This second guidance column from Japan Asset Management Platform Group (JAMP) highlights offsite monitoring of financial instruments business operators (FIBOs) by Japanese authorities. The Securities and Exchange Surveillance Commission (SESC), an independent body, collaborates with the Financial Services Agency (FSA) to conduct market surveillance and investigations of misconduct, inspections of FIBOs and disclosure statements, and criminal investigations. Below, JAMP explains the increasing incidence and importance of off-site monitoring.
In recent years, financial oversight in Japan has evolved from on-site inspections to a combination of on-site inspection and off-site monitoring, performed by various teams of SESC. In June 2020, the SESC abolished its Inspection Manual for Financial Instruments Business Operators, indicating the performance of the change. Compliance officers will surely miss the convenience of the manual, but they should not let their guard down. On-site inspections will continue and FIBOs need to be well-prepared for them. Over the last 3 years, the financial regulators completed between 40 and 70 FIBO inspections per year. Of those, some 30-50 operators were found to be not fully compliant or identified as having room for improvement, and sanctions were imposed on about 10 of them.
Due to the COVID-19 pandemic, we anticipate on-site inspections this year to be largely curtailed, with more emphasis placed on off-site monitoring. FIBOs looking to tighten compliance of their internal control systems with agency regulations should be prepared for the different procedures and methods of off-site inspection.
Regulators will gather information from various sources to verify compliance by the FIBO subject to inspection. Inspectors may conduct interviews by phone, scrutinize various reports, and require additional data submissions, if necessary. In some cases, regulators may routinely browse a financial operator’s website to verify that the contents are appropriate and truthful, and to seek explanations where discrepancies or red flags are found.
The following excerpts from the Securities Monitoring Overview and Case Studies, issued by SESC in July, illustrate some of the violations uncovered during on-site inspection. Operators should expect the same level of scrutiny from off-site inspectors.
▪Solicitation on website
- False or misleading representation of material matters were found.
- A securities firm sold corporate bonds to customers, falsely indicating in solicitation materials that the bonds had been audited by certified public accountants (CPAs).
- Advertisements significantly misled investors about commissions and transaction fees.
- A Type I FIBO violated its own rules by placing ads on the web after perfunctory review by the originating unit and without consulting the firm's compliance unit's role, the procedures to be followed, proper record keeping, etc. The ad as published contained potentially misleading errors.
- An investment advisor falsely posted an article on a comparison website regarding its advisory performance etc., as if it had been evaluated and/or uploaded by a third party.
As FIBO inspections move increasingly off-site, operators should maintain rigorous systems to ensure that websites are fully compliant with laws and regulations.
About JAMP: https://www.jamplatform.com/english/