In Japan, asset management business is classified as a type of financial instruments business, specifically the investment management business. The investment management business involves managing clients’ assets through investments in securities or rights related derivative transactions based on analysis of the value of financial instruments. There are 4 forms of investment management business stated in Financial Instruments and Exchange Act: (1) investment corporation asset management business, (2) discretionary investment business, (3) investment trust management business, and (4) fund management business.
(1) Investment Corporation Asset Management Business (Article 2, Paragraph 8, Item xii (a))
Investment Corporation Asset Management refers to the operation of the management of money or other assets by investing in rights pertaining to securities or derivative transactions based on investment decisions derived from analysis of the value of financial instruments, through the conclusion of entrusted contracts with investment corporations.
(2) Discretionary Investment Business (Article 2, Paragraph 8, Item xii (b))
In addition to the aforementioned, discretionary investment business includes to conclude a contract, in which one of the parties is fully or partly entrusted by the other party with the discretion to make investment decisions based on an analysis of the values, etc. of financial instruments, and is also entrusted with the authority necessary to make investments on behalf of the other party based on such investment decisions. And under this contract, the management of money or other assets by investing in rights pertaining to securities or derivative transactions based on investment decisions derived from analysis of the value of financial instruments is operated.
(3) Investment Trust Management Business (Article 2, Paragraph 8, Item (xiv))
The management (excluding management that falls under the category of act set forth in (xii)) of money or other property contributed by a person that holds rights indicated on the investment trust beneficiary securities, etc. or other rights specified by Cabinet Order, as an investment in securities or in rights connected with derivatives transactions, based on investment decisions that are grounded in an analysis of the values, etc. of financial instruments;
(4) Fund Management Business (Article 2, Paragraph 8, Item )
The management (excluding management that falls under the category of act set forth in (xii)) of money or other property invested or contributed by a general partner (GP), as an investment mainly in securities or in rights connected with derivatives transactions, based on investment decisions that are grounded in an analysis of the values, etc. of financial instruments:
All of these activities involve “as an investment in securities or in rights connected with derivatives transactions, based on investment decisions that are grounded in an analysis of the values, etc. of financial instruments”. However, the fund management business has an additional requirement of being primarily focused on investment in securities or in rights connected with derivatives transactions. For more details, please refer to this article.
To engage in investment activities related to security tokens (tokenized securities) or derivative transactions related to crypto assets, it is necessary to undergo a modification registration as stipulated in Article 31 of the Financial Instruments and Exchange Act for each respective activity.
Similarities between Investment Advice and Discretionary Investment
Investment advice and discretionary investment, both stemming from the same system that originated from the same former Investment Advisory Act and have many common regulatory aspects.
Furthermore, there may be overlaps in their scope of activities. Even if a contract with a client is concluded as an investment advisory agreement, if in practice, “one party is entrusted, in whole or in part, by the other party with the investment decision-making based on the analysis of the value of financial products and is authorized to make investments on behalf of the other party based on such investment decisions,” it would effectively fall under an investment discretion agreement.
There can be also overlapping in their business activities. Even if a contract with a client is concluded as an investment advisory contract, if in reality, “one of the parties is fully or partly entrusted by the other party with the discretion to make investment decisions based on an analysis of the values, etc. of financial instruments, and is also entrusted with the authority necessary to make investments on behalf of the other party based on such investment decisions” , then it would effectively fall under a discretionary investment contract.
Relationship with Type I and Type II Financial Instruments Business
Investment management business is a license for “investment activities” and not a license for “sales activities” of securities. In other words, with an investment management business license, it becomes possible to engage in activities such as operating funds primarily through securities or derivative transactions, managing investment trusts, and operating investment corporations. However, it does not allow the “sale” of these investment products, which are securities.
To sell funds (collective investment schemes), registration as a Type II Financial Instruments Business is generally required. In the case of selling investment trusts, registration as a Type II Financial Instruments Business is required for direct sales, and registration as a Type I Financial Instruments Business is generally required for handling.
Also, registration as a Type I Financial Instruments Business is necessary for the handling of investment corporation investment securities.
However, investment management firms the option to delegate solicitation to other registered firms engaging in Type I or Type II Financial Instruments Business and focus solely on their investment management activities.
Self-Regulatory Organizations
Discretionary investment businesses and fund management businesses are regulated by the Japan Investment Advisers Association which operates as a self-regulatory organization. On the other hand, investment trust management businesses and investment corporation asset management businesses are regulated by the Trust Companies Association of Japan as a self-regulatory organization.
Registration Requirements
Investment management business is subject to relatively strict registration requirements. The key registration requirements for investment management businesses, as defined by laws and supervisory guidelines, are as follows:
However, there are certain relaxation of requirements for investment management businesses targeting qualified investors, as mentioned later. On the other hand, there are additional registration requirements and stricter criteria for specified investment management businesses related to real properties that handle real estate securitization GKTK schemes, among others.
Furthermore, “the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.” explicitly states the need for individuals who possess knowledge and experience regarding the assets being managed as a person responsible for asset management on behalf of rights holders. It is required to have practical experience in the actual operational activities related to the management of the target assets.
In terms of personnel structure in addition to the “management requirements” and the “sufficient knowledge and experience requirements for compliance and risk management of executive officers,” there is also a requirement for “knowledge and experience requirements for compliance officers.” Furthermore, the supervisory guidelines explicitly state the need for “Persons with sufficient knowledge and experience regarding investment assets must be secured for the position responsible for making asset investment on behalf of rights holders”. It is required to have practical experience in the actual operational activities related to the management of the target assets.
Moreover, as a general rule, there is a requirement to separate the decision-making and execution of orders, so the investment management department generally needs to have a minimum of 2 personnel.
In general, for investment management businesses that do not fall under the category of investment management for qualified investors, it is estimated that a total of about 5-6 full-time employees are necessary. According to registration requirements, there is a need to have 2 individuals in the operations department, 1 individual in the compliance department, 1 individual in the internal audit department. It is also common to have sales representatives and other personnel in various operational roles. Additionally, when conducting investment trust management business, it is necessary to have a dedicated full-time calculation officer for the trust.
| Organizational Regulations: | A Stock corporation (limited to those with a board of directors, an accounting advisor, a company auditor, a board of company auditors, a financial auditor, Audit and Supervisory Committee, or Nominating Committee, a board of directors and a company auditor, a board of company auditors, or Nominating Committee, etc,) or any corporation incorporated under the law of a foreign country that have a board of directors. |
| Asset Regulations: | Minimum net assets and capital of JPY 50,000,000. |
| Business office in Japan: | Obligation to have a business office in Japan |
| Personnel Structure: | Top managers: Top managers must be sufficiently qualified to conduct Financial Instruments Business in a fair and appropriate manner, in terms of their backgrounds and capabilities. Managing directors: Managing directors must understand the viewpoints regarding governance indicated in the FIEA and various other laws and regulations, and have sufficient knowledge and experience to conduct governance, in addition to sufficient knowledge and experience regarding compliance and risk management to conduct Financial Instruments Business in a fair and appropriate manner. Persons in charge of asset management or investment advice: Persons with sufficient knowledge and experience regarding investment assets must be secured for the position responsible for making asset investment on behalf of investment rights holders. Staff in charge of compliance: The compliance division (staff in charge of compliance) must be independent from the asset investment division and staffed with personnel with sufficient knowledge and experience. Personnel structure of each division: The Financial Instruments Business Operator must be staffed and organized so that managers in charge of internal control are appropriately allocated, and personnel necessary for conducting relevant business in an appropriate manner are allocated to individual divisions. (in practice, multiple management persons and the establishment of an independent internal auditor is generally required). Persons in charge of investment trust assets calculation: In the case of management of investment trust assets, persons with sufficient knowledge and experience regarding accounting and screening related to investment trust assets. |
| Subsidiary Business Regulation: | Exists (No business that compromises investor protection due to difficulties in managing the risk of losses). |
| Major Shareholder Regulation: | Applicable (No non-qualified Major Shareholders). |
Please also refer to the Guidebook for Registration by FSA.
Investment management businesses, alongside Type I Financial Instruments Business, requires higher standards in terms of the number of personnel and the required knowledge and experience, compared to other business types. It becomes challenging to enter the industry without sufficient resources.
Registration Screening Procedure:
Same as Type I Financial Instruments Business, investment management business requires significant effort in developing internal regulations for the screening of the so-called Summary Registration Applicant document during the registration examination.
Regarding the relevant descriptions in the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc., it is necessary for registration applicants to provide specific details in a question-and-answer format about the internal structure they adopt and state the specific articles of internal regulations that govern that structure. The required documentation can extend to several hundred pages. Investment management operators, when undergoing the registration examination, are required have a deeper understanding of the Financial Instruments and Exchange Act and internal management systems compared to other business types.
Registration Support:
If you are interested in registering an investment management business in Japan, please feel free to contact our firm through the inquiry form. We would be happy to assist you.
Our firm has a track record of providing registration support to numerous investment management businesses in Japan. We offer comprehensive support including ensuring the appropriate personnel structure, assisting with license application, development of internal regulations, and post-registration operational assistance.
If you are interested in registering an investment management business in Japan, please feel free to contact us via the inquiry form. We would be more than happy to assist you.
