Regulatory Update-Supervisory Guidance and Update to Form 20 for Managers Marketing in Japan
Regulatory Update – March 23, 2015, Issue 102
As a placement agent licensed with the Financial Services Agency (FSA) in Japan, Monument Group wishes to ensure awareness on the part of its friends and clients of certain FSA regulations that impact managers of funds marketed to Japanese investors. An exemption (commonly known as the “Article 63 Exemption”) to one such regulation is particularly important for fund managers domiciled outside of Japan who may market their funds into Japan. But for this exemption, the vast majority of managers of funds distributed by Monument Group in Japan would be required to register with the FSA. Accordingly we are working with our clients to ensure that they avail themselves of this important exemption by complying with the FSA requirements.
This regulatory update is intended to provide friends and clients with all the necessary background information on Article 63 and make them aware of certain updates and upcoming changes to this exemption.
Background for the Article 63 Exemption
Private fund managers who market in Japan and ultimately have one or more Japanese investors in their funds are required to hold both distribution and investment management registrations in Japan. However, since being enacted in 2007, the Article 63 Exemption for “Special Business Activities for Qualified Institutional Investors” of the Financial Instruments and Exchange Act of Japan (FIEA) has allowed foreign managers of collective investment schemes to avoid these costly and burdensome FIEA registration requirements when marketing to Japanese investors. The exemption requires at least one Qualified Institutional Investor (QII) to be subscribed to the applicable fund at all times and permits up to 49 non‐Qualified Institutional Investors to also subscribe to the fund without triggering FIEA registration.
The FIEA’s Article 63 Exemption also requires an offshore manager to file what is called a “Form 20” with the FSA. This Form serves as, essentially, an exemption from (1) engaging in a “self‐offering” (jiko boshu) in Japan of the interests in the fund; and (2) engaging in “self‐management” (jiko unyo) of the assets of Japanese investors subscribed to the fund. To date, well over 2,500 entities have made filings with the FSA under the Article 63 Exemption.
Notably, the Form 20 filing requirement applies even where the offshore manager may be using the services of an FSA‐licensed placement agent such as Monument Group. Accordingly, in order to avoid triggering “self‐offering” licensing, most managers make an effort to file the form prior to any substantive marketing efforts to Japanese investors on their own part or on the part of their placement agent. It is worth noting that only managers of collective investment schemes in the form of limited partnerships can use the Article 63 exemption. Managers of funds formed as trusts 2 or corporations must follow a registration process in order to market to Japan‐based investors. Monument Group can, however, provide additional information on this separate process to clients whose funds are formed as corporations or trust vehicles.
Recent Updates and Proposed Amendments to the Article 63 Exemption
As noted, the FSA has proposed some changes to the important Article 63 Exemption. In particular, the FSA has: (i) imposed a requirement for managers to update Form 20 for purposes of identifying an investing QII; and (ii) proposed amendments tightening of the definition of Non‐Qualified Institutional Investors.
i. Updating Form 20 upon the investment of a Qualified Institutional Investor (QII).
As some of our clients are already aware, the FSA has been sending inquiries for additional investor information to all managers who have previously filed a Form 20 without identifying a QII – primarily because no such QII had invested at the time of the filing. While nothing has changed on the Form 20 itself, the FSA is now calling for strict adherence to this requirement. In particular, the FSA is requiring managers who initially filed an incomplete Form 20 to update their forms once a qualified institutional investor (QII) has invested in the relevant fund. (Some of our clients who are currently marketing or managing a fund in Japan may have already received such a notice from the FSA.) If you do not yet have a QII invested in your fund, you should indicate such on the Form 20. If you are nearing a fund closing and do not have a Japanese‐based investor in queue, consider filing a “Notice of Abolishment,” which is one of the options provided in the FSA’s notice.
ii. The new definition of “Permitted” Non‐QIIs.
Responding to significant losses experienced by unsophisticated Japanese investors, in May 2014, the FSA also proposed amendments to Article 63 (the “Proposed Amendments”) in an effort to narrow the definition of qualifying non‐QIIs for purposes of the exemption. The language of the Proposed Amendments has not yet been finalized, nor, as of the time of this writing, has the FSA published a response to public comments. However, the amendments seek to narrow the types of investors that can qualify as non‐QIIs under the Article 63 exemption to larger institutional investors (“Permitted non‐QIIs”) – e.g., pension plans, certain registered entities, etc. – in a number not to exceed 49.
The Proposed Amendments will limit the types of non‐QII investors to the following:
- Registered financial instruments business operator such as a Type 2 Financial Instruments Business Operator or an Investment Advisor;
- Fund Manager;
- Someone with a close relationship to a Fund Manager (e.g., officer, employee, parent company);
- Listed company;
- Stock company with a capital amount of over JPY50 million;
- Government affiliated corporation or an independent administrative institution;
- Special purpose company incorporated under the Act on Securitization of Assets;
- Employees’ pension fund or corporate pension fund expected to hold investment assets (as defined by the regulations) of JPY10 billion or more;
- Foreign entity;
- Individual expected to hold investment assets of JPY100 million or more and who has maintained his/her account for securities and/or derivative trading for over a year;
- Individual who is a GP of a partnership or a business operator of an anonymous partnership and foreign equivalent and is expected to hold investment assets of JPY300 million or more;
- Entity similar to any of the categories listed above.
The Proposed Amendments also include changes to the Comprehensive Guidelines for the Supervision of Financial Instruments Business Operators, etc. (the “Supervisory Guidelines”) for managers operating under the Article 63 Exemption. (The Supervisory Guidelines are the standards by which the FSA will expect all managers operating under the Article 63 Exemption to operate.) Specifically, under the Proposed Amendments, the following items for supervision over fund managers/General Partners operating under the Article 63 Exemption have been added:
- that the fund manager/General Partner operating under the Article 63 Exemption has taken affirmative steps to confirm: (a) the status of each QII and each non‐QII Investor; and (b) the number of non‐QII Investors subscribed to the LP Fund does not exceed 49; and
- that the fund manager/General Partner has properly kept records of the steps taken in relation to the foregoing confirmation and maintains custody of such records.
Although the effective date of the Proposed Amendments remains undetermined, we believe that the vast majority of investors solicited by Monument Group for its clients in Japan will ultimately fall within the new definition of a “Permitted” non‐QII. However, Monument Group continues to closely monitor for updates on the status of the Proposed Amendments and will keep our clients apprised of all relevant developments.
Conclusion
As an FSA‐licensed placement agent, Monument Group must ensure that its clients are also aware of FSA regulations that may impact them as managers of funds marketed in Japan. Monument Group will continue to monitor developments affecting the Article 63 Exemption and will keep its clients well‐informed of any additional updates to this important exemption.
Important Note: The information contained herein is general in nature and is not intended, and should not be construed, as legal or investment advice or opinion provided by Monument Group. This material may not be applicable to, or suitable for specific circumstances or needs. The reader should contact his or her counsel prior to taking any action based upon this information. Monument Group assumes no obligation to inform the reader of any regulatory changes or other factors that could affect the information contained herein.
About Monument Group
Monument Group is a leading, independent private fund placement agent managed by a senior team with significant buy side investment heritage. Since its inception in 1994, Monument Group has assisted clients around the world in raising 70 funds with 40 repeat clients, totaling over $80 billion of equity against an aggregate target of $77 billion. These clients represent a broad range of investment strategies including buyouts, growth capital, distressed securities, credit, venture capital, real estate, energy, special situations and payments for ecosystem services.
Monument Group, Inc. is a member of the Financial Industry Regulatory Authority (FINRA); Monument Group Europe LLP is authorised and regulated by the Financial Conduct Authority; Monument Group, L.P. is licensed as a Type II Financial Instruments Dealer in Japan; Monument Group (HK) Limited is licensed to conduct Type 1 regulated activities in Hong Kong.
