The Financial Instruments Business
consists of four business categories: Type I Financial Instruments Business, Type II Financial Instruments Business, Investment Management Business, and Investment Advisory and Agency Business.
There is no higher or lower concept between the types. The difference between the types is in the business operation that could be performed.
There is also a supplementary business category for Financial Instruments Business, that is Financial Instruments Intermediary, which specialize in intermediation, belonging to Type I Financial Instruments and Investment Management Business Operators.
Furthermore, as a special exemption, there are also Specially Permitted Businesses for Qualified Institutional Investors, etc., that allow for Self-offering Business (Type II Financial Instruments Business) and Fund Management business (Investment Management Business), to be carried only by notification, not required to be registered as a Financial Instruments Business Operator. This is special exemption, and are limited to funds for small-number professionals.
Although self-recruitment operations for such collective investment schemes were unnecessary to register as a financial institution during the days of the Securities and Exchange Law in principle, it is positioned as a Financial Instruments Business under the current Financial Instruments and Exchange Law.
More than 10 years have passed since the Financial Instruments and Exchange Act came into effect in 2007, and in the present day, several new business formats have emerged within Financial Instruments Business.
“Investment Management Business for Qualified Investors,” which allows for the relaxation of registration requirements when the amount of assets under management is small (JPY 20 billion) for professional investors only .
“Type I Small-amount Electronic Public Offering Service” and “Type Ⅱ Small-amount Electronic Public Offering Service” which is a business format focused on receiving applications online for the acquisition of small amounts of securities.
Not only the above, other new business categories such as the “financial services intermediary business,” which is a new arranger for financial services without affiliation, have been established under the law revision.
The meaning of “To be performed as a business”.
Article 2(8) of the Financial Instruments and Exchange Act stipulates that “Financial Instruments Business” as used in this Act means any of the following acts “to be performed as a business”.
To be performed as a business, it is commonly interpreted that is conducted in the form of “repetitive continuity,” which is an act of “versus the public.”
“Versus the public” and “continuity” include not only cases in which “versus the public” is actually carried out repeatedly, but also cases in which both “versus the public” and “continuity” are assumed (Financial Services Agency Public Comment, p. 35. No3 in 2007).
According to this public comment, even transactions between the 100% parent company and its subsidiary are not uniformly excluded from the Financial Instruments Business (No. 4), and the requirements for “to be performed as a business” are strictly understood in practice.
Questions are frequently asked, like such transactions would be legal if they are bilateral transactions, or they would be legal if not to continue iteratively by referring to other business laws such as the Real Estate Brokerage Act and the Money Lending Business Act, or not.
In these cases, it is necessary to make substantive judgments in accordance with the actual situation on a case-by-case basis. However, empirically such inquiries are in many cases that require registration.
On the other hand, the actions of individuals and companies engaged in the sale and purchase of securities for the purpose of self-investment are deemed to lack “ versus the public”, and the Financial Services Agency, in the public comments, respond that “the sale and purchase of securities” conducted in order to improve its portfolios basically does not fall under the category of “Financial Instruments Business” (Article 2(8) of the FIEA) and also not fall under the category of “Financial Instruments Business” (No. 25 on page 39).
Nevertheless, the premise of this discussion is that investments to improve their own portfolios generally lack ‘versus the publicity’ (see p. 4 in the interim discussion on the concept of “business” in the Financial Instruments and Exchange Commission and the Financial Instruments and Exchange Business). As long as they have ‘versus the publicity’, investments aimed at improving their own portfolios are deemed to fall under the category of Financial Instruments Business.
Discussions on Financial Instruments Businesses by Industry
As mentioned above, the Financial Instruments and Exchange Act consolidated multiple business categories into one financial instruments transaction business, with the framework being divided into four types: Type I Financial Instruments Business, Type Ⅱ Financial Instruments Business, Investment Management Business, and Investment Advisory and Agency Business.
The following is an overview of each type of registration.
Type I Financial Instruments Business
Type I Financial Instruments Business is a combination business format of the securities business under the former Securities and Exchange Act and the financial futures trading business under the former Financial Futures Exchange Act.
Operations consist of the following: the handling of term-1 securities, such as stocks and corporate bonds (securities business), the over-the-counter derivatives business (FX and securities CFD business), and receiving deposits of money, securities, certificates, or electronic records transfer rights (securities management business) from customers with respect to certain operations.
And the underwriting business and the PTS under the permit system are also positioned as Type Ⅰ Financial Instruments Business.
Type II Financial Instruments Business
Type II Financial Instruments Business mainly sells securities with low liquidity, such as equity interests in collective investment schemes and beneficial interests in trusts, i.e., deemed securities as prescribed in Article 2(2) of the Financial Instruments and Exchange Act, other than major securities such as stocks and corporate bonds.
In addition to deemed securities, certain securities, such as investment trust beneficiary securities which offered for personal sale and currency-related market derivatives, are also classified as Type II Financial Instruments Business.
Operations of registered Type II Financial Instruments Business Operators are mostly in the business of handling fund offering or private placement (self-placement) and offering or private placement, as well as trading, brokerage or private placement of real estate trust beneficiary rights.
A Type II Financial Instruments Business Operators are allowed to engage in certain activities, originally falling under the category of Type I Financial Instruments Business, such as the management of specified securities, etc. and specified underwriting activities, on certain qualified conditions.
Investment Management Business
The Investment Management Business consists of the following business categories: discretionary investment business (No. 12(b)), fund management business (No. 15), investment trust management business (No. 14), and investment corporation asset management business (No. 12(a)). This business manages the property of the right holder in securities or derivatives transactions.
The management of investment trusts, the conclusion of discretionary investment contracts, and the management of REIT are typical such businesses.
Since these are business types specializing in asset management, registration of Type II Financial Instruments Business is required in order to sell collective investment schemes (e.g., public offering or private placement and handling of private placement) or to make public or private placement of beneficiary certificates of investment trusts whose trustees are themselves.
Sales of beneficiary certificates of investment trusts managed by the investor under the discretionary investment contract fall under the category of public offering or private placement and this operation is required the registration of Type I Financial Instruments Business. Investment management companies that manage investment trusts often engage in sales in collaboration with securities companies.
Investment Advisory and Agency Business
Investment advisory and agency Business consist of investment advisory services (No. 11) and agency or agency services (No. 13).
This business format has a relatively large number of small and medium-sized companies, including information distribution, signal distribution and automatic trading (EA) related to stocks.
The business related to agency or intermediation is specifically “agency or intermediary for the conclusion of investment advisory contracts or discretionary investment contracts.”
This business acts as an intermediary for investment advisory contracts of existing investment advisory and agency companies and for concluding discretionary investment contracts.
Compared to investment advice services, mediators are a minority group that seem to be at most about 10 or 20% of the total number among the investment advice and agency operators, .
Securities-related business
Financial Instruments Business Operators, those who have obtained registration under Article 28 of the Old Securities and Exchange Act at the time of enforcement of the Financial Instruments and Exchange Act (Deemed Registration Type I Business Operators) and those who engage in securities-related business after the enforcement of the Financial Instruments and Exchange Act are allowed to use the term “securities” in their trade names.
The handling of public offerings or secondary distribution of securities or the handling of private placements is referred to as brokerage business. In the case of deemed securities, it is not a Type I Financial Instruments Business but a Type II Financial Instruments Business.
On the other hand, even Type I Financial Instruments Business Operators that engage in currency-related over-the-counter derivatives transactions, referred to as FX business operators, are not considered to be engaged in securities-related businesses.
Electronic Public Offering Business
If you handle certain unlisted securities (agency sales) online, is necessary to register for Electronic Public Offering Business.
In addition, if you accept applications for the acquisition of such securities online, it falls under the category of Electronic Subscription Electronic Public Offering Business.
In that case, in addition to being registered as a Type I or Type II Financial Instruments Business Operator, you would need to undergo registration specifically for an electronic-based application type electronic public offering business.
Provided, however, that in cases falling under the category of Type I Small Amount Electronic Offering Business and Type II Small Amount Electronic Offering Business, securities may be handled without registering Type I Financial Instruments Business or Type II Financial Instruments Business, by obtaining registration of the same business. This special provision applies only to certain small-scale offerings as an exception.
Investment Management Business for Qualified Investors
As a special exception to the Investment Management Business, there is a license for the Investment Management Business for Qualified Investors, as described above.
Qualified investors are one of the professional investor systems stipulated by the Financial Instruments and Exchange Act.
It is different from other professional systems such as special investors, qualified institutional investors, qualified institutional investors, etc., but it is generally in line with the concepts of qualified institutional investors, etc.
Unlike Specially Permitted Businesses for Qualified Institutional Investors, etc., they are legitimate registration companies, so they are able to conduct not only the so-called fund business, but also the investment trust management business and discretionary investment business, etc.
The maximum amount of assets under management is JPY 20 billion, which is the sum of the assets under management of Specially Permitted Businesses for Qualified Institutional Investors, etc.
Specially Permitted Businesses for Qualified Institutional Investors, etc.
Self-offering of partnership funds (No. 7) and operation of collective investment schemes (No. 15) for small-group professionals can be carried out only by notification of Specially Permitted Businesses for Qualified Institutional Investors, without registration of Financial Instruments Business .
Qualified Institutional Investors, etc. consist of Qualified Institutional Investors and Investors targeted for special business.
The requirements for the establishment of funds in Specially Permitted Businesses for Qualified Institutional Investors, etc. are that they consist of one or more Qualified Institutional Investors and 49 or fewer Investor Subject to Specially Permitted Services.
Special Permitted Business for Overseas Investors and Specially Permitted Business During Transition Period
Under the amendment of the Financial Instruments and Exchange Act of 2021, the self-placed private placement and offering of partnership funds (No. 7) and the management of collective investment schemes (No. 15) can be carried out without registration as a financial instruments trading business only by notification of specially permitted business for foreign investors, etc., in cases where investment is carried out at a business office or office placed in Japan, mainly in response to contributions or contributions from non-residents.
In addition, a notification for Specially Permitted Business During Transition Period is established as a temporary measure for five years.
By filing a notification of Specially Permitted Business During Transition Period, a foreign investment management business operator can engage in the following activities at their established offices or offices in Japan: discretionary investment business, investment trust management business, fund management business of a foreign collective investment scheme, and business specified by Cabinet Order (Item 1 of Paragraph 5), public offering or private placement of foreign investment trust beneficiary certificates, foreign investment certificates, and foreign collective investment schemes for discretionary investment business, public offering or private placement of foreign investment trust beneficiary certificates of which the foreign investment management business operator act as the entruster, public offering or private placement of foreign investment trust beneficiary certificates for which they act as the entruster, and public offering or private placement of foreign collective investment schemes for which they act as the issuer.
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