Changes to the FIEA Article 63 Exemption
Regulatory Update – March 16, 2016, Issue 103
A number of Monument Group clients operate under the Article 63 exemption (the “Article 63 Exemption” or “Exemption”) of the Financial Instruments and Exchange Act (FIEA) in Japan. This Exemption permits offshore managers to market to institutional investors relatively freely in Japan and to take Japanese investors into their funds.
As Monument Group has previously informed our clients, there have been a number of amendments and proposed amendments to the Article 63 Exemption over the past 18 months to 2 years, including changes to the Exemption’s Form 20 filing and to the Exemption’s definition of “Qualified Institutional Investor” (QIIs). Most recently – November 15, 2015 – the FSA released more substantive amendments to the Exemption and, after a brief comment period, adopted the final version of these amendments in February 2016 with an effective date of this past March 1st, 2016. Luckily, existing Form 20 filers may take advantage of a six‐month grace period for compliance with the more salient new requirements.
This memo provides further detail for our clients on the short‐term and longer‐term changes necessary for compliance with these recent amendments to the Article 63 Exemption (the “Amendments”).
Requirements to be met by end of Grace Period (August 31, 2016)
As noted above, the Amendments provide a six‐month grace period (“Grace Period”) – until August 31, 2016 – with respect to certain new requirements under the Exemption. However, existing filers under the Article 63 Exemption (“Article 63 Exemption Operators or “Exemption Operators”) should become familiar with these new requirements for a smooth transition as of August 31st.
By the end of the Grace Period existing Article 63 Exemption Operators must meet the following new requirements:
1. Provide additional information to the Japanese regulator (the FSA) by filing a new form of Article 63 Notification. The new form requires disclosure of significantly more information, including:
- the name and address of the office where the Article 63 Exemption Operator actually conducts its business,
- a description of relevant investment portfolios of the Fund, and
- the name, type, and number of all Japanese QIIs in the fund.
NB: Current Article 63 Exemption Operators may amend their existing forms to include all necessary additional information required by the Amendments. However, once an Article 63 Exemption Operator has adopted the new form, any further amendments and revisions to their notification must be made using the new form. 2
2. Submit additional documentation to the FSA with the new form of article 63 notification, including but not limited to the following:
- an oath of the Exemption Operator, its officers, and employees regarding certain qualification criteria;
- the constitutional document of the Exemption Operator; and
- the corporate registration of Exemption Operator.
3. Appoint a Japan representative: Importantly, the new amendments require offshore Article 63 Exemption Operators to appoint a Japan “representative” that is responsible for proper and efficient communications with Japanese regulators on behalf of the Exemption Operator. The FSA has provided the following guidance with respect to the status and role of an appropriate “representative”:
- It will not be necessary for the offshore Article 63 Exemption Operators to establish a physical presence or to situate personnel in Japan.
- As long as the regulators can immediately and adequately communicate with an offshore Article 63 Exemption Operator through such a Japan representative, any person who is a resident in Japan may serve as the Japan representative for the offshore Article 63 Exemption Operator.
- Appropriate professional service providers, such as lawyers and certified public accountants, as well as affiliated companies with presences in Japan, financial instruments business operators, independent advisers, and translators may be appointed to serve as a Japan representative to the offshore Article 63 Exemption Operator.
- NB: Type II distributors such as Monument Group may serve as the Japan representative for offshore managers for purposes of the Art. 63 exemption.
- After filing the above new form Article 63 Notification, Article 63 Exemption Operators must also make certain registered information available to its Japanese investors for easy access and review of such information (such as by maintaining such information at each of their offices or making it accessible via a website).
Immediate Compliance Requirements:
General obligations/duties
In principle, after the Effective Date, all existing Article 63 Exemption Operators will be subject to certain basic duties and prohibitions generally consistent with those governing non‐exempt distributors and asset managers registered with the FSA in Japan. These additional requirements should not, however, create significant additional burdens for Monument Group clients. In particular, newly applicable FIEA prohibitions against unfounded statements, the holding of misappropriated assets and the commingling of proprietary and investor funds should not (we hope!) necessitate any material changes to our clients’ existing policies and procedures.1 Likewise, Monument Group clients should not find a duty of loyalty, a fiduciary duty toward investors or a prohibition against self‐dealing to be “new” undertakings for them.
Record‐Keeping Obligations
Beginning March 1st, certain records must be maintained by Article 63 Exemption Operators with respect to both the “self‐offering” and “self‐management” aspects of the exemption. These records can be prepared and maintained in English. In addition, they only need to be maintained with respect to the Article 63 Exemption Operator’s Japan investors or in relation to any solicitation activities conducted in Japan.
Although Monument Group clients should already retain most, if not all, of the information under the laws of their respective jurisdictions/home regulators, some adjustments to current record‐ keeping/reporting systems may be necessary to ensure compliance with the Japan‐specific requirements under the Amendments.
1. “Self‐Offering” record‐keeping obligations.
After March 1st, existing Article 63 Exemption Operators will be required to prepare the following records and to maintain them for 10 years:
(i) The “Japan Investor Ledger” (kokyaku kanjo motocho) listing the name of each Japan limited partner, subscription date, name of the relevant LP Fund, number of interests subscribed, unit price and subscription amount, issue date of the LP Fund’s relevant interests, and credit, debit, and balance in the fund.
(ii) The “Transaction Record” (torihiki kiroku) describing the name of all Japan limited partners, name of the LP Fund, manner of offering of the LP fund, and particulars of orders accepted and executed (e.g., number of interests, unit price, and the amount and date of the orders accepted and executed).
2. “Self‐Management” record‐keeping obligations
Article 63 Exemption Operators engaging in “self‐management” – i.e., having Japan‐domiciled fund investors – must likewise prepare and maintain certain statutory books and records for 10 years. Such statutory books and records include:
(i) The Limited Partnership Agreement, or any other agreement that authorizes the Article 63 Exemption Operator to manage the assets contributed by the investors;
(ii) A copy of the investment management report (unyo houkokusho, Management Report) with respect to each management period of the LP Fund (no such report must be delivered to investors who are QIIs, but the manager must nonetheless create/retain the same information for QII investors); and
(iii) The Investment Management Detail Sheet (unyo meisaisho) with respect to the relevant assets under management by the Article 63 Exemption Operator.
Finally, Article 63 Exemption Operators must prepare and file with the FSA an annual business report as set forth under the Amendments (jigyohokokusho, Business Report) from the beginning of their business year following the Effective Date (i.e., March 1, 2016). For example, if the business year of an Article 63 Exemption Operator started January 1 and ended December 31, such Article 63 Exemption Operator would be required to prepare a business report for the business year starting January 1, 2017, and ending 4 December 31, 2017 (and the deadline of such business report is March 31, 2018). The Business Report (or information included therein) must be made available to the public upon request.
Possibility of Relying on Other Exemptions or Arrangements
Many Monument Group clients have elected to file under the Article 63 Exemption to give them greater flexibility with respect to their marketing activities in Japan (even though Monument Group serves as their Type II‐licensed distributor there) and have viewed the exemption as reasonable in light of the minor cost and low administrative burdens. The Amendments, however, impose more complicated filing requirements with materially burdensome ongoing obligations, some of which are on par with the obligations of fully‐registered Financial Instruments Business Operators in Japan. Accordingly, we recommend that Monument Group clients take the opportunity at this point to consider whether there are less burdensome alternatives to the Article 63 Exemption that would still allow for Japan‐based investors in their funds going forward.
One potential consideration for Monument Group clients could be what is known as the “de minimis” exemption from “self‐management” licensing under FIEA. Under this exemption, offshore fund managers need not be licensed under the FIEA where (i) the direct investors of the limited partnership are QIIs or Article 63 Exemption Operators, (ii) the indirect investors of the limited partnership are QIIs, (iii) the total number of the direct and indirect investors from Japan is less than 10, and (iv) the total amount of assets contributed by the direct investors from Japan does not exceed one‐third of the total assets under management of the limited partnership.2 A manager of a fund meeting these requirements and who has appointed a FIEA Type II licensed distributor (such as Monument Group) to perform its marketing in Japan could potentially avoid any filings or other notifications to the FSA in Japan.
Monument Group would be happy to discuss this potential Article 63 alternative – or any other matters detailed in this memorandum – in further detail at our clients’ convenience. We also encourage all clients to consult with their own counsel before taking any further action pursuant to the Amendments.
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.
1 Certain new requirements under the amendments – including a suitability check and the delivery of explanatory documents to investors prior to the purchase of a fund interest – will not be applicable where the Article 63 Exempt Operator markets only to QIIs.
2 Article 16(1)(xiii) of the Cabinet Office Ordinance concerning the Definitions Specified in Article 2 of the FIEA.
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 a range of general partners around the world to raise 76 funds, totaling $84 billion of equity. These clients represent a broad variety of investmentstrategies including buyouts, debt, distressed, energy and natural resources, growth, infrastructure and real estate. Monument Group has offices in Boston, Hong Kong, London and Tokyo. To learn more about Monument Group, please visit www.monumentgroup.com.
Monument Group, Inc., is a member of the Financial Industry Regulatory Authority (FINRA); Monument Group Europe LLP is authorized 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 and authorised by the Securities Futures Commission (SFC) to conduct Type 1 regulated activities in Hong Kong and is exempt from registration in Australia by the ASIC
