In cases where a business operator engaged in business equivalent to a financial instruments business in a foreign country establishes a base in Japan or conducts business with a resident as a counterparty, there are complex cross-border regulations regarding registration and notification obligations by business category.
The following is an explanation of the specific regulations. Please refer to the Special Feature page here for the support of overseas financial companies.
The Financial Services Agency publishes “laws and regulations applicable to foreign financial service providers entering the Japanese market.” This is an article that was already published a decade ago, and its content has already become outdated in light of current laws, but it is useful as an understanding of the framework.
A person other than a Financial Instruments Business Operator or a bank, Cooperative Structured Financial Institution or other financial institution specified by Cabinet Order who conducts securities-related business in a foreign country in compliance with the laws and regulations of a foreign country is called a Foreign Securities Company.
Securities-related businesses are mostly old securities companies, as stipulated in Article 28(8) of the Financial Instruments and Exchange Law. As the basic concept of laws and regulations concerning foreign securities business operators, the Financial Services Agency is a comprehensive supervisory guideline for financial instruments business operators, etc., which shows the following.
※X. Supervisory Evaluation Points and Various Administrative Procedures (Foreign Securities Companies, etc.)
X-1-1 Basic Concept on Laws and Regulations Regarding Foreign Securities Companies
Foreign securities companies are not allowed to engage in the activities specified under each item of Article 28(8) of the FIEA (hereinafter referred to as “activities concerning securities-related businesses”) with persons located in Japan as their transaction counterparts, unless their main Japanese sales branches or main business offices engaging in securities-related businesses are registered.
Meanwhile, unregistered foreign securities companies with no business base in Japan are allowed to engage in activities concerning securities-related businesses with persons in Japan as their transaction counterparts, if they take orders from the said persons without conducting solicitation regarding activities concerning securities-related businesses or take orders through agency and brokerage services provided by Financial Instruments Business Operators (limited to Type I Financial Instruments Business Operators). Furthermore, foreign securities companies may, with the permission of the authorities based on Article 60(1) of the FIEA, engage in trading at financial instruments exchanges in Japan. Supervisors shall perform supervision of the said companies with due consideration of the points of attention indicated in X-2-1.
X-1-2 Foreign Securities Companies’ Cross-Border Transactions Using Internet
The posting by foreign securities companies of advertisements regarding activities concerning securities-related businesses on Web sites shall in principle be deemed to constitute a solicitation. However, it shall not be deemed to constitute a solicitation aimed at investors in Japan as long as reasonable measures are taken to prevent the advertisement from leading to activities concerning securities-related business with investors in Japan as their transaction counterparts.
A disclaimer to the effect that the advertised service is not targeted at investors in Japan must be indicated. In judging whether an adequate disclaimer is properly indicated, attention shall be paid to the following points:
①Any particular computer operation other than viewing the advertisement should not be necessary for reading and understanding the disclaimer.
②The disclaimer must be indicated in language reasonably deemed to be readable and understandable for investors in Japan who are accessing the website.
(2) Measures to Prevent Transactions
Measures to prevent transactions regarding activities concerning securities-related businesses must be in place. In judging whether adequate measures are in place, attention shall be paid to the following points:
①When making transactions, the foreign securities company checks the location of the investors by requiring them to provide information regarding their residence location, mail address, e-mail address, payment method and other items.
②Care must be taken to avoid taking orders from the investors in cases where there is a reasonable reason for believing that the orders obviously concern activities concerning securities-related businesses involving investors in Japan.
③Care must be taken to avoid inducing investors in Japan to conduct activities concerning securities-related businesses by, for example, refraining from establishing a call center targeted at customers in Japan and establishing links to web pages targeted at investors in Japan.
The above-mentioned measures are merely examples, so if measures equivalent thereto or more effective measures have been implemented, the posting of advertisements by foreign securities companies shall not be deemed to constitute a solicitation.
(3) It should be noted that in cases where the above-mentioned reasonable measures are not in place, the said posting of advertisements is highly likely to constitute a solicitation aimed at investors in Japan. Therefore, in such cases, the foreign securities companies should bear the burden of proving that they do not engage in activities concerning securities-related businesses involving solicitation aimed at investors in Japan.
As the legal basis for these guidelines, Article 58-2 of the Financial Instruments and Exchange Act and Article 17-3 of the Order for Enforcement of the Financial Instruments and Exchange Act stipulate the cases in which a person in Japan may engage in acts related to securities-related business as the counterparty.
According to this statement, in the case of certain transactions involving the government or the Bank of Japan, with a certain financial institution or trust company as the counterparty, this is limited to those specified by the Cabinet Office Decision (Article 17-3-2) of the Financial Instruments and Exchange Act, which does not solicit foreign securities business operators from abroad without soliciting them from them, among other things as an agency for securities companies, those specified in Article 28-8-1, Item 3 or Item 6 of the Act, or those specified in Item 6 of the same paragraph (excluding brokerage, agency and agency services for transactions described in Item 4 of the same paragraph), or those designated by the Cabinet Office Decision (Article 1-8-1, Item 2, A or B).
It has been determined that the activities described in Article 8, Item 4 of the Act or the activities described in Item 6 of the same paragraph (limited to the intermediation, brokerage, and agency of transactions described in Item 4 of the same paragraph) are also not required to be registered as a financial instruments business.
In other words, with regard to a certain securities-related business (securities business), if a resident does not engage in any solicitation activities as a counterparty, the system of regulations does not constitute violations of laws and regulations even if it conducts business with a resident as a counterparty.
OTC derivatives(FX/CFD etc…)
With regard to over-the-counter derivative transactions (including securities CFD transactions) as set forth in Article 28, Paragraph 8, Item 4 of the Act, registration of a Financial Instruments Business operator registration is required, even in cases where solicitation is not carried out, except for certain cases, such as when the counterparty is a Type I Financial Instruments Business Operator (excluding Type I Small Amount Electronic Offering Business Operators), Registered Financial Institutions, Qualified Institutional Investors, persons equivalent thereto under foreign laws and regulations, or a stock company(KK) with capital of 1 billion yen or more.
In addition, OTC derivative transactions other than securities-related OTC derivative transactions (currency-related, crypto-asset-related and other OTC derivative transactions, including forex margin transactions) do not correspond to securities-related businesses in the first place.
Therefore, the exemption from registration obligations similarly does not apply. In principle, the Company is interpreted to violate the Financial Instruments and Exchange Act by providing transactions only with residents as counterparties. In cases of over-the-counter derivative transactions other than securities-related over-the-counter derivative transactions, Article 1-8-6, Paragraph 1, Item 2 of the Order for Enforcement of the Financial Instruments and Exchange Act stipulates that when the counterparty is a Type I Financial Instruments Business Operator (excluding Type-I small-amount electronic public offering service Provider), a registered financial institution, a qualified institutional investor, a person equivalent thereto under foreign laws and regulations, or a stock company with capital of ¥1 billion or more, registration as a financial instruments business is not required.
Asset management-related Activity
Next, let us look at the investment advisory and agency business and the investment management business.
Investment Advisor (IA)
The investment advisory and agency business and the investment management business are also described in detail in the “Guidebook on Procedures for Registration of Investment Management Business, etc.” announced by the Financial Services Agency in January 2020. First, if you do not provide investment advice at a domestic location and do not provide investment advisory and investment management services to residents, registration is not required.
In addition, there are special provisions concerning investment and advisory services provided to domestic financial institutions by foreign investment managers, etc. (Article 61 of the Financial Instruments and Exchange Act and Article 17-11 of the Order for Enforcement of the Financial Instruments and Exchange Act). In cases where a person engaged in investment advisory services in a foreign country conducts investment advisory services to investment managers or trust banks (limited to those engaged in investment management services), registration of investment advisory services is not required.
In addition, if a corporation engaged in the investment management business (discretionary investment management business) in a foreign country conducts the investment management business (discretionary investment management business) with an investment management business operator or trust bank engaged in the investment management business (discretionary investment management business), the registration of the investment management business will no longer be required.
Partner ship type fund management
Similarly, if a corporation engaged in the investment management business (fund management business) in a foreign country conducts the investment management business (fund management business) with an investment management business operator or a trust bank (only those engaged in the investment management business), registration of the investment management business will no longer be required.
In addition, according to Public Comment P565 No 1 of 2007, the Financial Services Agency stated that “even in cases where a fund managed by a manager registered as an investment management business is the counterparty to a contract, Article 61(2) or (3) of the FIEA shall apply, and foreign investment managers may engage in such business without registering or submitting a notification.”
Therefore, when forming a fund that invests in a foreign-registered collective investment scheme in the form of so-called fund of funds (FoF), if the management of the funds acquired by the client is conducted by the investment management business operator, it is possible to legally construct the scheme even if the GP on the foreign-registered collective investment scheme side does not register the investment management business or submit a notification of special operations for qualified institutional investors, etc.
Trust/company type fund management
Furthermore, if a foreign-domiciled fund is managed at a foreign location and the form of the fund is a trust-type or company-type fund, the registration of the investment management business is not required for management activities.
In the case of trust-type funds, although it is not necessary to register the investment management business as an investment manager for the management activities of the company-type funds as their own funds, if another company directs these vehicles from Japan based on the discretionary investment contracts, it is necessary to pay attention to the investment management business separately for each company.
Special exception for QIIs
In addition to this, there is a special exception concerning the management business of foreign partnership funds (Article 16-13 of the Cabinet Office stipulated in Article 2 of the Financial Instruments and Exchange Act) in which a small number of domestic investors are qualified institutional investors (direct investors) who invest in the fund only (b) domestic investors (indirect investors) who invest in the fund in the form of a fund are qualified institutional investors (c) the total number of direct investors and indirect investors is less than 10, and (d) the funds contributed by direct investors are less than one-third of the investment amount of the fund as a whole.
Registration of the investment management business (fund management business) is no longer required. However, separate regulations apply with respect to offering activities of these funds. In principle, registration of Type I financial instruments business or Type II financial instruments business is required for solicitation of funds, except in cases where such solicitation falls under self-placement or self-placement of corporate funds. Disclosure regulations also need to be considered if this qualifies as a self-offering of corporate funds.
Therefore, even if a special provision is used for the management of a foreign cooperative fund in which a small number of domestic investors are involved in the management activities, it is impossible to legally solicit a resident to acquire the fund by soliciting investment (solicitation or handling of private placement (Article 2, paragraph (8), item (ix) of the Financial Instruments and Exchange Act)) to a Type II Financial Instruments Business Operator, or except for cases where domestic investors do not engage in solicitation activities themselves, or cases where only qualified institutional investors and 49 or fewer investors are eligible investors and investors subject to exceptional business, and where the fund management company is able to make a lawful private placement by submitting a notification in advance of SPBQII (Specially Permitted Businesses for Qualified Institutional Investors, etc. )(Article 63 of the Financial Instruments and Exchange Act). Alternatively, Specially Permitted Business for Foreign Investors, etc. is another option.
Special business for overseas investors, etc.
Under the amendment of the Financial Instruments and Exchange Act of 2021, a system for special business for overseas investors, etc. was newly established.
After the enactment of this Act, if a base is established in Japan, notification will enable the fund management business (No. 15 operations; self-management of so-called collective investment schemes) mainly for overseas investors and the solicitation or private placement of such collective investment schemes. “Overseas investors, etc.” that can be solicited as special operations for overseas investors, etc. will also include certain domestic institutional investors, etc.
At the same time, a system for special operations during the transition period was established. This will enable overseas asset management business operators with proven track records to continue to conduct domestic and overseas asset management business, etc. However, this is basically scheduled to be excluded from customers that can be solicited by domestic investors.
Crypto-asset Exchange Service
The sporadic problem is that foreign cryptoasset exchanges, including large Chinese cryptoasset exchanges, are accepting the funds of their residents.
However, Article 63-22 of the Payment and Settlement Act stipulates “Prohibition of solicitation of foreign crypto-asset exchange service providers” and that “Foreign crypto-asset exchange service providers who are not registered under Article 63-2 shall not solicit persons in Japan to conduct acts listed in each item of Article 2(7).” Each item of Article 2(7) of the Payment and Settlement Act stipulates that “the sale and purchase of crypto-assets or exchange with other crypto-assets,” “the intermediation, brokerage or agency of the acts listed in the preceding item,” “the management of the user’s money with regard to the acts listed in the preceding two items that are conducted by such intermediary, brokerage or agent,” “the management of crypto-assets for the benefit of others (excluding cases where special provisions exist in other Acts concerning the management of such crypto-assets on a regular basis)” falls within the scope of the crypto-assets exchange business.
Due in part to the unregistered business being warned by the Financial Services Agency, the operation of crypto-asset exchanges and exchanges, which require Japanese residents to open accounts, all have an illegal impression.
This is a superficial understanding that lacks understanding of these articles. The prohibition under the Payment and Settlement Law is to “solicit residents to engage in transactions related to crypto-asset exchanges.” This is similar to regulation of foreign securities companies, and more loosely regulated than foreign FX/CFD traders whose transactions with residents are, in principle, prohibited.
Foreign crypto-asset service providers who do not set up Japanese-language websites, do not actively promote them to residents, and on the other hand, accept them from time to time if they wish to open accounts for Japanese residents can be viewed as legitimate.
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