This 2nd column by Japan Asset Management Platform Group (JAMP) on potential snags for financial instruments business operators (FIBOs) concerns the duty to notify authorities when a change in business and business method is contemplated.
Applications to register as a FIBO in Japan must include a Statement of Operating Procedures (SOP), or gyomu hoho-sho, describing the intended business and business methods, in accordance with the terms and conditions of the Financial Instruments and Exchange Act and its cabinet ordinances. The SOP is the bible for all FIBOs in Japan.
Any change to a FIBO’s business, especially if considered material to the existing business as represented in the original Statement, requires “swift” (sumiyaka-ni ) notification of the regulator, generally interpreted to mean within 30 days. Prior to notification, we recommend submitting a draft SOP to the regulator, as the proposed change(s) may affect other documents previously submitted.
Any supplemental documents or revisions to previous filings or should be prepared in close consultation with the authorities. For example, an investment management FIBO that plans to expand product lines or add new types of products should first check with the authorities. Some products could require imposition of additional organizational structures, or additional hiring. New personnel required by the intended change should also be reported to the authorities within the required timeframe.
Notification may require more than an amendment to the text of the original SOP. A Statement may refer to “X as specified in the ‘attached’ Rule”. For example, “Article X – Compliance: Complaints or inquiries from outside the company will be dealt by the Company in good faith", in accordance with the provision of the attached “Rules for Handling Complaints”. In this context, the Rules for Handling Complaints are incorporated in the body of the SOP by reference, and are considered part of SOP, but separated as an attachment due to their length and complexity. Any amendment to the Rules in whole or in part is also considered an amendment to the SOP; therefore, notification of the change to the local authorities is required too.
When notification is required, it may be simpler to include all appropriate and necessary details in the revised SOP, rather than stating “as specified in the attached Rule”. If it is impractical to cite each revision to the attachment in the Statement, a new document can be created that enumerates those rules and regulations to differentiate “attached” documents from “separately prepared” documents. The new document should be titled to indicate whether it is intended as an attachment or not.
To avoid delays and omissions when notifying the authorities of changes to business and business methods, it is essential for the FIBO to establish and maintain an internal control system, such as maintaining a list of required notifications that is disseminated to compliance officers and employees.
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