Financial Sector

December 2005

FSA To Tighten Disclosure Rules On Funds' Shareholdings
The Financial Services Agency has approached securities-related associations with plans to shorten the period during which investment funds are not required to disclose large stock purchases from up to three months to about two weeks in a bid to improve transparency. The revision to the special rule would call on funds and securities firms to disclose stock purchases of 5% or more of outstanding shares within five business days following the Friday of the week in which the deals took place. The maximum period allowed for such disclosures would effectively become two weeks. In cases where the purchaser already owns more than a 5% stake, the rule will apply to transactions involving changes of more than 2.5 points. The current requirement in these cases demands that disclosures be made by the 15th day of the following month. Market participants have criticized this special rule, citing problems such as funds suddenly emerging as large shareholders with the objective of taking over a company and causing wild swings in stock prices. The financial industry was particularly critical of shareholder activist Yoshiaki Murakami, who was able to use the rule to hide purchases of Tokyo Broadcasting System Inc. shares. This led a Liberal Democratic Party official to say "the special rule should be abolished." Institutional investors, many of which handle hundreds of issues, oppose the revisions. Many of them agree that it would be difficult to make short-term stockholding calculations for each issue. In the U.S., shareholding fluctuations of more than 5% must be disclosed within one month. And some warn that the new rules may discourage foreigners from investing in Japan. (The Nihon Keizai Shimbun, December 2, 2005)

Tougher Disclosure Rules for Investment Funds Come Under Fire
A proposal to tighten disclosure rules on stock purchases by investment funds faced strong opposition from institutional investors and others at a government panel meeting Friday. The Financial Services Agency hopes to see the period during which investment funds are not required to disclose large stock purchases shortened from the current three months. But institutional investors objected to the increased work loads set forth in the proposal, which the FSA presented to a working committee of the Financial System Council, an advisory panel to the prime minister. Moreover, attorneys and other experts warned of a backlash if the revised rule was applied to the securities industry as a whole, suggesting that the rule apply only to investors intent on controlling a company. Criticism has been brewing within political and business circles that investment funds have been taking advantage of the special rule to covertly acquire large blocks of shares, such as when a fund led by investor activist Yoshiaki Murakami took stakes in Tokyo Broadcasting System Inc. and Hanshin Electric Railway Co. In its proposal to the panel, the FSA did not set a specific target for reducing the disclosure period but instead listened to the opinions of five institutional investor groups that benefit from the special rule, including the Japan Securities Dealers Association. Earlier, the FSA floated the idea of shortening the period to about two weeks to securities-related groups. The council seeks to reach a consensus at its Dec. 16 meeting. However, it seems unlikely that the FSA's proposal will win unanimous support, and it is probable that a compromise will have to be found. (The Nihon Keizai Shimbun, December 10, 2005)