The SESC's Recommendations for Strengthening Market Surveillance Functions
The Securities and Exchange Surveillance Commission (SESC) has submitted three recommendations for the strengthening of market surveillance functions to the Prime Minister and the Commissioner of the FSA:
- Expanding insider trading regulations to cover more types of related parties
- Strengthening administrative monetary penalties by increasing amounts and expanding scope to improve deterrent effects
- Enhancing inspection and investigation capabilities through various measures including expanded powers and international cooperation
The SESC emphasizes the need for these reforms as Japan works towards becoming an "asset management powerhouse" while ensuring fair and transparent markets for all investors.
As public-private efforts towards becoming an asset management powerhouse progress and anyone can become an investor, it is important to further strengthen market surveillance functions and establish a fair and transparent market where both existing and new investors can invest with confidence.
Given the increasing complexity, sophistication, and internationalization of financial instrument transactions, and based on the results of recent inspections and investigations by the Securities and Exchange Surveillance Commission (SESC), the following cases have been identified, requiring the establishment of effective measures to appropriately address these issues:
Case 1: Cases where acts considered fraudulent cannot be captured as violations under existing laws and regulations
Case 2: Cases where the amount of administrative monetary penalties is low (or not directly applicable), resulting in insufficient deterrent effect against violations
Case 3: Cases where difficulties arise in conducting effective and efficient inspections and investigations
Recommendation 1: Scope of Related Parties in Insider Trading Regulations
There are cases where persons who receive information from those who should be considered insiders equivalent to tender offer-related parties, such as contract signatories with issuers, fall outside the scope of insider trading regulations. These are acts that should be considered fraudulent in light of the purpose of the regulations, but are not subject to regulation under the current system.
⇒ Need to expand the scope of tender offer-related parties to include those who should be considered insiders equivalent to each related party
Recommendation 2: Scope and Calculation Standards for Administrative Monetary Penalties
Many malicious cases occur where unfair trading is conducted through the use of nominee accounts, including cooperative parties who are not subject to administrative monetary penalties but who provide accounts while being aware of the unfair trading by the recipient. Additionally, there are cases such as non-submission of large shareholding reports by investors who continuously accumulate shares, where the current level of administrative monetary penalties appears insufficient as a deterrent compared to the expected profit amount. Furthermore, unfair trading cases involving high-frequency trading, which is a new form that may make it difficult to calculate administrative monetary penalties using conventional methods, have been identified.
⇒ Need to take appropriate measures including raising the level of administrative monetary penalties and expanding their scope to exert effective deterrent power, and revising calculation methods to respond to new trading forms
Recommendation 3: Measures for Effective and Efficient Implementation of Inspections and Investigations
In conjunction with raising the level of administrative monetary penalties based on Recommendation 2, it becomes important to further enhance effectiveness and efficiency in inspections and investigations.
⇒ Need to take appropriate measures such as expanding reduction systems to encourage voluntary cooperation from subjects
Diversification of financial instrument business operators and listed companies subject to SESC inspections and progress in international cooperation between authorities have been observed.
⇒ Need to take appropriate measures including adding powers for appearance orders regarding inspections of domestic business operators and investigation cooperation with foreign authorities, and working toward early signing of the International Organization of Securities Commissions (IOSCO) Enhanced Multilateral Memorandum of Understanding (EMMoU)
There is a need to appropriately respond to cases suspected of being composite types involving unregistered financial instrument business and fraudulent practices, market manipulation, and other unfair trading.
⇒ Need to take appropriate measures such as creating criminal investigation authority for those conducting unregistered business
Norbert Gehrke
