been deleted in the last five years prescribed in
Article 14, Paragraph 1, Item 3, any act of such person during the period registered (limited to the act in the last five
years) fell under the preceding Item.
© Japan Securities Dealers Association.All Rights Reserved. 14

Ⅲ- 5. Statistical Data of Disciplinary Actions Against

Officers and Employees of Association Members (i)
(Number of Persons)
Disciplinary
Revocation of
Suspension and Action Relating
Registration
Registered Prohibition from to Sales
ＦＹ Employees & Treatment of
SRs Duties Manager &
Perpetrator of an
Internal
Unacceptable Act
Administrator
2010 453,440 438,008 20 70 8

2011 448,379 433,699 23 85 12

2012 437,331 424,674 16 93 6
2013 432,967 424,423 6 123 13
2014 435,215 422,875 26 88 13
2015* 441,726 429,292 8 63 6

Notes 1. Employees is the sum total of employees of Regular Members and Registered SRs of Special Members.
2. Employees and Registered SRs are as of the end of Dec. except for FY2015, which is as of the end of June.
3. Numbers other than Employees and Registered SRs are the total number of people. Figures for FY2015 are up to
the end of Nov. 2015.

© Japan Securities Dealers Association.All Rights Reserved. 15

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Ⅲ- 5. Statistical Data of Disciplinary Actions Against
Officers and Employees of Association Members (ii)
Disciplinary Actions Taken Against Sales Representatives for Past 3 Years: Types of Misconduct
Type of Misconduct 2014 2013 2012 Type of Misconduct 2014 2013 2012

Trading without consent 23 39 33 Leakage of confidentiality 7 5 3

Fraud/ Misappropriation 23 7 13 Acceptance of false name 3 4 0
transaction
False or misleading representation/ 19 28 17
False notification Borrowing/ Lending of money and 2 3 0
Breach of Laws and Regulations

securities

Breach of JSDA Rules

Compensation of loss/ Provision of 9 15 10
profits Placing orders with another 1 1 2
association member (Jiba-Dashi)
Speculative trading 8 8 15
Name lending 1 0 0
Extremely inappropriate conduct 6 4 0
regarding duty of sales representative Excessive solicitation 1 0 0
Refusal to conduct financial 4 4 3 Investment solicitation of unlisted 0 1 2
instrument transactions or delaying shares
those transactions unreasonably
Name borrowing 0 1 0
Provision of conclusive evaluations 0 3 0
Unfair sale of publicly offered 0 0 1
Artificial creation of a market price 0 1 0 shares
and its acceptance
Delayed delivery 0 0 1
Others 5 1 7
Sub-total 15 15 9
Sub-total 97 110 98
Falling under deficient cases 2 4 2
Total 114 129 109

(Note) Regarding the case involving multiple acts of misconduct and violations of laws and regulations, we have chosen one that has been the
most relevant to the judgment on disciplinary action, etc., and have counted it as the number of acts of misconduct by type.
© Japan Securities Dealers Association.All Rights Reserved. 16

Ⅳ- 1. Case Studies: Breach of Laws and Regulations by Officers

and Employees of Association Members (Misappropriation)

Misappropriation
(Outline of Misconduct) Perpetrator Customer
③Deposited money ① Explain
The perpetrator has explained that the customer’s signature and
seal on the payment slip would be necessary when purchasing the ↓
Money
MMF with the deposited money. However, after having received the ② Money transfer request
delivered to
customer’s signature, etc., the perpetrator did not, in fact, purchase Sales Rep. ＋
the MMF and misappropriated the money that he withdrew. ⑥Investigate, etc. Apply for purchase of investment trust
(Motive) Employee in ⑤Inform ④ Inform
Use this money to repay card loans and consumer loans. Audit Dept.
FINMAC

Perpetrator Customers (Outline of Misconduct)

① Explain The perpetrator explained to the customer that the surplus money
②Surplus Money generated when purchasing financial products would be treated as a
↓ deposit. However, in fact, the perpetrator misappropriated it.
Misappropriate (Motive)
⑤Investigate, etc.
③ Lend Customer Struggling to achieve the sales targets, the perpetrator would like to
Employee in purchase money use the money for lending the purchase price to other customers for
Audit Dept.
④ Inform their purchase of financial products

(Outline of Misconduct) Perpetrator ① Detect customers with certain

extracting criteria
Thinking that there would be no inquiry from customers regarding
the account for which the customer's address is unknown, and that it
was less than likely to be uncovered even by an in-house inspection, ③ Transfer customer’s ② Detect customers
deposited money to satisfying the criteria
the perpetrator misappropriated money in a way to transfer the
customer funds to his own bank account. bank a/c of perpetrator
(Motive) ④Internal inspection Employee in
Audit Dept.
To produce funds for repaying debts
© Japan Securities Dealers Association.All Rights Reserved. 17

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Ⅳ- 2. Case Studies: Breach of Laws and Regulations by Officers
and Employees of Association Members (Trading Without
Consent)
I want to increase the number
of accounts for accumulative- ③Accumulative investment
type investment trusts
(Outline of Misconduct) ②Informing customers Customer A
In order to increase the number of contracts for cumulative-type investment not to be worried
trusts, the perpetrator has selected customers who had no outstanding balance about errors in money transfer
in their accounts, and has concluded a contract to apply for the investment of cumulative-type investment trust
trusts without the consent of customers (recognizing that the said investments Perpetrator
trusts would be purchased once money enters these accounts). Later on, Customer B
because a certain number of customers received stock dividends, the said ①Personally fabricate
investment trusts were purchased in these customers’ accounts. an application form
for accumulative
(Motive) investment trust on
To increase the number of sales contracts regarding cumulative-type customer’s behalf
investment trusts Customer C
(Clue to Discovery)
Reported by customers

I want to achieve (Outline of Misconduct)

prospective sales that
were excessively In order to achieve the prospective sale of bonds that was
committed. ②Intend to solicit sale of retail excessively committed to the branch, the perpetrator intended
investor targeted JGBs and to make a solicitation to sell the retail investors targeted JGBs
purchase of other bonds held by his customer and purchase other bonds, but he could
not communicate with the customer. Thus, in order to ensure
there are purchase funds, the perpetrator has sold the said
Perpetrator Customer retail investor targeted JGBs held by the customer.
(Motive)
To achieve prospective sales that had been committed in
①Commit excessive ③Retail investors targeted JGBs were excess
amount of prospective sold without customer’s consent
sales
(Clue to Discovery)
In-house investigation

© Japan Securities Dealers Association.All Rights Reserved. 18

Ⅳ- 3. Case Studies: Breach of Laws and Regulations by Officers

and Employees of Association Members (False Information)

I would like to
(Outline of Misconduct) improve my sales
performance…
By making a false report to customers that does not look
Perpetrator Customer
attentively in the transaction report, such as reporting an
①Report an excessively
excessively small amount of loss, or reporting an excessively large small amount of loss
amount of custody assets, the perpetrator received orders and
executed the transactions. ③ Report excessively large
(Motive) amount of custody assets
(commit falsification of
To improve sales performance detailed report of custody assets)
(Clue to Discovery)
In-house investigation ②④Receive orders and execute
transactions

(Outline of Misconduct)
Superior Y The perpetrator had received a purchase order for stock from
Customer A and executed it. However, while he was
⑥ ⑤Verification of communicating with Customer B, the perpetrator forgot that the
⑦ order slips
Remark

purchase order of Customer A had already been executed, and

Reply “No Problem”

Customer B executed the said purchase order again.

②Take care When processing the slip soon after, he became aware of the
Superior X duplicated order execution. In order to hide his operational
of another
customer’s orders mistake, the perpetrator then proposed an additional purchase of
④Verification of
stocks to the customer A, and received the purchase order and
order slips
executed it.
①③Execute purchase orders (Motive)
Perpetrator for foreign stocks Customer A To conceal operational failure.
⑧False notification/ Receive (Clue to Discovery)
customer’s consent In-house investigation

© Japan Securities Dealers Association.All Rights Reserved. 19

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Ⅳ- 4. Case Studies: Breach of Laws and Regulations by Officers
and Employees of Association Members (Compensation
of Loss or Provision of Profits)
(Outline of Misconduct)
The perpetrator made a solicitation for purchasing foreign bonds under a ①Solicit purchase
secondary offering, and received a purchase order from a customer following the ②Apply based on the understanding
customer’s response that he would subscribe if it was possible to cancel it. Perpetrator that the deal can be canceled Customer
However, the perpetrator forgot to tell the customer at that time that he/she ③Failed to explain forex
needed to pay the forex cost if he/she canceled during the period of secondary cost for cancellation
offering. ④Customer states he/she
Later on, the perpetrator received from the customer a request to cancel the wants to cancel
purchase of bonds. Although the perpetrator recognized the failure to explain the ⑤Make a promise to assume
forex cost, he made a promise to the customer to pay the forex cost due to forex cost
cancellation in order to avoid criticism.
(Motive)
To avoid criticism for his method of solicitation
(Clue to Discovery) (Outline of Misconduct)
Reported by customer Although the perpetrator should have waited for
the arrival of maturity of the term-deposit before
starting solicitation of any other financial product, in
order to quickly conclude a contract with a customer
①Apply for term-deposit who was interested in the investment trusts, he
④Whether or not the contract
accepted after consulting his superior a request for the
interest rate is applicable for
early cancellation ②Solicit investment trust early cancellation of the term-deposit by applying the
initial contract interest rate (which was larger than
③Intend to buy investment trust interest rate to be applied for early cancellation) .
⑤Reply that contract ⑥Reply that early (Motive)
interest rate is cancellation with contract
applicable for early
To improve sales performance / Lack of
interest rate is possible
Branch Manager cancellation Perpetrator Customer understanding regarding laws and regulations
⑦Apply to purchase
investment trust (Clue to Discovery)
In-house investigation

© Japan Securities Dealers Association.All Rights Reserved. 20

Ⅳ- 5. Case Studies: Breach of Laws and Regulations by Officers

and Employees of Association Members (Other Types of
Misconduct (i))
Speculative Trading

Association (Outline of Misconduct)

Members Because the margin transactions were not prohibited by in-house
[Lack of internal rules prohibiting rules, the perpetrator carried out margin transactions even after
Internet Securities Brokers margin transactions by officers and employees were prohibited by
margin transactions]
the enactment of the Financial Instruments and Exchange Act on
September 30, 2007, failing to recognize that fact.
Margin
Transactions (Motive)
To pursue personal speculative profits
Perpetrator (Clue to Discovery)
Regulator’s investigation

Involvement in Insider Trading

Perpetrator Acquaintance
①Receive over-the-phone (Officer of listed company)
(Outline of Misconduct) insider information
In order to obtain a reward for providing information, the
perpetrator informed a day trader with whom he was acquainted of the ⑤Reward (Money)
insider information acquired from an officer of the listed company.
The perpetrator carried out transactions on the basis of this
information and received money as a reward from the said day trader ④Reward ②Tell the customer about
(Money) the insider information
that made profits.
(Motive)
To obtain a reward for the provision of information
(Clue to Discovery) ③Trade the issue of stock subject to
Regulator’s investigation insider information
Customer

© Japan Securities Dealers Association.All Rights Reserved. 21

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Ⅳ- 6. Case Studies: Breach of Laws and Regulations by Officer
and Employees of Association Members (Other Types of
Misconducts (ii))
Acceptance of Transactions Under False Name
Customer
(Outline of Misconduct) (Account Opened)
When the perpetrator made a solicitation to a customer for foreign
bonds, he made also a solicitation to a superior of the customer present,
and received a purchase order for the foreign bonds from the superior of
the customer. However, the superior of the customer did not hold an
account with the company, and it would take several days to open the
account. The perpetrator, who would like to immediately increase his
sales performance,, executed an order to buy the foreign bonds for the
superior of the customer in the customer’s account with the consent of the
customer and his/her superior.
(Motive) Superior of
Customer
To improve sales performance
(Account
(Clue to Discovery) not opened)
In-house investigation

Borrowing and Lending of Money and Securities (Outline of Misconduct)

Although the perpetrator made a solicitation to purchase stock and
①Request to pay purchase received an agreement from the customer, later on he received a request
money on customer’s behalf from the customer to borrow money, with the customer saying he/she was
Perpetrator Customer not able to prepare the money by the designated date for the settlement of
②Lend purchase money the purchase money. So, the perpetrator extended the purchase money to the
customer. Later on, the perpetrator became unable to refuse requests to lend
money whenever such a request came from the customer.
(Motive)
To avoid the purchase money going unpaid
(Clue to Discovery)
In-house investigation

© Japan Securities Dealers Association.All Rights Reserved. 22

Ⅴ- 1. Internal Administration System, Etc. of

Association Members
Communicating
& handling
Reporting Internal Administration properly
President
Supervisor FSA
Guiding & Guiding &
Reporting Reporting
supervising supervising SESC
Sales Unit
（Branch, Sales Div. Guiding & JSDA
supervising Reporting
of Head Office, Etc.） Internal JPX-R
Administra
Internal -tion
Sales Manager
Administrator Division
Guiding & Internal
supervising administration

Registered Sales
Conducting
Representative Internal
internal
administration
administration

© Japan Securities Dealers Association.All Rights Reserved. 23

12
Ⅴ- 2. Duties of Sales Managers and Internal Administrators

【Rules Concerning Internal Administrators, Etc. of Association Members】

(Duties of Sales Manager)
Article 12 The Sales Manager must comply with the FIEA and other laws, regulations, and
various rules; and guide and supervise officers or employees belonging to each sales unit
for which the Sales Manager is appointed as the Sales Manager to keep a business attitude
toward complying with the FIEA and other laws, regulations, and various rules so that sales
activities including a solicitation for investments and management of customers may be
properly carried out.
2 The Sales Manager must, when there has occurred a serious case concerning sales
activities including a solicitation for investments and management of customers at the sales
unit for which the Sales Manager is appointed as the Sales Manager, promptly report the
contents thereof to the Internal Administration Supervisor and receive his/her instructions.
(Duties of Internal Administrator)
Article 15 Internal Administrator must comply with the FIEA and other laws, regulations, and
various rules; and perform proper internal administration by such means as constantly
supervising to see if sales activities at the sales unit for which the Internal Administrator is
appointed as the Internal Administrator are properly carried out in accordance with the
FIEA and other laws and regulations.
2 Internal Administrator must, when there has occurred a serious case concerning sales
activities including solicitation for investments and management of customers at the sales
unit for which the Internal Administrator is appointed as the Internal Administrator,
promptly report to the Internal Administration Supervisor and receive his/her instructions.
© Japan Securities Dealers Association.All Rights Reserved. 24

Ⅴ- 3. Prohibition of Posting Delinquent

Sales Managers and Internal Administrators
(Decision Concerning Action Prohibiting Allocation of Sales Manager)
Article 17 If, as a result of examination of a Report of Development and Results of the Incidents submitted by an Association Member
pursuant to Article 10, Paragraph 1 of the Employee Rules, or Accredited Materials prescribed in Article 11, Paragraph 4 of the same Rules, or
any material reported or submitted by an Association Member pursuant to the rules set forth in the next Paragraph, the Sales Manager is
subject to either of the following Items, the Association may take an action that prohibits the Association Member to which such Sales
Manager belonged when he/she was subject to either of the following Items from appointing or allocating such Sales Manager as a Sales
Manager or an Internal Administrator in a period within five years. Provided, however, this provision shall not apply if the Association
regards such Sales Manager as a Perpetrator of an Inappropriate Act pursuant to Article 12, Paragraph 1 of the Employee Rules..
(1) The Sales Manager personally breaches laws or regulations;
(2) Officers or employees who belong to the sales unit for which the Sales Manager is appointed as Sales Manager breach laws or
regulations, and it is judged that the Sales Manager has not sufficiently performed his or her duties as prescribed in Article 12, such as the
Sales Manager having concealed or having taken no action against such breach of laws and regulations, etc. or such breach having been
caused by the instruction by the Sales Manager.

(Decision Concerning Action Prohibiting Allocation of Internal Administrator)

Article 18 If, as a result of examination of a Report of Development and Results of the Incidents submitted by an Association Member
pursuant to Article 10, Paragraph 1 of the Employee Rules, or Accredited Materials prescribed in Article 11, Paragraph 4 of the same Rules, or
any material reported or submitted by an Association Member pursuant to the rules set forth in the next Paragraph, the Internal Administrator
is subject to either of the following Items, the Association may take an action that prohibits the Association Member to which such Internal
Administrator belonged when he/she was subject to either of the following Items from appointing or allocating such Internal Administrator as
a Sales Manager or an Internal Administrator in a period within five years. Provided, however, this provision shall not apply if the Association
regards such Internal Administrator as a Perpetrator of an Inappropriate Act pursuant to Article 12, Paragraph 1 of the Employee Rules.
(1) The Internal Administrator personally breaches laws or regulations;
(2) Officers or employees who belong to the sales unit for which the Internal Administrator is appointed as Internal Administrator breach
laws or regulations, and it is judged that the Internal Administrator has not sufficiently performed his or her duties as prescribed in Article 15,
such as the Internal Administrator having concealed or having taken no action against such breach, or such breach having been caused by the
instruction by the Internal Administrator.

© Japan Securities Dealers Association.All Rights Reserved. 25

13
Thank you for your attention!

© Japan Securities Dealers Association.All Rights Reserved. 26

14
 Financial Instruments and Exchange Act

(Act No. 25 of April 13, 1948)

Chapter IV Financial Instruments Firms Association

Section 1 Authorized Financial Instruments Firms Association
Subsection 1 Establishment and Business (Article 67 - Article 67-20)
Subsection 2 Association Members (Article 68 and Article 68-2)
Subsection 3 Management (Article 69 - Article 72)
Subsection 4 Supervision (Article 73 - Article 76)
Subsection 5 Miscellaneous Provisions (Article 77 - Article 77-7)

1
 Chapter IV Financial Instruments Firms Association

Section 1 Authorized Financial Instruments Firms Association

Subsection 1 Establishment and Business

(Purposes of Authorized Association)

Article 67 (1) An Authorized Financial Instruments Firms Association (hereinafter
referred to as an "Authorized Association" in this Chapter) aims to ensure fair and
smooth sales and purchase or other transactions of Securities and Derivative
Transactions, etc. and to contribute to the sound development of Financial
Instruments Businesses and protection of investors.
(2) An Authorized Association may establish a market where Over -the-Counter
Traded Securities are traded (limited to the cases where Member Firms(meaning
the members of an Authorized Association; hereinafter the same shall apply in this
Section) conduct such transactions on their respective account, and the case where
Member Firms provide intermediary, brokerage or agency service; the same shall
apply in Article 67-11(1)) (hereinafter referred to as the "Over-the-Counter
Securities Market"), in order to facilitate distribution of Securities (limited to
Securities not listed on a Financial Instruments Exchange; the same shall apply in
Article 67-11(1)), to ensure fairness of the sales and purchase or other transactions
of Securities, and to contribute to the protection of investors.
(3) An Authorized Association shall be a juridical person.
(4) A person who is not an Authorized Association shall not use any term in its name
that is likely to mislead people to understand that said person is an Authorized
Financial Instruments Firms Association.

(Authorization of Establishment)
Article 67-2 (1) An Authorized Association may be established only by Financial
Instruments Business Operators.
(2) A Financial Instruments Business Operator who intends to establish an
Authorized Association shall obtain an authorization from the Prime Minister.
(3) Registered Financial Institutions shall be deemed to be Financial Instruments
Business Operators with regard to application of the provisions of the preceding
two paragraphs, Article 68(1) and (2), Article 78(1), Article 79-7(1) and Article 79-
11, within the scope of performing Registered Financial Institution Businesses.

(Submission of Application for Authorization)

Article 67-3 (1) A person who intends to obtain an authorization under paragraph
(2) of the preceding Article shall submit an application for authorization
containing the following matters to the Prime Minister:
(i) the name;
(ii) the location of office; and
(iii) the names of Officers and names of Member Firms.
(2) The articles of incorporation and other rules as well as other documents specified
by a Cabinet Office Ordinance shall be attached to the application for
authorization under the preceding paragraph.

(Examination of Application for Authorization)

Article 67-4 (1) When an application for authorization under paragraph (1) of the
preceding Article has been filed, the Prime Minister shall examine whether the
application conforms to the following criteria:
(i) the provisions of the articles of incorporation and other rules conform to laws
and regulations, and are sufficient to facilitate fair and smooth sales and
purchase or other transactions of Securities as well as Derivative Transactions ,
etc., and to ensure sound development of Financial Instruments Businesses and
protection of investors; and
(ii) an Authorized Association pertaining to said application will be organized in
such a manner that conforms to the provisions of this Act.

2
(2) When the Prime Minister finds that the application for authorization conforms to
the criteria under the preceding paragraph, as a result of an examination under
said paragraph, he/she shall grant the authorization of establishment, except for
the cases where the application falls under any of the following items:
(i) when the applicant for authorization is a person who has been punished by a
fine under the provisions of this Act, and for whom five years have not passed
since the day when the execution of the punishment terminated or he/she
became free from execution of the punishment;
(ii) when any of the Officers include any person who falls under any of the
categories of the persons prescribed in items (a) to (g) inclusive of Article 29 -
4(1)(ii); or
(iii) when the application for authorization or documents to be attached thereto
includes fake statements on important matters.

(Hearing of Applicant for Authorization and Notification)

Article 67-5 (1) The Prime Minister shall, when he/she has received an appl ication
for authorization under Article 67-3(1) and finds it inappropriate to grant the
authorization, notify to that effect to the applicant for authorization and have the
officials conduct a hearing.
(2) The Prime Minister shall, when he/she has decided to grant or refuse to grant an
authorization under Article 67-2(2), notify to that effect in writing to the applicant
for authorization without delay.

(Rescission of Authorization)
Article 67-6 When an Authorized Association is found to have already fall en under
any of the categories specified in any of the items of Article 67-4(2) at the time of
receipt of the authorization of establishment, the Prime Minister may rescind its
authorization.

(Prohibition of Pursuit of Profit)

Article 67-7 An Authorized Association shall not conduct any business for profit.

(Matters Which Must be Stated in Articles of Incorporation)

Article 67-8 (1) The articles of incorporation of an Authorized Association shall
contain the following matters (limited to an Authorized Association that
establishes an Over-the-Counter Securities Market, with regard to the matters
listed in item (xiii)):
(i) the purpose;
(ii) the name;
(iii) the location of offices;
(iv) matters related to Member Firms;
(v) matters related to general meeting;
(vi) matters related to Officers;
(vii) matters related to council and other meetings;
(viii) matters related to execution of business operations;
(ix) matters related to improvements in qualities of Officers and employees of the
Member Firms, and qualities of the Financial Instruments Intermediary Service
Providers (limited to the Financial Instruments Intermediary Service Providers
of which Entrusting Financial Instruments Business Operator, etc. is a Member
Firm; hereinafter the same shall apply in this Section) and their Officers and
employees;
(x) matters related to preparation of rules;
(xi) matters related to complaint resolution filed by investors concerning the
operations of the Member Firms or Financial Instruments Intermediary Service
Providers and mediation as prescribed in Article 77-2;
(xii) matters related to sales and purchase or other transactions of Securities
solicited by Member Firms or Financial Instruments Intermediary Service
Providers;
(xiii) matters related to an Over-the-Counter Securities Market;

3
 (xiv) matters related to investigation of the status of observance of laws and
regulations, dispositions given by government agencies based on laws and
regulations, or the articles of incorporation or other rules, or the fair and
equitable principles of transactions by Member Firms and Financial
Instruments Intermediary Service Providers;
(xv) matters related to membership fees;
(xvi) matters related to accounting and assets; and
(xvii) the methods of public notices.
(2) If an Authorized Association intends to change its articles of incorporation, it
shall obtain authorization from the Prime Minister.
(3) When there are any changes in matters listed in Article 67-3(1)(ii) or (iii), an
Authorized Association shall notify to that effect to the Prime Minister without
delay. The same shall apply to cases where rules of an Authorized Association
(excluding the articles of incorporation; and with regard to an Authorized
Association which establishes an Over-the-Counter Securities Market, excluding
the rules set forth in Article 67-12) have been prepared, changed or abolished.

(Capacity of Representative Person, etc. to Commit Tortious Acts)

Article 67-9 An Authorized Association is liable for damage caused to others by its
president or director during the course of the performance of their duties.

(Address of Authorized Association)

Article 67-10 The address of an Authorized Association shall be at the location of its
principal office.

(Registration in the Registry of Over-the-Counter Traded Securities)

Article 67-11 (1) An Authorized Association which establishes an Over -the-Counter
Securities Market shall register the types and issues of Securities to be sold and
purchased on the relevant Over-the-Counter Securities Market in the Registry of
Over-the-Counter Traded Securities to be kept at the Authorized Association.
(2) The Authorized Association set forth in the preceding paragraph shall keep a
copy of the Registry of Over-the-Counter Traded Securities at its office and make
the copy available for public inspection, pursuant to the provisions of a Cabinet
Office Ordinance.

(Authorization of Regulations)
Article 67-12 When an Authorized Association intends to establish an Over -the-
Counter Securities Market, it shall stipulate in its rules th e following matters
with regard to the registration under paragraph (1) of the preceding Article and
Over-the-Counter Traded Securities, and obtain an authorization from the Prime
Minister. The same shall apply to cases where the Authorized Association int ends
to change or abolish said rules:
(i) criteria and methods of registration, and rescission thereof;
(ii) matters related to report and announcement of trading price;
(iii) methods of concluding contracts on sales and purchase or other transactions;
(iv) methods of transfer and other settlement; and
(v) in addition to the matters listed in each of the preceding items, necessary
matters related to sales and purchase or other transactions of the Over -the-
Counter Traded Securities.

(Notification of Registration, etc.)

Article 67-13 When an Authorized Association intends to conduct registration under
Article 67-11(1) or rescission of such registration, it shall notify to that effect to
the Prime Minister.

(Order for Registration of Share Certificates, etc.)

Article 67-14 With respect to the Share Certificates, etc. issued by the Issuer of the
Over-the-Counter Traded Securities registered by an Authorized Association
(limited to the share certificates, or the securities or certificates listed in Article

4
 2(1)(xx) indicating the rights pertaining to share certificates (hereinafter referred
to as the "Share Certificates, etc." in this Article and in Article 125)) which have
not been registered by said Authorized Association under the provision of Article
67-11(1), if the Prime Minister finds that registration by said Authorized
Association of said Share Certificates, etc. under said paragraph is necessary and
appropriate for the public interests or protection of investors, he/she may order
said Authorized Association to register said Share Certificates, etc. under the
provision of said paragraph.

(Order of Rescission of Registration, etc.)

Article 67-15 (1) When an Authorized Association intends to conduct or has
conducted registrations of Securities under the provision of Article 67-11(1), or
intends to rescind or has rescinded said registrations, in violation of its rules
specifying the matters prescribed in Article 67-12(i), the Prime Minister may order
said Authorized Association to rescind the registered Securities or to re-register
the Securities of which registrations have been rescinded, or to take the measures
necessary for rectification of the violation. In this case, a hearing shall be held
irrespective of the categories of procedures for hearing state ments of opinion under
Article 13(1) of the Administrative Procedure Act.
(2) With regard to the application of the provisions of Section 2, Chapter III of the
Administrative Procedure Act in cases where the notice under Article 15(1) of said
Act has been provided in the hearings pertaining to the disposition under the
provision of the preceding paragraph, the Issuer of the relevant Securities shall be
deemed as the person who has received the notice under Article 15(1) of said Act.

(Notification of Suspension, etc. of Sales and Purchase)

Article 67-16 With regard to the Over-the-Counter Traded Securities registered by
an Authorized Association, when an Authorized Association has suspended, or
cancelled suspension of, sales and purchase of said Over -the-Counter Traded
Securities on the Over-the-Counter Securities Market, it shall notify to that effect
to the Prime Minister without delay.

(Order of Suspension of Sales and Purchase, etc.)

Article 67-17 (1) When an issuer of the Over-the-Counter Traded Securities has
violated this Act, an order given under this Act, or the rules of the Authorized
Association which has registered the relevant Over-the-Counter Traded Securities,
if the Prime Minister finds it necessary and appropriate for the public interest or
protection of investors, he/she may order said Authorized Association to suspend
sales and purchase of, or to rescind registration of, the Over -the-Counter Traded
Securities on the Over-the-Counter Securities Market established by said
Authorized Association. In this case, a hearing shall be held irrespective of the
categories of procedures for hearing statements of opinion under Article 13(1) of
the Administrative Procedure Act.
(2) With regard to the application of the provisions of Section 2, Chapter II I of the
Administrative Procedure Act in cases where the notice under Article 15(1) of said
Act has been provided in the hearings pertaining to the disposition under the
provision of the preceding paragraph, the issuer specified in the preceding
paragraph shall be deemed as the person who has received the notice under Article
15(1) of said Act.

(Report to Authorized Association)

Article 67-18 A Member Firm (in cases where any of the items (i) to (iii) applies,
limited to a Member Firm of an Authorized Association which establishes an Over-
the-Counter Securities Market) shall report the matter listed in each of the
following items in the respective case specified therein to the Authorized
Association to which it belongs, pursuant to the provisions of a Cabi net Office
Ordinance:
(i) when sales and purchase of Over-the-Counter Traded Securities conducted on
the Member Firm's own account, or sales and purchase of Over -the-Counter

5
 Traded Securities for which the Member Firm has provided intermediary,
brokerage or agency services has been effected: the kinds, issues, prices or
volumes, or other matters specified by a Cabinet Office Ordinance pertaining to
the Securities for which the sales and purchase is effected;
(ii) when a Member Firm makes an offer for sales or purchase of Over-the-Counter
Traded Securities on its own account: the kinds, issues, prices or other matters
specified by a Cabinet Office Ordinance pertaining to the Securities for which
the offer for sales or purchase is made;
(iii) when a Member Firm has accepted entrustment, etc. of sales and purchase of
Over-the-Counter Traded Securities: the kinds, issues, prices, volumes or other
matters specified by a Cabinet Office Ordinance pertaining to the Securities for
which the Member Firm has accepted entrustment, etc.;
(iv) when sales and purchase of the Tradable Securities (meaning the Share
Certificates, bonds with share option or any other Securities specified by a
Cabinet Office Ordinance for which solicitation of sales and purchase or other
transactions has not been prohibited by said Authorized Association under its
rules (excluding Securities listed on a Financial Instruments Exchange and
Over-the-Counter Traded Securities; the same shall apply hereinafter)
conducted on the Member Firm's own account, or sales and purchase of the
Tradable Securities for which the Member Firm has provided intermediary,
brokerage or agency services has been effected: the kinds, issues, prices or
volumes or other matters specified by a Cabinet Office Ordinance pertainin g to
the Securities for which the sales and purchase is effected;
(v) when a Member Firm makes an offer for sales or purchase of Tradable
Securities on its own account: the kinds, issues, prices or other matters specified
by a Cabinet Office Ordinance pertaining to the Securities for which the offer for
sales or purchase is made;
(vi) when a Member Firm has accepted entrustment, etc. of sales and purchase of
Tradable Securities: the kinds, issues, prices, volumes or other matters specified
by a Cabinet Office Ordinance pertaining to the Securities for which the Member
Firm has accepted entrustment, etc.;
(vii) when a sales and purchase of the Listed Share Certificates, etc. (meaning the
share certificates, bonds with share option or any other Securities spec ified by a
Cabinet Office Ordinance which are listed on a Financial Instruments Exchange;
hereinafter the same shall apply in this Article to Article 78-5 inclusive)
conducted outside of a Financial Instruments Exchange Market on the Member
Firm's own account, or sales and purchase of Listed Share Certificates, etc.
conducted outside of a Financial Instruments Exchange Market for which the
Member Firm has provided intermediary, brokerage or agency services has been
effected: the kinds, issues, prices or volumes or other matters specified by a
Cabinet Office Ordinance pertaining to the Listed Share Certificates, etc. for
which the sales and purchase is effected; or
(viii) when a Member Firm makes, outside of a Financial Instruments Exchange
Market, an offer for sales or purchase of the Listed Share Certificates, etc. to a
large number of persons simultaneously, or in other cases specified by a Cabinet
Office Ordinance: the kinds, issues, prices or other matters specified by a
Cabinet Office Ordinance pertaining to the Securities for which the offer for
sales or purchase is made.

(Notices, etc. of Trading Volume, Price, etc.)

Article 67-19 An Authorized Association shall, pursuant to the provisions of a
Cabinet Office Ordinance and based on the reports made pursuant to the provision
of the preceding Article, notify its Member Firms and also publicize the daily
trading volume, and highest price, lowest price, closing price and any other
matters for each day and for each issue in relation to sales and purchase of Over-
the-Counter Traded Securities on the Over-the-Counter Securities Market
established by said Authorized Association, sales and purchase of the Tradable
Securities, and sales and purchase of the Listed Share Certificates, etc. conducted
outside of a Financial Instruments Exchange Market (limited to those which a

6
 Member Firm conducts on its own account, and those for which a Member Firm
provides intermediary, brokerage or agency services; hereinafter the same shall
apply in the following Article).

(Report of Trading Volume, Price, etc.)

Article 67-20 An Authorized Association shall, pursuant to the provisions of a
Cabinet Office Ordinance, report to the Prime Minister the daily trading volume,
and highest price, lowest price, closing price and any other matters for each day
and for each issue in relation to sales and purchase of Over -the-Counter Traded
Securities on the Over-the-Counter Securities Market established by said
Authorized Association, sales and purchase of the Tradable Securities, and sales
and purchase of the Listed Share Certificates, etc. conducted outside of a Financial
Instruments Exchange Market.

Subsection 2 Member Firms

(Qualification of Member Firms and Restriction on Membership of Authorized

Association)
Article 68 (1) Member Firms of an Authorized Association shall be limited to
Financial Instruments Business Operators.
(2) An Authorized Association shall stipulate in its articles of incorporation that any
Financial Instruments Business Operator is eligible for membership as a Me mber
Firm, excluding the cases set forth in paragraph (5); provided, however, that this
shall not apply to cases where a membership is restricted due to reasons of
geographic conditions or types of the business of the Financial Instruments
Business Operator.
(3) An Authorized Association shall stipulate in its articles of incorporation that it
shall endeavor to prevent fraudulent acts, market manipulation or collection of
unreasonable fees or expenses and other acts of unfair profiting by Member Firms
and Financial Instruments Intermediary Service Providers, as well as to promote
the fair and equitable principles of transactions.
(4) An Authorized Association shall stipulate in its articles of incorporation that it
shall endeavor to prevent acts in violation of laws and regulations or its articles of
incorporation or other rules and to ensure confidence of investors, by having
Member Firms establish the internal rules and control systems of said Member
Firms and Financial Instruments Intermediary Service Prov iders whose
Entrusting Financial Instruments Business Operator, etc. is said Member Firm for
the purpose of observance of the laws and regulations and the Authorized
Association's articles of incorporation and other regulations.
(5) An Authorized Association may stipulate in its articles of incorporation that the
Authorized Association may refuse the admission as a Member Firm if an
applicant has been ordered to suspend sales and purchase or other transactions of
Securities or Derivative Transactions, etc. or has been expelled from membership
of, or has had qualification for trading rescinded by, an Authorized Association or
a Financial Instruments Exchange, on account of having violated laws and
regulations, dispositions issued by government agencies based on laws and
regulations, or the articles of incorporation or other rules of the Authorized
Association or a Financial Instrument Exchange, or of having conducted acts
contrary to the fair and equitable principles of transactions.
(6) An Authorized Association shall make a list of Member Firms available for public
inspection.

(Dispositions, etc. Rendered to Member Firms)

Article 68-2 An Authorized Association shall stipulate in its articles of incorporation
that, when a Member Firm or a Financial Instruments Intermediary Service
Provider whose Entrusting Financial Instruments Business Operators, etc. is the
Member Firm has violated laws and regulations, dispositions rendered by
government agencies based on laws and regulations, or the Authorized
Association's articles of incorporation or other rules, or has violated the fair and

7
 equitable principles of transactions, the Authorized Association shall impose a fine
for default, order said Member Firm to suspend or limit the rights of a Member
Firm under the articles of incorporation or shall expel said Member Firm from the
Authorized Association.

Subsection 3 Management

(Appointment of Officers and Their Authorities)

Article 69 (1) An Authorized Association shall appoint one president, two or more
directors and two or more auditors as its Officers.
(2) The president shall represent the Authorized Association and preside over its
affairs.
(3) The directors shall, pursuant to the provisions of the articles of incorporation,
represent the Authorized Association, administer the affairs of the Authorized
Association assisting the president, perform the duties of the president in his/her
place when the president is unable to attend to his/her duties, and perform the
duties of the president when the post is vacant.
(4) The auditors shall audit the affairs of an Authorized Association.
(5) An Officer shall lose the position when he/she comes to fall under any of the
items (a) to (g) of Article 29-4(1)(ii).

(Order to Dismiss Officers)

Article 70 When the Prime Minister discovers that a person has become an Officer
of an Authorized Association by wrongful means, or when an Officer of an
Authorized Association has violated laws and regulations, a disposition issued by
government agencies based on laws and regulations or i ts articles of incorporation,
he/she may order the Authorized Association to dismiss said officer.

(Provisional Directors or Provisional Auditor)

Article 71 The Prime Minister may, when there is no person to perform the duties of
a director or auditor and if he/she finds it necessary, appoint a provisional director
or provisional auditor.

(Obligation of Confidentiality, etc. of Officers and Employees)

Article 72 (1) Officers or employees, or a person who was formerly in such position
of an Authorized Association shall not divulge to another person or misappropriate
any confidential information learned during the course of his/her duties.
(2) Officers or employees, or a person who was formerly in such position of an
Authorized Association shall not use any information learned during the course of
his/her duties for purposes other than providing for use in relation to the business
of the Authorized Association.

Subsection 4 Supervision

(Order for Change of Articles of Incorporation, Operational Rules, etc .)

Article 73 When the Prime Minister finds it necessary and appropriate, with regard
to an Authorized Association's articles of incorporation or any other rules or trade
practice, or its business operation or the status of its property, for the public
interest or protection of investors, he/she may order the Authorized Association to
change its articles of incorporation or any other rules or trade practice, or to take
other necessary measures for supervision, within the limit necessary. In this case,
a hearing shall be held irrespective of the categories of procedures for hearing
statements of opinion under Article 13(1) of the Administrative Procedure Act.

(Rescission of Authorization, Suspension of Business, Dismissal of Officers, etc.

Due to Violation of Laws and Regulations, etc.)
Article 74 (1) When an Authorized Association has violated laws and regulations, a
disposition given by government agencies based on laws and regulations, or its
articles of incorporation or any other rules (hereinafter refe rred to as the "Laws

8
 and Regulations, etc." in this Article); or, despite the fact that a Member Firm, a
Financial Instruments Intermediary Service Provider, or an issuer of Over -the-
Counter Traded Securities or Tradable Securities has violated the Laws an d
Regulations, etc., or has committed an act contrary to the fair and equitable
principles of transactions specified in the articles of incorporation or any other
rules, the Authorized Association has failed to exercise its powers vested under
this Act, an order given under this Act, or its articles of incorporation or any other
rules, or to take any other necessary measures, for having such persons observe
the Laws and Regulations, etc. or the fair and equitable principles of transactions,
if the Prime Minister finds it necessary and appropriate for the public interest and
protection of investors, he/she may rescind the authorization of its establishment,
issue an order of suspension of all or part of its business, specifying a period of
suspension not exceeding one year, issue an order of change of its business
methods or of prohibition of a part of its business, issue an order of dismissal of its
Officers, or issue an order to take necessary measures specified in the articles of
incorporation or any other rules.
(2) When the Prime Minister intends to issue an order of suspension of all or part of
business, an order of change of business methods or of prohibition of a part of
business, or an order to take necessary measures specified in the articles of
incorporation or any other rules under the provisions of the preceding paragraph,
he/she shall hold a hearing irrespective of the categories of procedures for hearing
statements of opinion under Article 13(1) of the Administrative Procedure Act.

(Order for Production of Reports and Inspection)

Article 75 When the Prime Minister finds it necessary and appropriate for the
public interest or protection of investors, he/she may order an Authorized
Association, an issuer of Over-the-Counter Traded Securities or Tradable
Securities or a person who received entrustment of business from said Authorized
Association to submit reports or materials that will be helpful for understanding
the business or property of said Authorized Association, or have the officials
inspect the status of the business or property, or the books and documents or other
articles of said Authorized Association or the person who received entrustment of
business from said Authorized Association (with regard to the person who received
entrustment of business from said Authorized Association, the inspection shall be
limited to what is necessary to understand the business or property of said
Authorized Association).

(Documents to be Submitted to the Prime Minister)

Article 76 An Authorized Association shall submit the following documents to the
Prime Minister within three months from the date of the commencement of each
business year:
(i) the business summary report for the previous business year and the business
plan for the current business year;
(ii) the inventory of property as of the end of the previous business year; and
(iii) the statement on settlement of accounts for the previous business year and the
budget statements for the current business year.

Subsection 5 Miscellaneous Provisions

(Response, etc. to Complaints from Investors)

Article 77 (1) When an investor files an application for resolution of a complaint
concerning the business carried out by a Member Firm or a Financial Instruments
Intermediary Service Provider, an Authorized Association shall respond to a
request for consultation, provide necessary advice to the applicant, investigate the
circumstances pertaining to such complaint and notify said Member Firm or
Financial Instruments Intermediary Service Provider of the substance and content
of such complaint and demand that said Member Firm or Financial Instruments
Intermediary Service Provider should process the complaint expeditiously.
(2) When an Authorized Association finds it necessary for resolving the complaint

9
 pertaining to an application under the preceding paragraph, it may demand that
the relevant Member Firm or Financial Instruments Intermediary Service
Provider should provide a written or oral explanation or submit materials.
(3) When there has been a demand under the preceding paragraph from an
Authorized Association, a Member Firm or Financial Instruments Intermediary
Service Provider shall not refuse the demand without justifiable grounds.
(4) An Authorized Association shall fully inform its Member Firms or Financial
Instruments Intermediary Service Providers about any applications under
paragraph (1), circumstances pertaining to said complaints and the outcome of any
resolution.

(Mediation by Authorized Association)

Article 77-2 (1) When there is a dispute pertaining to sales and purchase or other
transactions of Securities or Derivative Transactions, etc. conducted by a Member
Firm or a Financial Instruments Intermediary Service Provider, any party to the
above transactions may file an application for mediation with an Authorized
Association, for the purpose of resolving such dispute.
(2) When an application under the preceding paragraph has been filed, an
Authorized Association shall appoint a mediator who has relevant knowledge and
experience and who has no special interest in the parties involved in the dispute
pertaining to said filing (hereinafter referred to as the "Case" in this Article) and
refer the Case to mediation of said mediator; provided, however, that a mediator
shall not conduct mediation when he/she finds that mediation is not suitable for a
Case in light of its nature, or that the party concerned has filed an application for
mediation for unjust purposes and without due course.
(3) A mediator may hear opinions of the parties or witnesses, request said p ersons to
submit reports, or request the parties to submit books and documents and other
articles that will be helpful; and may prepare a mediation plan necessary for
resolution of the Case and recommend the parties to accept said plan, as he/she
deems appropriate.
(4) In the case of the preceding three paragraphs, when a Financial Instruments
Intermediary Service Provider is a party concerned, its Entrusting Financial
Instruments Business Operators, etc. shall also be deemed the parties thereto.
(5) When there has been a demand under the provision of paragraph (3), a Member
Firm or a Financial Instruments Intermediary Service Provider shall not refuse
the demand without justifiable grounds.
(6) An Authorized Association shall be entitled to collect from the parties all or part
of the expenses incurred in relation to mediation.
(7) A mediator or a former mediator shall not divulge to another person or
misappropriate any confidential information learned during the course of his/her
duties.
(8) A mediator or a former mediator shall not use any information learned during the
course of his/her duties for purposes other than providing for use in relation to the
business of an Authorized Association.

(Entrustment of Mediation Service to Third Parties)

Article 77-3 (1) An Authorized Association may entrust the complaint resolution
service prescribed in Article 77(1) and the mediation service prescribed in
paragraph (1) of the preceding Article to a person who has the financial basis and
personnel structure required for conducting these services in an appropriate
manner.
(2) Notwithstanding the provision of the preceding paragraph, an Authorized
Association may not entrust the complaint resolution service and the mediation
service referred to in said paragraph to a person who falls under any of the
following items:
(i) a person who was sentenced under any provision of this Act, if a period of two
years has not yet elapsed since the day on which the person served out the
sentence or was exempted from the execution of the sentence;
(ii) a person whose authorization was rescinded under Article 74(1), if a period of

10
 two years has not yet elapsed from the date of rescission; or
(iii) a person, any of whose Officers in charge of its business fall under any of the
following conditions:
(a) a person who was sentenced to imprisonment or a heavier punishment or was
sentenced under any provision of this Act, if a period of two years has not yet
elapsed since the day on which the person served out the sentence or was
exempted from the execution of the sentence; or
(b) a person who was an Officer of an Authorized Association whose
authorization was rescinded under Article 74(1), if the person was an Officer
of the Authorized Association within at least 30 days before the rescission an d
a period of two years has not yet elapsed from the date of rescission.
(3) A person who is entrusted with the services under paragraph (1) may not entrust
the entrusted services to another person.
(4) The provisions of the preceding two Articles shall ap ply mutatis mutandis to the
services entrusted by an Authorized Association under paragraph (1).

(Enlightenment Campaigns Carried Out by Authorized Association, etc.)

Article 77-4 An Authorized Association shall endeavor to promote sound
development of Financial Instruments Business and protection of investors by
dissemination of financial knowledge, enlightenment campaigns and publicity
campaigns.

(Registration of Association)
Article 77-5 (1) An Authorized Association shall be registered pursuant to t he
provision of a Cabinet Order.
(2) An Authorized Association shall be established by registering its establishment
at the location of its principal office.
(3) The matters that require registration under the provision of paragraph (1) may
not be duly asserted against a third party until after the registration.

(Causes for Dissolution, etc. of Association)

Article 77-6 (1) An Authorized Association shall be dissolved based on the following
grounds:
(i) the occurrence of causes specified by the articles of incorporation;
(ii) a resolution of a general meeting;
(iii) the number of Member Firms has become 5 or less;
(iv) a decision of commencement of bankruptcy proceedings; or
(v) the rescission of authorization of establishment of an Authorized Association.
(2) A resolution of a general meeting concerning dissolution of an Authorized
Association shall not come into effect unless the authorization of the Prime
Minister thereon has been obtained.
(3) When an Authorized Association has been dissolved under the provision of item
(i) or (iii) of paragraph (1), the former representative person shall notify to that
effect to the Prime Minister without delay.
(4) With respect to an Authorized Association, when a decision of commencement of
bankruptcy proceedings or of conclusion of bankruptcy proceedings has been
rendered, or when a rescission of a decision of commencement of bankruptcy
proceedings or a decision of earlier termination of bankruptcy proceedings has
become final and binding, a court clerk shall notify the Prime Minister to that
effect.
(5) In addition to what is provided for in the preceding paragraphs, necessary
matters concerning the dissolution of Authorized Association shall be specified by
a Cabinet Order.

(Delegation to Cabinet Office Ordinance)

Article 77-7 The procedures for implementation of the provisions of Article 67 to the
preceding Article inclusive and any other matters necessary for enforcement
thereof shall be specified by a Cabinet Office Ordinance.

11
 Self-regulatory Regulations

〔Customer Management and Internal Management by Association Member〕

 Rules Concerning Solicitation for Investments and Management of Customers, Etc. by
Association Members
 Rules Concerning Establishment of Confidential Corporate Information Management
System by Association Members
 Rules Concerning Change, Etc. of Assessment Rates for Substitute Securities Related to
Margin Transactions
 Rules Concerning Establishing a Trade Compliance Screening System for the
Prevention of Unfair Trading
 Rules Concerning Proper Handling of Pre-Hearing by Association Members
 Rules Concerning Establishment of Order Management System by Association
Members
 Rules Concerning Handling of Block Trade for Intermediation Purpose
 Rules Concerning Acceptance, Etc. of Deposit of Securities
 Detailed Rules Related to the Rules Concerning Acceptance of Deposit, Etc. of
Securities
 Rules Concerning Appropriate Implementation of Separate Management of Customer
Assets by Regular Members
 Rules Concerning Internal Administrators, Etc. of Association Members
 Detailed Rules Related to the Rules Concerning Internal Administrators, Etc. of
Association Members
 Rules Concerning Application for Confirmation, Examination, Confirmation, Etc. of
Incidents
 Rules concerning uniform accounting regulations of securities-related business
 Rules Concerning Handling of Documents Delivery, Etc. Through Electromagnetic
Method
 Rules Concerning Financial Instruments Intermediary Service Providers
 Rules Concerning Protection, Etc. of Customers From Fraudulent Withdrawal Using
Counterfeit or Stolen Card
 Rules Concerning Planning, Etc. of Business Continuity Management in Case of
Emergency by Regular Members
 Rules Concerning Elimination of Relationships with Antisocial Forces

〔Relating to Employees and Sales Representatives of Association Members〕

 Rules Concerning Employees of Association Members
 Detailed Rules Related to the Procedures of Handling Perpetrator of Inappropriate
Acts Prescribed in Chapter IV of the Rules Concerning Employees of Association
1
 Members
 Rules Concerning Sale and Purchase, Etc. of Specified Securities, Etc. of Listed
Companies, Etc. by Employees of Association Members
 Rules Concerning Qualification and Registration, Etc. of Sales Representatives of
Association Members
 Detailed Rules Relating to the Rules Concerning Qualification and Registration, Etc. of
Sales Representatives of Association Members
 Rules Concerning Qualification Examination for Sales Representatives, Etc.

〔Relating to Advertising〕
 Rules Concerning Representation of Advertising, Etc. and Offer of Premiums
 Rules Concerning Handling of Analyst Reports

〔Relating to Personal Information Protection〕

 Guideline for Protection of Personal Information
 Rules Concerning Securement of Proper Handling of Personal Information by
Association Members
 Rules Concerning Complaint Processing Operation Related to Handling of Personal
Information

〔Relating to Stocks〕
 Rules Concerning Over-The-Counter Securities
 Rules Concerning Investment Crowdfunding
 Rules Concerning Stock Community
 Rules Concerning Green Sheet Issues and Phoenix Issues
 Detailed Rules Concerning Report to the Association on Company Information, Etc. by
Companies, Etc. Issuing Green Sheet Issues and Phoenix Issues
 Detailed Rules Related to the Rules Concerning Green Sheet Issues and Phoenix Issues
 Rules Concerning Sale and Purchase, Etc. of the Listed Share Certificates, Etc.
Conducted Outside of a Financial Instruments Exchange Market
 Detailed Rules Relating to the Rules Concerning Sale and Purchase, Etc. of the Listed
Share Certificates, Etc. Conducted Outside of a Financial Instruments Exchange
Market
 Rules Concerning Transaction Subject to Closing Price and Associated Proprietary
Transactions
 Rules Concerning Handling of Cumulative Stock Investment and Mini Investment in
Stocks
 Rules Concerning Handling for Borrowing and Lending Transactions of Share
2
 Certificates, Etc.
 Rules Concerning Underwriting, Etc. of Securities
 Detailed Rules Relating to the Rules Concerning Underwriting, Etc. of Securities
 Rules Concerning Distribution to Customers Related to Underwriting, Etc. of Public
Offering, Etc. of Share Certificates, Etc.
 Rules Concerning Handling of Allotment of New Shares to Third Party, Etc.

〔Relating to Bonds〕
 Rules Concerning Publication of Over-The-Counter Trading Reference Prices, Etc. and
Trading Prices of Bonds
 Detailed Rules Relating to the Rules Concerning Publication of Over-The-Counter
Trading Reference Prices, Etc. and Trading Prices of Bonds
 Rules Concerning Publication, Etc. of Over-The-Counter Quotation of Corporate Bonds,
Etc. for Retail Customers
 Rules Concerning Solicitation, Etc. of Sale and Purchase, Etc. of Domestic CPs Etc. and
Private Placement Corporate Bonds
 Rules Concerning Handling of Sale and Purchase of Bonds with Options
 Rules Concerning Handling of Conditional Sale and Purchase of Bonds, Etc.
 Rules Concerning Handling of Sale and Purchase of Bonds, Etc. with Delayed
Settlement
 Rules Concerning Handling of Short Selling, and Borrowing and Lending Transactions
of Bonds

〔Relating to Foreign Products and Transactions〕

 Rules Concerning Foreign Securities Transactions
 Rules Concerning Foreign Securities Futures Transactions, Etc.

〔Relating to Securitized Products〕

 Rules Concerning Distributions, Etc. of Securitized Products Standardized Information
Reporting Package (SIRP) PDF/Excel

〔Relating to Derivatives〕
 Rules Concerning CFD Transactions
 Rules Concerning Binary Option Transactions

〔Relating to Code of Ethics〕

 Rules Concerning Maintenance of and Compliance with Ethical Code by Association
Members
3
 Noriyuki Yokoo
Enterprise Compliance Specialist, Securities
Business Division
Financial Services Agency
15 April 2016
1

Supervision of Authorized Financial Instruments

Firms Association
 Authorization of Establishment (Article67-2)
A Financial Instruments Business Operator who intends to establish an Authorized Association shall obtain an
authorization from the Prime Minister.
 Prohibition of Pursuit of Profit (Article67-7)
An Authorized Association shall not conduct any business for profit.

 Matters Which Must be Stated in Articles of Incorporation (Article 67-8(1))

(x) matters related to preparation of rules
(xiv) matters related to investigation of Member Firms, etc.
 Dispositions Rendered to Member Firms (Article68-2)
An Authorized Association shall stipulate in its articles of incorporation that the Authorized Association shall
impose a fine for default, order said Member Firm to suspend or limit the rights of a Member Firm or shall expel
said Member Firm from the Authorized Association.
 Order for Production of Reports and Inspection (Article75)
When the Prime Minister finds it necessary and appropriate for the public interest or protection of investors, he/she may
order to submit reports that will be helpful for understanding the business or property of said Authorized Association, or
have the officials inspect the books and documents or other articles of said Authorized Association.

 Rescission(Revocation) of Authorization, etc. (Article74)

If the Prime Minister finds it necessary and appropriate for the public interest and protection of investors, he/she may
rescind the authorization of its establishment, issue an order of suspension of all or part of its business, or issue an order to
take necessary measures specified in the articles of incorporation or any other rules.
2

1
 Self-Regulation
Rulemaking
Enactment, revision, or repeal of rules are decided at Self-regulation
Board. (Please see attached sheet for current self-regulation rule)
Inspection
Inspection of Regular Members and Special Members
※Cooperation with SESC and TSE (Japan Exchange Regulation)

Disciplinary Action
Disciplinary action against member firm or employee with regard to
violations of laws and regulations.
※Other than above, disciplinary action against sales representative delegated by law.
Activities to promote public awareness
Seminar, publication material, dispatch of lecturer, etc.
※Furthermore, SROs focus on school education
3

Registration affairs concerning

a Sales Representative
Registration of the Sales Disciplinary Action against
Qualification Examination for

Representative the Sales Representative

the Sales Representative

Business Suspension

(Note)
Deletion of Registration
Change of Registration

of up to two years
New Registration

Sales Representative
conduct the Business of
is treated as the perpetrator
must not have a person who
An Association Member
Revocation of
Registration

※Refusal of Registration: The persons whose registrations as Sales Representatives was revoked,
and for whom it is less than five years since the date of revocation.
※Type of Sales Representative: Class-1 Sales Representative, Margin Transaction Sales
Representative, Class-2 Sales Representative, Special Member’s Class-1 Sales Representative,
Special Member’s Class-2 Sales Representative, Special Member’s Class-4 Sales Representative
※Registered Sales Representatives require to take the training course for Renewal of the Sales
Representative Qualification every five years. 4

2
Thank you

3
 Supervision systems of
Financial Instruments Markets
2016/4/15
JFSA

1.Trading Value of each Financial Instruments

Exchange
Trading Value （2015）

Tokyo Stock Nagoya Stock Sapporo Securities Fukuoka Stock

Exchange, Inc. Exchange, Inc. Exchange *1 Exchange *1

¥billion 748,567 132 70 20

$billion 6,500 1 0.6 0.1

Ratio 99.970% 0.018% 0.009% 0.003%

*1 Financial Instruments Membership Corporations

Number of Listed Companies （As of the end of 2015）

Tokyo Stock Nagoya Stock Sapporo Securities Fukuoka Stock

Exchange, Inc. Exchange, Inc. Exchange *1 Exchange *1

3,502 295 57 112

Ratio 88.3% 7.4% 1.4% 2.8%

*1 Financial Instruments Membership Corporations

1
 2.Financial Instruments and Exchange Act
(Act No. 25 of April 13, 1948)
Chapter V Financial Instruments Exchange
○Section 1 General Provisions (Article 80 - Article 87-9)
○Section 2 Financial Instruments Membership Corporation and Self-Regulation
Organization; and Stock Company Which Establishes Financial Instruments
Exchange Market (Article 88 - Article 109)
Subsection 1 Financial Instruments Membership Corporation (Article 88 - Article 102)
Subsection 1-2 Self-Regulation Organization (Article 102-2 - Article 102-39)
Subsection 2 Stock Company which Establishes Financial Instruments (Article 103 - Article 109)
○Section 3 Sales and Purchase of Securities, etc. in Financial Instruments (Article
110 - Article 133)
○Section 4 Dissolution, etc. of Financial Instruments Exchange (Article 134 - Article
147)
○Section 5 Supervision (Article 148 - Article 153-4)
○Section 6 Miscellaneous Provisions (Article 154 and Article 154-2)
2

Subsection 1 Financial Instruments Membership Corporation Subsection 1-2 Self-Regulation Organization Subsection 2 Stock Company Which Establishes Financial Instruments
Exchange Markets
Division 1 Establishment Division 1 Establishment
Division 1 General Provisions
Article 88 (Juridical Personality) Article 102-2 (Juridical Personality)
Article 88-2 (Founder) Article 102-3 (Founder)
Article 88-3 (Articles of Incorporation) Article 102-4 (Articles of Incorporation) Article 103 (Articles of Incorporation)
Article 88-4 (Organizational Meeting) Article 102-5 (Organizational Meeting) Article 103-2 (Restrictions on Holdings of Voting Rights)
Article 88-5 (Voting Rights of Prospective Members) Article 102-6 (Provisions Applied Mutatis Mutandis) Article 103-3 (Submission of Notification of Holding Subject Voting Rights)
Article 88-6 (No Voting Rights) Article 103-4 (Order for Production of Report and Inspection for Person
Article 88-7 (Handing Over of Affairs to President) Who Submits Notification of Holding Subject Voting Rights)
Article 88-8 (Change of Articles of Incorporation) Article 104 (Public Inspection of Total Number of Issued Shares, etc.)
Article 88-9 (Capacity to Commit Tortious Act, etc.) Article 104-2 (Eligibility, etc. of Directors, etc.)
Article 88-10 (Address) Article 105 (Authorization for Reduction of Capital, etc.)
Article 88-11 (Inventory of Assets and Directory of Members) Article 105-2 (Special Provisions for Officers)
Article 88-12 (Restrictions on Authority of Representation of Board Article 105-3 (Request for Investigation by Court)
Members)
Article 88-13 (Conflicts-of-Interest) Division 2 Self-Regulating Committee
Article 88-14 (Ordinary General Meetings)
Article 88-15 (Extraordinary General Meeting) Article 105-4 (Authority, etc.)
Article 88-16 (Convocation of General Meetings) Article 105-5 (Organization)
Article 88-17 (Execution of Business) Article 105-6 (Term of Office)
Article 88-18 (Matters for Resolution of General Meeting) Article 105-7 (Removal from Positions, etc.)
Article 88-19 (Voting Rights of Members) Article 105-8 (Election and Dismissal of Directors)
Article 88-20 (No Voting Rights) Article 105-9 (Handling of Emergent Cases)
Article 88-21 (Jurisdiction over Appointment of Special Agent) Article 105-10 (Enjoinment of Acts of Executive Officers or Directors)
Article 88-22 (Application Mutatis Mutandis of Companies Act) Article 102-7 (Application Mutatis Mutandis of Companies Act) Article 105-11 (Treatment of Change in Operational Rules, etc.)
Article 105-12 (Convenor)
Division 2 Registration Division 2 Registration Article 105-13 (Request for Convocation)
Article 105-14 (Convocation Procedures)
Article 89 (Establishment) Article 102-8 (Establishment) Article 105-15 (Resolution)
Article 89-2 (Registration) Article 102-9 (Registration) Article 105-16 (Minutes)
Article 89-3 (Registration in District of Location of Secondary Offices) Article 102-10 (Application Mutatis Mutandis of Provisions Regarding Article 105-17 (Omission of Report)
Article 89-4 (Registration of Relocation of Office) Registration Procedures) Article 105-18 (Public Inspection)
Article 89-5 (Registration of Change) Article 106 (Decisions on Execution of Duties of Self-Regulating
Article 89-6 (Registration of Provisional Disposition to Suspend Execution Committee)
of Duties, etc.) Article 106-2 (Attendance of Company Auditors, etc.)
Article 89-7 (Jurisdiction of Registration)
Article 89-8 (Application for Registration of Establishment) Division 3 Major Shareholders
Article 89-9 (Documents to be Attached to Application for Registration of
Change) Article 106-3 (Authorization, etc.)
Article 90 (Application Mutatis Mutandis of Commercial Registration Act, Article 102-11 (Application Mutatis Mutandis of Commercial Registration Act, Article 106-4 (Criteria for Authorization)
etc.) etc.) Article 106-5 (Application Mutatis Mutandis of Provisions Regarding
Refusal, etc. of Authorization)
Division 3 Members Division 3 Membership Article 106-6 (Order for Production of Report and Inspection)
Article 106-7 (Disposition for Supervision)
Article 91 (Qualification of Members) Article 102-12 (Qualification of Members) Article 106-8 (Lapse of Authorization)
Article 92 (Contribution and Liability) Article 102-13 (Provisions Applied Mutatis Mutandis) Article 106-9 (Application Mutatis Mutandis of Provisions Regarding
Article 93 (Transfer of Equity) Subject Voting Rights)
Article 94 (Voluntary Withdrawal)
Article 95 (Statutory Withdrawal) Division 4 Financial Instruments Exchange Holding Company
Article 96 (Refund of Equity)
Article 106-10 (Authorization, etc.)
Division 4 Self-Regulation Related Services Article 106-11 (Application for Authorization)
Article 106-12 (Criteria for Examination for Authorization)
Article 102-14 (Self-Regulation Related Services by Self-Regulation Article 106-13 (Application Mutatis Mutandis of Provisions Regarding
Organization) Refusal, etc. of Authorization)
Article 102-15 (Application for Authorization) Article 106-14 (Limitation on Holding of Voting Rights)
Article 102-16 (Criteria for Authorization) Article 106-15 (Submission of Notification of Holding Subject Voting Rights)
Article 102-17 (Application Mutatis Mutandis of Provision Concerning Article 106-16 (Order for Production of Report and Inspection for Person
Hearing) Who Submits Notification of Holding Subject Voting Rights)
Article 102-18 (Entrusted Services) Article 106-17 (Authorization, etc. Pertaining to Major Shareholders)
Article 102-19 (Prohibition of Re-entrustment) Article 106-18 (Criteria for Authorization Concerning Major Shareholders)
Article 102-20 (Termination of Entrustment Relations) Article 106-19 (Application Mutatis Mutandis of Provisions Regarding
Refusal, etc. of Authorization)
Division 4 Administration Division 5 Administration Article 106-20 (Order for Production of Report and Inspection for Major
Shareholders)
Article 97 (Restriction on Business) Article 102-21 (Restriction on Services) Article 106-21 (Dispositions Rendered to Major Shareholders for Purpose of
Article 102-22 (Scope of Services) Supervision)
Article 98 (Appointment of Officers, etc.) Article 102-23 (Appointment of Officers, etc.) Article 106-22 (Loss of Authorization Regarding Major Shareholders)
Article 99 (Duties of Officers) Article 102-24 (Duties, etc. of Officers) Article 106-23 (Scope of Business)
Article 102-25 (Term of Office, etc. of Board Members) Article 106-24 (Scope of Subsidiary Company)
Article 102-26 (Attendance at Board of Directors Meetings by Board Article 106-25 (Application Mutatis Mutandis of Provisions Regarding
Members) Refusal, etc. of Authorization)
Article 102-27 (Holding of Council)
Article 102-28 (Request for Convocation of Council by Board Members)
Article 106-26 (Rescission of Authorization)
Article 106-27 (Order for Production of Report and Inspection) 3

2
 Article 102-29 (Convocation Procedures of Council) Article 106-28 (Dispositions Rendered for Purpose of Supervision)
Article 102-30 (Resolution of Council) Article 107 (Loss of Authorization)
Article 102-31 (Minutes) Article 108 (Application Mutatis Mutandis of Provisions Regarding
Article 102-32 (Treatment of Change in Operational Rules, etc.) Subject Voting Rights)
Article 102-33 (Advice on Necessary Measures by Council) Article 109 (Application Mutatis Mutandis of Provisions Regarding
Article 102-34 (Report on Business to Council) Dispositions Rendered for Purpose of Supervision)
Division 5 Dissolution Division 6 Dissolution
Article 100 (Causes for Dissolution) Article 102-35 (Causes for Dissolution of Self-Regulation Organization)
Article 100-2 (Distribution of Residual Assets) Article 102-36 (Application Mutatis Mutandis of Provisions Regarding
Article 100-3 (Period of Registration of Dissolution) Dissolution Procedures)
Article 100-4 (Registration of Completion of Liquidation)
Article 100-5 (Documents to be Attached to Application for Registration of
Dissolution)
Article 100-6 (Documents to be Attached to Application for Registration of
Completion of Liquidation)
Article 100-7 (Commencement of Bankruptcy Proceedings)
Article 100-8 (Financial Instruments Membership Corporation in
Liquidation)
Article 100-9 (Appointment of Liquidator by Court)
Article 100-10 (Dismissal of Liquidators)
Article 100-11 (Duties and Authority of Liquidator)
Article 100-12 (Request, etc. for Filing of Claims)
Article 100-13 (Filing of Claims after Lapse of Period)
Article 100-14 (Commencement of Bankruptcy Proceedings of Financial
Instruments Membership Corporations in Liquidation)
Article 100-15 (Supervision by Court)
Article 100-16 (Filing of Completion of Liquidation)
Article 100-17 (Application Mutatis Mutandis of Companies Act) Article 102-37 (Application Mutatis Mutandis of Companies Act)
Article 100-18 (Jurisdiction of Cases Regarding Liquidators)
Article 100-19 (Appeal on Judicial Decision for Appointment of Liquidators)
Article 100-20 (Remuneration of Liquidators)
Article 100-21 (Dismissal of Liquidator)
Article 100-22 (Appointment of Inspector)
Article 100-23 (Request for Investigation, etc. by Court)
Article 100-24 (Capacity of Liquidators to Commit Tortious Acts) Article 102-38 (Capacity of Liquidators to Commit Tortious Acts, etc.)
Article 100-25 (Application Mutatis Mutandis of Commercial Registration Article 102-39 (Application Mutatis Mutandis of Commercial Registration
Act) Act)
Division 6 Entity Conversion
Article 101 (Entity Conversion from Membership-Type Financial
Instruments Exchange into Stock Company-Type Financial
Instruments Exchange)
Article 101-2 (Entity Conversion Plan)
Article 101-3 (Keeping and Inspection, etc. of Documents, etc. Concerning
Entity Conversion Plan)
Article 101-4 (Objection by Creditors)
Article 101-5 (Keeping and Inspection, etc. of Documents, etc. on Progress,
etc. of Entity Conversion Procedures)
Article 101-6 (Allotment of Shares to Member)
Article 101-7 (Amount to Be Included in Stated Capital)
Article 101-8 (Amount to Be Included in Capital Reserve, etc.)
Article 101-9 (Issuance of Shares upon Entity Conversion)
Article 101-10 (Application, etc. for Shares Issued upon Entity Conversion)
Article 101-11 (Allotment of Shares Issued upon Entity Conversion)
Article 101-12 (Subscription for Shares Issued upon Entity Conversion)
Article 101-13 (Performance of Contribution)
Article 101-14 (Timing of Shareholder Status)
Article 101-15 (Restriction on Invalidation or Rescission of Subscription)
Article 101-16 (Contribution of Property Other than Money)
Article 101-17 (Authorization for Entity Conversion)
Article 101-18 (Criteria for Authorization)
Article 101-19 (Coming into Effect of Entity Conversion)
Article 101-20 (Registration)
Article 102 (Action Seeking Invalidation of Entity Conversion)

3.Organization chart of TSE and NSE

Japan Exchange Group, Inc.
Management and administration of subsidiary financial instruments
exchanges and self-regulatory organization

Tokyo Stock Exchange, Inc. Japan Exchange Regulation, Inc. Nagoya Stock Exchange, Inc.
General General
Meeting of
Meeting of Meeting of
Shareholders Audit
Shareholders Members
Committee
Board of Auditors Auditors
Auditors Office Auditors Office Auditors

Auditors Advisory
Committee
Board of President General Board of General Board of General Affairs
President President
Directors & CEO Administration Governors Administration Directors Div.
Listing Sales
Listing
Examination Promotion Div.
Advisory Board of Board of Committee
Advisory Standing
Executive Executive Listed of the Self-Regulation
Committees Equities Committees Committees
Officers Officers Company Executive Div.
Market Market
Operating Compliance officers
Information Discipline Structure
Operation Div.
Committee Services Trading Self-
Participants Regulation
Clearing &
Examination &
Settlement Disciplinary
Inspection
Trading
Market
participants
Surveillance &
Compliance
New Listings
International
Market Surveillance
Business Office
Development
IT
Administration
IT
Development

IT Services
SRO 5

3
4.Definition of Self-Regulation Related Services

○ Financial Instruments and Exchange Act

① Business related to listing and delisting of financial instruments
(article84, paragraph2, item(ⅰ))
② Investigation of the status of observance by the member of the law
(article84, paragraph2, item(ⅱ))

○ Cabinet Office Ordinance concerning financial instrument market

① Examinations of securities trading (article7, item(ⅰ))
② Examination of qualification for members (article7, item(ⅱ))
③ Disciplinary action against members (article7, item(ⅲ))
④ Examination on information disclosure (article7, item(ⅳ))

4.(reference) Laws and regulations regarding Self-

Regulation Related Services
○Financial Instruments and Exchange Act
Article84 (Self-Regulation Related Services)
(2) The term "Self-Regulation Related Services" set forth in the preceding paragraph shall mean the following services
conducted in relation to a Financial Instruments Exchange:
(i) Business related to listing and delisting of financial instruments, Financial Indicators and Options
(ii)Investigation of the status of observance by the Member, etc. of the laws and regulations, dispositions given by
government agencies based on laws and regulations, or the articles of incorporation or other rules, or the fair and
equitable principles of transactions.
(iii)Other business specified by a Cabinet Office Ordinance as that which may be necessary for ensuring fairness in
transactions on a Financial Instruments Exchange Market.

○Cabinet Office Ordinance concerning financial instrument market

Article7 The business specified by Cabinet Office Ordinance, as referred to in Article 84, paragraph(2), item (ⅲ) of the
act, shall be as follows:
(i) Detailed Examinations of securities trading or market derivatives trading carried out by the members, etc. in the
exchange financial instruments market (excluding examination instantaneously carried out for expediting securities
trading or market derivatives trading in the exchange financial instruments market)
(ii) Examination of qualifications of the members, etc.
(iii) Operations related to disposition and any other measures against the members, etc.
(iv) Examinations on information disclosure by the issuer of listed securities with regard to the issuer, and operations
regarding disposition and other measures to be taken against the issuer of listed securities

4
 5-1.Legal structure of Financial Instruments
Exchange
（１）A person who wants to establish a Financial Instruments Market
has to obtain a license from the Prime Minister. (Article 80)
(Licensing)
Article 80 (1) With the exception of an Authorized Financial Instruments Business Association, a
person must not operate a Financial Instruments Market unless it is licensed by the Prime Minister.

（２）A person who intends to obtain a license shall submit an

application for license containing the the articles of incorporation,
the operational rules, and the brokerage contract rules. (Article 81(2))
(Application for License)
Article 81 (1) A person seeking the license referred to paragraph (1) of the preceding Article must submit
a written license application to the Prime Minister, in which the person states the following particulars:
(2) The articles of incorporation, the operational rules, the brokerage contract rules, and other
documents specified by a Cabinet Office Ordinance shall be attached to the application for
license under the preceding paragraph.
※Matters to Be Stated in Operational Rules (Article 117)
○Trading Participant Regulations ○Clearing and Settlement Regulations ○Margin/Loan Trading
Regulations ○Securities Listing Regulations
※Brokerage Contract Rules and Matters to Be Stated Therein (Article 133)
○The conditions for becoming entrusted with the purchase and sale of Securities, etc.
○Clearing and Settlement Regulations 8

5-2.Legal structure of Financial Instruments

Exchange
（３）A Financial Instruments Exchange needs to conduct the Self-
Regulation Related Services. (Article 84)
A Financial Instruments Exchange can entrust all or part of the
Self-Regulation Related Services to a Self-Regulation Organization.
(Article 85)
(Self-Regulatory Services)
Article 84 (1) A Financial Instruments Exchange must perform Self-Regulatory Services in an appropriate manner, in
accordance with this Act and with its articles of incorporation and other rules, in order to ensure the fair purchase and sale of
Securities and Market Transactions of Derivatives on the Financial Instruments Exchange Market, as well as to protect
investors.
(2) The term "Self-Regulatory Services" as used in the preceding paragraph means the following services conducted in respect
of a Financial Instruments Exchange:
(i) services related to the listing and delisting of Financial Instruments, Financial Indicators, and Options;
(ii) the investigation of Members', etc. compliance with laws and regulations, dispositions by government agencies which are
based on laws and regulations, with the articles of incorporation and other rules, and with the principle of good faith in
transactions; and
(iii) other services specified by Cabinet Office Ordinance as necessary for ensuring fairness in transactions on a Financial
Instruments Exchange Market.

(Entrustment of Self-Regulatory Services)

Article 85 (1) With the authorization of the Prime Minister, a Financial Instruments Exchange may entrust the whole or part of the Self-
Regulatory Services of the Financial Instruments Exchange to a self-regulatory organization.
9

5
 5-3.Legal structure of Financial Instruments
Exchange
（４）And a Financial Instruments Exchange needs to follow the
regulations below. (Article 148 - Article 153)

①Rescission of License (Article 148)

(Rescission of a License)
Article 148 If a Financial Instruments Exchange is discovered to have fallen under one of the categories in the
items of Article 82, paragraph (2) at the time it obtained its license, the Prime Minister may rescind its license.

②Authorization, etc. of Amendment of Articles of Incorporation, etc.

(Article 149)
(Authorization to Change the Articles of Incorporation)
Article 149 (1) A Financial Instruments Exchange must obtain the authorization of the Prime Minister if it seeks
to change its articles of incorporation, operational rules, or brokerage contract rules.
(2) If a particular set forth in Article 81, paragraph (1), item (ii) or (iii) changes, the Financial Instruments
Exchange must notify the Prime Minister of this without delay. The same applies if the rules of a Financial
Instruments Exchange are prepared, if they change, or if they are discontinued, or if all business conducted with
the authorization referred to in the proviso to Article 87-2, paragraph (1) is discontinued.
10

5-4.Legal structure of Financial Instruments

Exchange
③Dismissal of Officers (Article 150)
(Dismissal of Officers)
Article 150 (1) If the Prime Minister discovers that a person has become the officer of a Financial
Instruments Exchange by wrongful means, or if the officer of a Financial Instruments Exchange violates
a law or regulation, the articles of incorporation, or a disposition by a government agency which is
based on a law or regulation, the Prime Minister may order the Financial Instruments Exchange to
dismiss that officer.

④Order for Production of Report and Inspection (Article 151)

(Collection of Reports and Inspections)

Article 151 Whenever the Prime Minister finds it to be necessary and appropriate in the public interest
or for the protection of investors, the Prime Minister may order a Financial Instruments Exchange, its
Subsidiary Company, an Issuer of Securities listed on a Financial Instruments Exchange, or the person
that a Financial Instruments Exchange has entrusted with it business, to submit reports or materials
that should serve as a reference with regard to the business or assets of the Financial Instruments
Exchange or its Subsidiary Company, or may have the relevant officials inspect the state of the
business or assets, or the books and documents or any other articles, of a Financial Instruments
Exchange, its Subsidiary Company, or the person that a Financial Instruments Exchange has entrusted
with its business.

11

6
 5-5.Legal structure of Financial Instruments
Exchange
Rescission of Registration
⑤Disposition Rendered to a Financial Instruments or
Exchange for Purpose of Supervision (Article 152) Business Suspension Orders
a. When it violates a law or regulation , a disposition by a government agency which is
based on a law or regulation , or the articles of incorporation or any other rules
b. When the conduct of the Financial Instruments Exchange,etc. is found to be harmful
to the public interest or to the protection of investors
(Supervisory Measures for Financial Instruments Exchanges)
Article 152 (1) If a Financial Instruments Exchange falls under a case specified in one of the following items and the Prime Minister finds it to be necessary and appropriate in the public
interest or for the protection of investors, the Prime Minister may issue the disposition provided for in the relevant item:
(i) if it violates a law or regulation, a disposition by a government agency which is based on a law or regulation, ( omitted ) or the articles of incorporation or any other rules; or, even though
a Member, etc. or an Issuer of Securities listed by a Financial Instruments Exchange has violated a law or regulation, a disposition by a government agency which is based on a law or
regulation, or the Financial Instruments Exchange‘s articles of incorporation, operational rules, brokerage contract rules, or any other rules (hereinafter referred to as "Laws and
Regulations, etc." in this item), or has engaged in an act that is contrary to the principle of good faith in transactions as specified in the articles of incorporation or any other rules, the
Financial Instruments Exchange fails to exercise the powers accorded it under this Act, an order based on this Act, or its articles of incorporation or any other rules, or to take any other
necessary measures to cause the person to observe the Laws and Regulations, etc. or the principle of good faith in transactions:
・rescinding the license referred to in Article 80, paragraph (1), ordering the suspension of all or a part of its business activities during a fixed period of no longer than one year, ordering a
change in its business activities, issuing an order prohibiting a part of its business activities, ordering the dismissal of its officers, or ordering the Financial Instruments Exchange to take
the necessary measures specified in the articles of incorporation or any other rules;
(ii) if the conduct of the Financial Instruments Exchange, or the status of purchase and sales of Securities or Market Transactions of Derivatives on a Financial Instruments Exchange Market
operated by the Financial Instruments Exchange, is found to be harmful to the public interest or to the protection of investo rs:
・ordering the suspension of all or a part of purchase and sales of Securities or Market Transactions of Derivatives on the Financial Instruments Exchange Market during a fixed period of no
longer than 10 days, or, subject to a cabinet decision, ordering the suspension of all or a part of its business during a fixed period of no longer than three months;

⑥Order to Improve Business Operation (Article 153)

(Business Improvement Orders)
Article 153 If the Prime Minister finds it to be necessary and appropriate in the public interest or for the protection of investors as concerns a Financial Instruments Exchange's
articles of incorporation, operational rules, brokerage contract rules, other rules, or it trade practices, or as concerns its business operations or the state of its assets, the Prime
Minister, within the scope of this necessity, may order the Financial Instruments Exchange to change its articles of incorporation, operational rules, brokerage contract rules,
other rules, or its trade practices, or to take measures that are necessary from a supervisory perspective. 12

6-1.Cases in which administrative action has been

taken（Insufficient listing examination）
May 24, 2004, Business Improvement Administrative Order against Tokyo Stock
Exchange
 ARDEPRO co.,Ltd. (house agent) has its license (building lots and buildings
transaction business) revoked shortly after being listed, and was unable to
operate its primary business.
 When conducting the listing examination of ARDEPRO, TSE failed to conduct
the proper check on the license status.
 And TSE didn’t take sufficient measures to inform investors of this fact.
 FSA issued business improvement order pursuant to the provision of article
153 of the act.
Article 153 When the Prime Minister finds it necessary and appropriate with regard to a Financial
Instruments Exchange's articles of incorporation, operational rules, brokerage contract rules or any
other rules or trade practice, of a Financial Instruments Exchange or its business operation or the
status of its property for the public interest or protection of investors, he/she may order the
Financial Instruments Exchange to change its articles of incorporation, operational rules, brokerage
contract rules or any other rules or trade practice, or to take other necessary measures for
supervision, within the limit necessary.
13

7
 Business Improvement Administrative Order
against Tokyo Stock Exchange
May 24, 2004
Financial Services Agency
1.ARDEPRO Co., Ltd. (''ARDEPRO''), which was listed on the Mothers section of the Tokyo Stock Exchange (''TSE'') on March 18, 2004, had its license for building lots and
buildings transaction business revoked by the Tokyo Metropolitan Government on April 8, shortly after being listed, and was thus unable to engage in the business of
selling existing apartments, which is its primary business.
2.The following problems were identified as a result of confirming how listing examination and listing supervision was conducted by TSE with respect to ARDEPRO.
(1) As ARDEPRO is primarily engaged in the business of selling existing apartments, it needs to be licensed for building lots and buildings transaction business. When
conducting the listing examination of ARDEPRO, confirmation is deemed necessary in regard to the term of validity stipulated in Article 3 of the Building Lots and
Buildings Transaction Business Law (Law No.176, 1952) and whether or not there are reasons for revoking the license under the provision of Article 66 of the Law.
However, no such procedures were taken during the listing examination by TSE.
(2) ARDEPRO had its license revoked on April 8, shortly after being listed on the Mothers section. Since then, it could not engage in the business of selling existing
apartments, which is its primary business, until it was issued a new license on May 21. However, TSE did not take sufficient measures to inform investors of this fact.
3.Although these acts do not violate the Securities and Exchange Law or regulations of the Tokyo Stock Exchange, they may undermine the confidence of investors. TSE's
listing examination and listing supervision framework must therefore be corrected promptly.
4.Accordingly, TSE was ordered to make the following business improvements and to report on the situation by June 18, 2004 under the provision of the first paragraph
of Article 153 of the Securities and Exchange Law.
(1) In cases where a company applying for a listing is required to keep business license from a government ministry or agency to run its primary business, it is necessary
to confirm the term of validity of the license and whether or not there are reasons for revoking the license, and take measures to protect investors, such as properly
asking the listed company to disclose the confirmed information. TSE must review the listing examination framework and establish a framework for taking such
measures.
(2) In cases where the listed company cannot run its primary business, it is necessary to take measures to alert investors, such as assigning it to the supervision post in a
timely and appropriate manner. TSE must review the listing control framework and establish a framework for taking such measures.
(3) Other measures to improve the situation must also be taken as deemed necessary by TSE, in consideration of this latest problem.
5.Others
TSE was ordered to provide a report on the following matters regarding its responses up to this point, in addition to the status of business improvement over the issues
mentioned above.
(1) A detailed account of the listing examination, regarding the forecasts for ARDEPRO's future business operations. In particular, the reasons for not confirming the term
of validity of its license and that it did not correspond to reasons for revoking the license.
(2) A detailed account of TSE's responses after learning that ARDEPRO's license was revoked. In particular, the reasons why it was not assigned to the supervision post.

14

6-2.Cases in which administrative action has been

taken(Insufficient IT management system)

Aug 24, 2012, Business Improvement Administrative

Order against Tokyo Stock Exchange
 TSE derivative trading system was down from 9:18
am to 10:55 am on August 7, 2012.
 TSE also had same trouble on February 2,2012. Its
management system was insufficient.
 FSA issued business improvement order pursuant to
the provision of article 153 of the act.

15

8
 Cooperation
with SROs
Securities and Exchange
Surveillance Commission
15 April, 2016
Kaoru Murakami
Deputy Director for Coordination Division

Legal Framework
JFSA,SESC
Financial Instruments and Exchange Act (FIEA)

Act Order for Enforcement of the

Financial Instruments and
Exchange Act
Cabinet Order
Cabinet Office Ordinance on
Financial Instruments
Business, etc.
More Ministerial Order
detailed
Manual for On-Site Inspection Guideline for Off-Site Supervision

SESC Inspection Manual JFSA Guideline for Supervision

SRO
Self-regulatory regulations
1

1
 1.Cooperation with SROs regarding inspection
(1)State of implementation of inspections in FY 2014
Japan Exchange Regulation
SESC JSDA (Tokyo stock exchange)

Number of companies 280 255 94

(Type Ⅰ business operator) (Member broker) (General Trading Participants)
Number of companies
inspected
77 84 30

◎Financial Instruments and

◎Financial Instruments ◎Financial Instruments
Exchange act
Legal grounds and Exchange act and Exchange act
Article 84(2)(ⅱ),
Article 56-2 Article 67-8(1)(xiv) 88-3(2)(ⅵ)

◎Articles Of ◎Trading Participant

Internal regulation Incorporation Regulations
Article 7 (1)(ⅷ) Article 19

Trading Participants
Department Inspection division Inspection HQ Examination & Inspection

Financial Instruments and Exchange act

(Order for Production of Report and Inspection)
Article 56-2 (1)When the Prime Minister finds it necessary and appropriate for the public interest or protection of investors, he/she may order a Financial Instruments
Business Operator, etc. a person who conducts transactions with the Financial Instruments Business Operator, etc., a Bank, etc., the majority of whose Voting Rights
Held by All the Shareholders, etc. are held by the Financial Instruments Business Operator, etc., a Holding Company which holds the Financial Instruments Business
Operator, etc. as its Subsidiary Company, or a person who received entrustment of business from the Financial Instruments Business Operator, etc. to submit reports or
materials that will be helpful for understanding the business or property of the Financial Instruments Business Operator, etc., or have the officials inspect the status of
the business or property, or the books and documents or other articles of the Financial Instruments Business Operator, etc., the Subsidiary Specified Juridical Person,
the Holding Company which holds the Financial Instruments Business Operator, etc. as its Subsidiary Company, or the person who received entrustment of business
from the Financial Instruments Business Operator, etc.
(Matters Which Must be Stated in Articles of Incorporation)
Article 67-8 (1) The articles of incorporation of an Authorized Association shall contain the following matters:
(xiv) matters related to investigation of the status of observance of laws and regulations, dispositions given by government agencies based on laws and regulations,
or the articles of incorporation or other rules, or the fair and equitable principles of transactions by Member Firms and Financial Instruments Intermediary Service
Providers;
(Self-Regulation Related Services)
Article 84 (1) A Financial Instruments Exchange shall properly conduct the Self-Regulation Related Services in accordance with this Act, its articles of incorporation and other
rules in order to ensure fair sales and purchase of Securities and Market Transactions of Derivatives on the Financial Instru ments Exchange Market, as well as to protect investors.
(2) The term "Self-Regulation Related Services" set forth in the preceding paragraph shall mean the following services conducted in relation to a Financial Instruments Exchange:
(ii) investigation of the status of observance by the Member, etc. of the laws and regulations, dispositions given by government agencies based on laws and
regulations, or the articles of incorporation or other rules, or the fair and equitable principles of transactions
(Articles of Incorporation)
Article 88-3 (1) In order for a Financial Instruments Incorporated Association to be incorporated, the founders must prepare articles of incorporation, and all founders
must sign or have their names and seals affixed thereto.
(2) The following particulars must be stated or recorded in the articles of incorporation of a Financial Instruments Incorporated Association:
(vi) the particulars of investigations into Members', etc. compliance with laws and regulations, dispositions by government agencies which are based on laws and
regulations, the articles of incorporation and other rules, and the principle of good faith in their transactions;

Articles Of Incorporation (JSDA)

(Businesses)
Article 7 In order to accomplish the purpose of the preceding Article, the Association shall conduct the businesses set forth in each of the following Items:
(ⅷ)To investigate Association Members’ and Financial Instruments Intermediary Service Providers’ situation of observance of laws and regulations,
disciplinary actions taken by administrative government offices pursuant to laws and regulations, or the Articles of Association and other rules o r the good
faith principles of transactions, and the situation of the business and property of Association Members;

Trading Participant Regulations (TSE)

Rule 19. Investigation of Trading Participants
1. In cases prescribed in each of the following items or in other cases where the Exchange deems it necessary in the light of opera tions of the Exchange market,
the Exchange may require a trading participant to submit informational reports or materials concerning the business or assets of such trad ing participant, or
inspect the actual status of such participant’s business or assets, or books, documents or other objects:
3

2
 1.Cooperation with SROs regarding inspection
(2)State of implementation of inspections

 Each organization carries out inspections

once every three years on average.
 SROs (such as TSE and JSDA) have
opportunities to jointly carry out inspections
to reduce the burden of securities
companies as needed.
(SESC has never carried out a joint inspection
with SROs.)

1.Cooperation with SROs regarding inspection

(3) Purpose of SROs inspection
(Stock exchange) Stock exchange carries out inspections
focusing on compliance with the laws and rules of stock
exchange regarding the following;
 Trading participants’ business process from the
acceptance of orders to payment and settlement
operations

(JSDA) JSDA carries out inspections focusing on

compliance with the laws and rules of JSDA regarding the
following:
 Member brokers’ business stance and state of
solicitation
5

3
 1.Cooperation with SROs regarding inspection
(4) Current status of cooperation
○ Report to SESC
The inspection results of SROs are reported to SESC as
needed.
(In case where a serious problem is discovered, SROs
report to SESC immediately.)

○ The timing of carrying out inspections

SESC and SROs arrange the timing of carrying out
inspections not to overlap.

2.Cooperation with SROs regarding market surveillance

(1) Respective roles in market surveillance
Entity SESC SROs Securities Companies
Situation
 Market surveillance  Monitor individual
in real time (Stock orders and
Exchange) transactions
 Give special
Real time attention and alert
to get trader to stop
the trade if any
suspicious one is
discovered
 Ex-post market  Ex-post market
Ex-post surveillance surveillance (Stock
 Enforcement Exchange)
 Inspect the  Inspect the
monitoring and monitoring and
compliance system compliance system
Inspection
in securities in securities
companies and SROs companies (member
companies)
7

4
 2.(2) The use of “Compliance WAN”

②Submit through FDs, ②

e-mail, etc.
③

Note: A Business Year (BY) starts from July 1.

A Fiscal Year (FY) starts from April 1.

2.(3) Cooperation with Stock Exchanges in Market

Surveillance Examination
SESC closely cooperates with Stock Exchanges by
following; Stock Exchanges
・Monthly or any time meeting
・Day-to-day information exchange（exchange of
transaction data by use of “Compliance WAN” , etc.,）

SESC
Extract the suspicious transaction
Transaction
data sharing
data
(Suspicious transactions of Insider trading,
Market manipulation, etc.)
Market
surveillance Information Market surveillance examination
exchange
division ・Asking securities companies about their
client’s identity, transaction data, etc.,
・Analysis of individual transaction
・Compiling the market surveillance
Submit the market
examination report
surveillance
examination report
Investigation
department
(administrative or
criminal) 9

5
 2.(4) Obligation of securities companies to conduct trading
examinations
Securities companies should conduct sufficient trading
management and screening with regard to transactions based on
laws and regulations.
○Financial Instruments and Exchange Act
(Principle of Suitability)
Article 40 A Financial Instruments Business Operator, etc. shall engage in his/her business in
such a manner that the state of the operation of the business does not fall under any of the
cases listed in the following items:
(ii) in addition to what is specified in the preceding item, where there are other circumstances
specified by a Cabinet Office Ordinance where the state of the operation of the business is
likely to go against the public interest or hinder the protection of investors.

○Cabinet Office Ordinance concerning financial instrument market

（The state of the operation of the business is likely to go against the public interest or hinder the
protection of investors.）
Article123 The status specified by Cabinet Office Ordinance, as referred to in Article 40, item (ii) of the
Cabinet Order, shall be as follows:
(Xii) The status which trading examinations with regard to transactions of Securities is
not adequate.
10

2.(4) Obligation of securities companies to conduct trading

examinations
○Inspection manual for Financial Instruments Business Operators
II-1-2. Structures and Systems / Inspection Items for Type I Financial Instruments Business
Operators
1.(2) Development of Systems for Sales Management and Examination
(vii) When a suspected case of insider trading is confirmed, have the results of sales
examination, including the contents of the measures if such measures were taken against
said customer(s), been reported to the SESC and self-regulatory organizations?

○Comprehensive Guidelines for Supervision of Financial Instruments

Business Operators, etc.
IV-3-2-3 Exercise of Checking Function against Investors
(1)Points of Attention Regarding Trading Management System for Prevention of Illegal
Trading
(ii) Establishment of Trading Screening Criteria and Efficient Utilization Thereof
B. Whether the securities company, etc., conducts appropriate trading management
regarding selected issues by, for example, establishing specific screening criteria and
taking measures necessary for preventing illegal trading practices, such as market
manipulation.
11

6
 2.(5) Admission to JSDA
 Securities companies don’t have any obligation to join the
JSDA.
 However, in cases where they don’t join JSDA, they should
establish internal rules equivalent to JSDA’s Article of
Incorporation, etc. and should develop the system to comply
with internal rules.
⇒ Every securities company join JSDA at this time.
(Refusal of Registration)
Article 29-4 (1) The Prime Minister shall refuse registration when an applicant falls under any of the
following items:
(iv) when a person intends to engage in Type I Financial Instruments Business, Type II Financial Instruments
Business, or Investment Management Business: any of the following ;
(d) In cases where a person doesn’t join association, it doesn’t establish internal rules equivalent to
Association’s Article of Incorporation, etc. or doesn’t develop the system to comply with the internal rule.
12

3.Relationship between the Laws and the Self-

regulatory regulations
 Violation of the Self-regulatory regulations ≠ Violation of the Laws
Ways of thinking
 Making member companies to obey the Self-regulatory
regulations is SROs’ responsibility.
(Case study)
 In case SESC found the violation of the Self-regulatory
regulations in its inspection.
⇒ Basically, SESC can’t apply the laws.
⇒ However, SESC can apply article 51 depend on the substance.

(Order to Improve Business Operation to a Financial Instruments Business Operator)

Article 51 When the Prime Minister finds it necessary and appropriate for the public interest or protection
of investors, with regard to a Financial Instruments Business Operator's business operation, he/she may
order said FIBOs to change the methods of business or take other necessary measures for improving its
business operation.
13

7
 CONFIDENTIAL

Capital Market Development in Myanmar

15 April 2016

Ryota Sugishita
JICA Consultant, Daiwa Institute of Research

1-1. Yangon Stock Exchange (YSX) opened on 9 Dec 2015

 YSX’s opening ceremony was held on 9 Dec 2016,

by U Win Shein, Finance Minister, and FSA’s
Commission Mr Nobuchika Mori, JPX’s
President Mr Koichiro Miyahara as well as Mr
Daiwa Institute of Research’s President Takashi
Fukai.

 This is the first Japanese project to establish a

stock exchange in overseas.

Source: Daiwa Institute of Research

1

1
1-2. YSX started trading on 25 Mar 2016

 Trading at YSX started on 25 Mar 2016, with one stock called First Myanmar Investment

 5 securities companies have been issued a license and in operation, including Myanmar
Securities Exchange Centre (MSEC)

First trades Ring the bell

KBZ Sterling
MSEC counter Securities

Source: Daiwa Institute of Research 1

2. YSX is the last stock exchange in Asia

 The stock exchange is a core infrastructure for capital markets, providing opportunity in financing
for corporates as well as building wealth for citizens.
 There are stock exchanges in Papua New Guinea, Bhutan and Maldives. Except for Myanmar, only
Brunei and North Korea are countries without a stock exchange.

Mongolian Stock Tokyo Stock

Exchange (1991) Exchange (1878)

Taiwan Stock Korea Exchange

Exchange (1961) (1956)

Hanoi Stock Shanghai Stock

Exchange (2005) Exchange (1990)

Lao Securities Shenzhen Stock

Exchange (2010) Exchange (1990)

Hong Kong Exchanges

Yangon Stock and Clearing (1914)
Exchange (2015)
Philippine Stock
Stock Exchange of Exchange (1927)
Thailand (1974)
Ho Chi Minh Stock
Cambodia Exchange (2000)
Securities Exchange
(2011) Singapore
Bursa Malaysia Exchange (1973)
(1964)
Indonesia Stock
Exchange (1977)
Source: Daiwa Institute of Research
2

2
3-1. Milestone: 1993 – Daiwa started collaboration with Myanmar

Visited for the first time in 1993

 Chief Representative at Daiwa Institute of Research (DIR) Bangkok Office visited Myanmar
early 1993 just for curiosity. He was warmly welcomed by the Myanmar government and was
requested if Daiwa Securities Group could support in developing Myanmar’s capital markets.

 Daiwa Securities Group management felt Myanmar had huge potential, when they visited
Myanmar.

 Ministry of Economic Development and DIR signed an MOU in 1993 for cooperation in
developing capital markets.

Japanese securities sector in early 90’s

 After the collapse of the domestic stock market, Japanese securities companies eyed on
growing Asian countries to promote Asian stocks to investors.

 Hong Kong and Singapore were the two main markets for Japanese investors, some investors
also looked at Korea and Taiwan. The next markets would be Malaysia, Thailand, then China,
Indonesia and the Philippines.

 In the long-run, Vietnam and Myanmar could be the following markets.

3

3-2. Milestone: 1996 – a joint venture company established

Myanmar Securities Exchange Centre

 Daiwa Institute of Research conducted study on Myanmar, by interviewing with major companies
as well as potential investors. DIR also drafted Securities and Exchange Law, with help of a lawyer.
 In 1996, DIR and Myanma Economic Bank (MEB) established a 50-50 joint venture company
called Myanmar Securities Exchange Centre.

Legal
MSEC’s activities
framework
 MSEC was regarded as the first securities
company in Myanmar as well as an early Regulator
stage company of a stock exchange.
 In 1997, MSEC started over-the-counter
Stock Securities
trades for Myanmar Forest Products Joint
exchange companies
Venture (FPJVC), together with dividend
payment service. Listed
Investors
 FPJVC has been popular as a high-yield companies
stock.
Capital markets
4

3
3-3. Milestone：1997-2008 – stagnation

Asian Financial Crisis

 The Asian Financial Crisis caused a plunge in share prices and foreign exchange rates for 1997-
98 in many of Myanmar’s neighboring countries.

 The Myanmar government became increasingly cautious about the capital markets.

 There was a plan of other over-the-counter stocks to be traded at MSEC, but all of them were
cancelled.

Burma Sanctions Program by the U.S.

 In 1997, the Office of Foreign Assets Control (OFAC) under the U.S. Department of the
Treasury implemented Burma Sanctions Program in 1997. As a result, most of foreign financial
institutions withdrew from Myanmar.

 DIR faced difficulties to support Myanmar’s capital market development.

3-4. Milestone： 2008 – reactivation of capital market development

Target to establish a stock exchange by 2015

 Although Myanmar was not able to enjoy foreign direct investment due to the sanctions, it
gradually moved forward with democracy and economic development.

 After the ASEAN Economic Community Blueprint was announced in 2007, apparently
Myanmar began to think it needed a stock.

 Capital Market Development Committee was set up in 2008. A capital market roadmap
prepared by the committee targeted at establishing a stock exchange by 2015.

 MSEC started to trade Myanmar Citizens Bank’s shares over-the-counter in 2008, which was
the second counter at MSEC.

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3-5. Milestone：2010 – Tokyo Stock Exchange joined

Two decisions

 We expected for Myanmar to be motivated for accelerating capital market development, when
it was officially announced that General Election would be held on Nov 2010. In fact, we were
asked by the Central Bank of Myanmar (CBM) if we were able to support for establishing a
stock exchange.

 We asked Tokyo Stock Exchange Group (now JPX) for help to jointly establish YSX.

 We also decided to renew our JV agreement with MEB for MSEC.

Competing with KRX

 Korea Exchange(KRX) was in collaboration to set up and operate a stock exchange in Lao PDR
and Cambodia since Sep 2007 and Jan 2008, respectively.

 KRX was also contacting for helping Myanmar to establish a stock exchange.

 Tokyo Stock Exchange Group and DIR decided to sign an MOU with CBM immediately.

4-1.YSX project：2011 – MOU signed

An MOU draft submitted to the Central

Oct-10
Bank of Myanmar (CBM)

Signing ceremony on the MOU between CBM,

JPX and DIR, 29 May 2012
General Election, Nov-10

Jul-11 Requested to submit the MOU again

Sep-11 Approval by Minister

Jan-12 Sent to President Office

Apr-12 Approved by President Office

MOU signed between CBM, JPX and

May-12
DIR

5
 4-2. YSX project：building an all Japan project team

Major issues
1) Drafting Securities and Exchange Las 4) Developing securities industry
2) Establishing a regulatory authority 5) Improving accounting
3) Building IT system 6) Educating investors

Issues Conducted by Note

Drafting Securities and Policy Research
Signe an MOU with CBM, Aug-12
Exchange Law Institute (MOF)
Drafting rules and PRI Sign an MOU with MOF, Jan-15
notifications for Securities
and Exchange Law
Establishing Securities FSA Signed an MOU with MOF, Jan-14
Exchange Commission
Making YSX rules JPX Signed an MOU with CBM, May-12
Developing IT system for YSX DIR Signed a JV agreement with MEB, Dec-14
Short-list IPO candidates
Daiwa Securities
Supporting education for Myanmar Institute of Certified Public Accountants, Dec-13
Group
accountants

5. Road to opening YSX

2012 2013 2014 2015 2016
2012.8 2014.1
PRI-CBM MOU FSA-MMOF MOU
Legal
framework and 2013.7
2014.8
2015.7
regulator Securities Exchange
Securities and Exchange Rules for S. E. Law
Commission Myanmar
Law enacted approved
established
2015.8 2016.3
2012.5 2014.12
Building Trading
TSE-DIR-CBM MOU JV agreement
ready started

2015.4 2015.12
YSX Opening ceremony
IT system ordered

Settlement bank appointed

Approved as the stock exchange by SECM

2015.10
Securities
Licensees candidates
companies announced

Listed 2015.8
companies Listing requirements

2014.10 2014.11 2015.1 2015.3

Investors Investor seminar by Daiwa Securities Group

Financial Capital market seminar (1st-6th, 20 locations), two comic books, booklet and DVD “Developing
literacy Myanmar Capital Markets, Introduction to JPX DVD in Burmese

10

6
6-1. Discussions and capacity building

Discussions

 JPX and DIR intensively discussed on the basic design of YSX since the signing of the MOU
with CBM.

 JPX and DIR submit proposals for the YSX establishment.

 We also submitted a report called “9 Keys to Success in Development of Myanmar Capital

Markets,” requesting Myanmar to decide nine issues, mainly legal issues.

Capacity building

 We were often asked by people in Myanmar, “why do we need capital markets?”

 We held a capital market seminar six times, at 20 different locations, for Aug 2012 and Oct
2013 to share knowledge with government officials, financial institutions, professors,
accountants, lawyers and media.

 In addition, we distributed comic books as well as showing a DVD in the local language.

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6-2. Discussions and capacity building

Deputy Finance Minister Dr Maung
Finance Minister U Win Shein, Deputy Minister for National
Maung Thein, trading room at Daiwa
Planning and Economic Development U Set Aung, CBM
Securities, 6 Feb 2013
Governor U Than Nyein, on as site tour at JPX, 12 Oct 2012

2nd Capital Market Seminar by JPX

and DIR

6th Capital Market Seminar by PRI, JPX Signing ceremony for JV agreement of
and DIR, 25 Oct 2013, YSX, 23 Dec 2014

12

7
6-3. Discussions and capacity building
Basic design of YSC Proposals for the Myanmar government Welcome to JPX in Burmese
(Booklet and DVD)

Comic books

13

7-1. IT system development

Developing first

 JPX and DIR agreed that the IT system for YSX would be developed by DIR.

 DIR started development without order to meet the target of establishing YSX by 2015. Usually
IT system vendors start development only after order was secured.

Design

 We assumed that listed shares would be all scripless. Shares traded at MSEC, as well as
government bonds were physically traded. We spent months in explaining about scripless
trading to the Myanmar government.

 Unlike in Japan, we proposed that YSX should incorporate all of trading, clearing, settlement
and depository by IT system.

 We also urged the Myanmar government to issue securities companies licenses as soon as
possible.

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8
7-2. IT system development

IT system demonstration room

Data center construction

2013 2015

15

8. YSX at a glance

YSX building, front YSX entrance, opening ceremony

Jan 2016 9 Dec 2015

YSX ground floor, before renovation YSX ground floor

2013 Jan 2016

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