Financial Sector

March 2006

TSE eyes 30% order cap on buying a firm's shares
The Tokyo Stock Exchange will limit the size of individual stock purchase orders to less than 30 percent of a company's outstanding shares by the end of April, Liberal Democratic Party and TSE sources said Friday. The TSE is taking the action to stem large, erroneous brokerage orders, they said. It will also publicly identify, beginning in May, any brokerage that places a botched order over a certain size. TSE representatives presented the plan at a meeting of lawmakers from the ruling LDP's panel on financial system affairs. The bourse will modify its computer trading systems to incorporate the limit, the sources said. The plan to set the purchase ceiling was devised in response to a mistaken order last December by Mizuho Securities Co. to sell 610,000 shares in a newly listed staffing firm, J-Com Co., for 1 yen each, instead of one J-Com share for 610,000 yen. The order set off a stampede by brokers and individual investors to cash in on the suddenly bargain-priced stock. The TSE will also verify with brokers the accuracy of orders in excess 5 percent of a firm's outstanding shares, up to the 30 percent limit, the sources said. The exchange will suspend orders found to be in error and urge brokerages to cancel them. The TSE will also consider a proposal made at the meeting by an LDP lawmaker to identify all brokerages that place erroneous securities orders, regardless of the size of the purchase. (The Japan Times: March 18, 2006)

Proposed Law Fills Gaps In Investor Protection Safety Net
Ensuring adequate disclosure of risks associated with financial products, as well as extending tender offer periods, are key features of investment services legislation approved Friday by the cabinet. While rules governing financial products have been spread across a variety of laws, the proposed legislation would comprehensively regulate most products that are subject to such risks as a loss of principal. It would cover most high-risk vehicles including stocks, bonds, investment trusts, derivative deposits, variable annuities and foreign-denominated deposits. The new law would also impose regulations on investment partnerships, funds and other entities currently escaping government oversight. The legislation will be presented to the current Diet session, and if passed, could take effect next year. Under the proposed law, marketers of financial products would be required to provide easy-to-understand explanations to potential investors, as well as detailed information on the related risks. For instance, they must let customers know the magnitude of a potential loss in principal. Currently, investors seeking compensation associated with insufficient explanations must demonstrate a causal relationship between the marketing of the financial product and their ensuing losses. But under the new law, they would need to prove only that the marketers failed to supply the required explanations. In addition to compensating their customers, these businesses would also be subject to administrative penalties. Rules on tender offers would also be changed to make such solicitations more investor-friendly. The tender period is currently counted by calendar days, but the 20- to 60-day window would be calculated on a business day basis under the proposed framework. And the target would be permitted to demand an extension to 30 business days from the beginning of the offer. This means the minimum time shareholders are given to consider the offer would be more than doubled from 20 calendar days to 30 business days, or about a month and a half. The new law would also make it easier for investors and shareholders to see the positions of both the prospective acquirer and its target. The targeted firm would need to indicate its stance regarding the tender offer, and the potential acquirer would be required to answer questions from its intended quarry. But the party conducting the tender offer would be able to lower the tender price after the offer has been launched if the target decides to trigger such defenses as a stock split. And the potential acquirer would be allowed to withdraw the tender offer for cases involving issuances of new shares and equity warrants or the sale of high-value assets. The new law would also impose harsher penalties for corporate executives who mislead investors. The maximum prison term for such securities law violations as engaging in unfair trading and falsifying financial statements would be raised to 10 years, up from five years at present. The legislation also calls for stepped up disclosures, requiring publicly traded firms to issue quarterly earnings statements and top managers to certify certain financial documents. Disclosure rules would also be tightened for large shareholders. Under the proposed framework, securities firms, banks and other institutional investors that engage in frequent stock trading must file biweekly reports on stakes exceeding 5%, rather than on a quarterly basis as currently required. All filings would be done online to enhance viewing access for investors. (The Nihon Keizai Shimbun, March 11, 2006)