Foreign Managers Allowed to Temporarily Manage Assets from Japan in Emergency Situations

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Morgan Lewis

Subordinate regulations under the Financial Instruments and Exchange Act, Act No. 25 of 1948, as amended (FIEA), were amended on July 22 to allow foreign business operators to temporarily conduct business in Japan upon approval by the Financial Services Agency (FSA) if such operators have difficulty doing business in their jurisdictions due to catastrophe situations such as a natural disaster, an epidemic, or political instability.

AMENDMENTS TO REGULATIONS UNDER THE FIEA

Under the FIEA, foreign business operators may not conduct securities-related business (e.g., securities dealings and brokerage) or investment management business in Japan without being registered as a Financial Instruments Business Operator. However, the FSA announced on July 22, 2020 that the amendments to the Cabinet Office Ordinance on Definitions under Article 2 of the FIEA (the Amendments) have been promulgated and implemented on that day for the purpose of easing this requirement for short periods of time.

Following the Amendments, foreign business operators’ activities relating to a securities-related business or investment management business may be temporarily excluded from the scope of the Financial Instruments Business and such foreign business operators (Covered FBO) may conduct business in Japan upon approval by the FSA if such Covered FBOs have difficulty, or may have difficulty, in continuing to conduct business in their home jurisdiction due to a catastrophe such as a natural disaster or other difficult situations (such as epidemic or political instability). Thus, the Amendments provide foreign business operators suffering from the coronavirus (COVID-19) pandemic or political instability in their home jurisdictions an opportunity to temporarily conduct their business in Japan while the catastrophe continues.

In order to obtain the approval from the FSA, a Covered FBO needs to file an application form and certain supplemental documents (e.g., corporate registry, certificate of license issued by the relevant home jurisdiction, and certain pledge statements). The application form can be prepared and filed either in Japanese or in English. The FSA released the application form in Japanese, and the English version will also be released shortly. There is no “filing fee” in connection with this application.

The application form should include, for example, (i) the name and address of the Covered FBO, (ii) the name and title of representative of the Covered FBO, (iii) the name and contact information of a designated representative in Japan, (iv) the name and title of persons in charge of the relevant temporary business, (v) the name of the foreign authorities and the details of license, (vi) a summary of difficulties or the possibility of difficulties to continue the business in its home jurisdiction; (vii) the content of business to be conducted in Japan under the approval, (viii) the period for which the business is to be conducted in Japan, and (ix) the contents of other businesses to be conducted in Japan, if any. A Covered FBO must appoint a representative in Japan in order to obtain this approval by the FSA. The period for which the FSA will grant the temporary approval for conducting business in Japan is not more than three months. Upon the FSA’s approval, the name of the Covered FBO, the content of business to be conducted in Japan, and the period for which the business is to be conducted in Japan will be publicly available.

If a Covered FBO conducts a securities-related business or investment management business in Japan without obtaining approval from the FSA, such conduct could be considered as an unlicensed Financial Instruments Business activity under the FIEA, which could lead to criminal liability of imprisonment for not more than five years, a fine of not more than 5 million Japanese yen, or both.

PUBLIC COMMENTS AND Q&A CONCERNING THE AMENDMENTS

Together with the Amendments, the FSA also announced on July 22, 2020 its response to public comments, as well as Q&As concerning the Amendments to clarify the interpretation of the new rules following the Amendments. The key features of these clarifications are as follows:

  • Before the Amendments, it has been interpreted that the registration as a Financial Instruments Business Operator is not required when foreign business operators conduct business in Japan during a short business trip (e.g., for one to two weeks) to Japan. The FSA clarified that the Amendments would not change this interpretation. In other words, even after the Amendments, foreign managers may continue to conduct activities under a foreign license during these brief business trips in Japan.
  • The FSA clarified that the Amendment would not change the existing rules of the “Independent Agent Exemption” for Japanese-registered Discretionary Investment Managers (DIMs) under Japanese tax law. In other words, the existing rules applicable to the Japanese registered DIMs will also apply to Covered FBOs conducting temporary business in Japan following approval by the FSA.
  • The FSA noted that, although prior approval is not available, in principle, the approval will be granted within three business days after the filing of the application if the substantial review of the application documents has been completed prior to the formal submission. The FSA expects Covered FBOs to consult with the FSA concerning the content of the application documents prior to the formal application.
  • There is no renewal system under the new rules. However, in cases where the catastrophe has not been abated or cured within the original approved period, the Covered FBO may file a new application for up to another three-month period prior to the expiration of the original approved period. If there is no change of the application documents, the Covered FBO may omit the attachments by filing an oath to state so. The FSA also clarified that there is no limitation as to the number of times a Covered FBO may file an application.
  • The FSA clarified that, in general, the representative in Japan should be a senior person among persons in charge of the relevant temporary business in the Covered FBOs conducting the relevant temporary business in Japan. The FSA also noted that, if a Covered FBO is an affiliate of Japanese Financial Instruments Business Operator, a person in such Japanese Financial Instruments Business Operator may act as the representative in Japan in the Covered FBO.
  • If it is difficult to obtain required attachments (such as certificate of license issued by the relevant home jurisdiction) due to the catastrophe in the relevant jurisdiction, the Covered FBO may instead file a copy of document created by foreign authorities which describes the information similar to a certificate of license or a list of licensed foreign business operators.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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