Promoting Foreign Asset Managers’ Entry into the Japanese Market: Amendments to FIEA

The Financial Services Agency of Japan (FSA) recently submitted a bill to the National Diet of Japan including certain amendments to finance-related laws for purposes of strengthening Japan’s financial system and financial stability in response to social and economic changes caused by the COVID-19 pandemic. Among these measures, this LawFlash addresses the proposed amendments to the Financial Instruments and Exchange Act (FIEA) for purposes of promoting foreign asset managers’ entry into the Japanese market.

OVERVIEW OF FIEA AMENDMENTS

The proposed FIEA amendments will establish two new exempted business categories (i.e., Specially Permitted Business for Foreign Investors and Specially Permitted Business in Transition Period) under which asset managers may conduct an investment management business (and related marketing activities) in Japan, provided that such investment management business is conducted primarily for foreign investors.

Specially Permitted Business for Foreign Investors

The Specially Permitted Business for Foreign Investors (SPBFI) exemption allows asset managers to conduct (i) investment management of limited partnership (LP) form funds (as a general partner), and (ii) solicitation of interests in such LP funds, upon notification to the FSA or the relevant Local Finance Bureau, if the following requirements (1) and (2) are satisfied:

(1) The investor comprises any of the following:

• Nonresident investors (i.e., nonresident corporations or individuals residing in foreign countries) meeting certain requirements that will be provided in a forthcoming Cabinet Office Ordinance
• Qualified Institutional Investors (QII) and equivalent persons to be provided in a forthcoming Cabinet Office Ordinance
• Investors with a close relationship with those set out in the above categories (details will be provided in a forthcoming Cabinet Order)

(2) A majority of its assets are sourced from nonresident investors.

While an SPBFI has some similarities with Special Permitted Business for QII under Article 63 of the FIEA (Article 63 Business), an SPBFI is different from an Article 63 Business in that (i) no QII participation is required to rely on the SPBFI exemption, and (ii) there is no limit on the number of non-QIIs investing as long as the above requirements are satisfied.

In addition to the above, the FIEA amendments provide certain requirements for the SPBFI exemption, including the following:

• Not being subject to disqualification conditions (cancellation of license, criminal record, etc.)
• A personnel and business structure with the ability to operate as an SPBFI
• A business office in Japan (in the case of a nonresident corporation)
• A designated representative in Japan (in the case of a nonresident corporation)

Specially Permitted Business in Transition Period

The Specially Permitted Business in Transition Period (SPBTP) exemption allows an asset manager to conduct the following activities on a temporary basis for up to five years, upon notification to the FSA or the relevant Local Finance Bureau:

In order to rely on the SPBTP exemption, certain additional requirements need to be satisfied, as noted below.

Scope of Investor

Investors with respect to an SPBTP need to fall under either of the following:

• Nonresident investors (i.e., nonresident corporations or individuals residing in foreign countries)
• Investors with a close relationship with a foreign asset manager (details to be provided in a forthcoming Cabinet Order)

Asset Manager Qualification

Unlike for an SPBFI, an SPBTP is available only for asset managers licensed in certain foreign countries that have an investor protection system of a similar level compared to Japan and that have conducted an investment management business in the relevant jurisdiction for at least a certain period (to be specified in a forthcoming Cabinet Order).

In a manner similar to the SPBFI exemption, the FIEA provides certain requirements to qualify for the SPBTP exemption, including the following:

• Not being subject to disqualification conditions (cancellation of license, criminal record, etc.)
• A personnel and business structure with ability to operate as an SPBTP
• A business office in Japan (in the case of a nonresident corporation)
• A designated representative in Japan (in the case of a nonresident corporation)
• A majority of assets need to be invested in assets other than domestic shares, share options, or other securities (to be specified in a forthcoming Cabinet Order)[1]

• Investment management pursuant to a discretionary investment management agreement
• Investment management of foreign investment trusts (formed as a trustor under the relevant trust deed), and solicitation of such foreign investment trusts
• Investment management of foreign LP funds (as a general partner), and solicitation of interests in such foreign LP funds

According to the FSA, asset managers filing an SPBTP notification will be expected to obtain a formal registration as a Financial Instruments Business Operator or to file a notification for an Article 63 Business or SPBFI during the transition period. In addition, it should be noted that the SPBTP exemption will be available only within the period of five years after the amendments are implemented.

COMPARISON BETWEEN SPBFI AND SPBTP

The table below shows a rough comparison between the SPBFI exemption and the SPBTP exemptions. Please note that this table is prepared based on the legislative provisions submitted to the Diet and may change depending on subsequent regulatory considerations and the relevant implementing Cabinet Order and Cabinet Office Ordinance.

OTHER CONSIDERATIONS

Japanese regulators expect that the above exemptions will be of great interest to foreign asset managers primarily focused on making investments in the Japan market (notably, private equity and real estate investment funds investing in Japan). Unfortunately, it seems unlikely that foreign asset managers will be interested in doing so from a base in Japan due to tax, language, and other considerations. Also, because these exemptions are not designed to be used for the purpose of raising capital in Japan (as with the Article 63 Business exemption)—due to the requirements that a majority of investors for an SPBFI, and all investors for an SPTPB, must be nonresident investors—it is uncertain that these exemptions will provide a strong incentive for foreign asset managers to act under them.

However, for foreign asset managers currently located in Hong Kong, Singapore, and other Asian locations that have primarily focused on investments in Japan, the streamlined process to establish a base in Japan, together with certain personal tax incentives being implemented concurrently with the new legislation, could provide these foreign asset managers a strong incentive to relocate operations to Japan, especially in the post-COVID-19 era when weekly and monthly commuting to Japan for work will likely be more difficult for them. Moreover, political, cultural, and social (schooling and family assistance) considerations that also are undergoing liberalization in Japan may help attract expatriate Japanese managers back to Japan from other Asian locations where they have been for the last 25 years.

Indeed, attracting experienced Japanese national managers back to living and conducting Japan-targeted business in Japan appears to have been one of objectives of the asset management elements of the FIEA amendments. Whether the changes will prove enough to reverse the long history of “offshore management” of Japan investments remains to be seen, but they are certainly a good start.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Tokyo
Tomoko Fuminaga
Narumi Ito

[1] According to the FSA’s report dated December 23, 2020 summarizing the discussion in the Working Group on the Financial Market Regulations of the Financial System Council, it is likely that other domestic securities will be specified in a forthcoming Cabinet Order.