For the last several months, the Financial Services Agency (the “FSA”) has worked toward strengthening the regulatory framework dealing with insider trading after Japan’s three major brokerage firms — Nomura Securities Co., Ltd. (“Nomura”), SMBC Nikko Securities Inc. and Daiwa Securities Co., Ltd. — were implicated in insider trading activities earlier this year. The FSA is set to finalize revisions to the current Financial Instruments and Exchange Act by the end of December and plans to submit the draft to the ordinary Diet session next year. Included in the revisions are the following:

  • Parties leaking inside information will also be fined. Currently, only investors who benefit from the information are fined.
  • The maximum fines levied against institutional investors will be substantially increased. The penalty charges will be calculated based on total fees the funds receive from their clients, instead of the profits derived from illegal trades. For instance, with respect to the scandal involving Nippon Sheet Glass Company, Ltd., the ¥130,000 fine would jump up to approximately ¥300 million under the new regulations.
  • Securities firms that have been found to have leaked inside information will be penalized even if the recipient does not act on the information. In the case of information leaked by other businesses, they will only be penalized if the information is used to benefit the recipient.

In our previous blog about insider trading at Nomura Securities, we noted the criticism that Japan’s existing rules were too lenient and unlikely to deter insider trading activities. The revised regulations will aim to curb these activities, and some institutions have gone far as to withhold information that may not even be considered inside information. In response to this overreaction, the FSA clarified that its intention was not to restrict legitimate information. However, if the rules are not clearly laid out, it may restrict the flow of other information. In the meantime, investors can only hope that the new rules are constructed in a manner that will bring confidence to the market and spur IPOs.