Proposed Amendment to the Investment Trust and Investment Corporation Act of Japan

Investment funds established in Japan using an investment trust structure (the "Investment Trusts") or an investment corporation structure (the "Investment Corporations") are subject to the Investment Trust and Investment Corporation Act of Japan (the "ITICA").  The ITICA also governs investment funds established in other countries (such as the Cayman Islands and Luxembourg) using an investment trust structure (the "Foreign Investment Trusts") or an investment corporation structure (the "Foreign Investment Corporations"), and for which solicitations for investments are conducted in Japan. 
 
The ITICA has not undergone extensive amendments since 2000, when the Investment Corporation for investment in real property (i.e., J-REITs) was introduced in Japan.  The Financial Services Agency of Japan (the "FSA") is currently contemplating an extensive amendment to the ITICA to take into account international trends in fund regulations, social and economic changes, and developments in financial products in recent years.  A working group under the FSA published its final report on the proposed amendments to the ITICA on 7 December 2012.  The key points of such amendments to the ITICA are outlined as follows.
 
Amendments to Investment Trust Regulations
 
Deregulation in response to recent international trends in fund regulations and social and economic changes
 
Written resolution.  Under the existing ITICA, a unit-holders' written resolution is required for (i) any "material change"(1) to the trust deed of an Investment Trust or a Foreign Investment Trust or (ii) a merger between two Investment Trusts or Foreign Investment Trusts.  However, it is practically difficult for a fund (especially one that is publicly offered) to obtain such written resolution.  Accordingly this written resolution requirement is claimed to impede the flexible management of a fund.  To address this issue, the FSA proposes to limit the written resolution requirement to certain changes to trust deeds and certain merger terms.
 
Trade of assets between funds managed by the same manager.  Currently, asset trading between Investment Trusts managed by the same investment management company is, in principle, prohibited unless such trade is deemed necessary and reasonable or the consent of all unit-holders in the relevant Investment Trusts has been obtained for such trade.  The scope of the safe harbors for this provision will be further clarified in the amended ITICA.
 
Multi-class funds.  In response to international trends on fund regulations, the FSA initially contemplated allowing Investment Trusts to issue several different types of units, similar to class shares, whose trust fee structures, currencies and other arrangements would respectively be different.  However, as a result of discussions on this issue, the FSA decided against the introduction of this amendment in order to further analysehow the conflicting interests of various classes may be balanced.
 
To secure proper products suitable to retail investors
 
Management report.  Currently, investment management companies managing Investment Trusts and issuers of Foreign Investment Trust units are, in principle, required to prepare management reports for each of the fund's accounting period and deliver such reports to fund unit-holders.  In order to make it easier for unit-holders to understand the actual investment status of funds in which they are investing, the FSA intends to require fund managers and issuers to prepare two types of reports, namely, (i) a report on material issues regarding investment status which will be delivered to fund unit-holders in writing or email, and (ii) a report detailing information regarding investment status which will be delivered to fund unit-holders in the form of, in principle, electronic copies through the website.  The FSA will also be reviewing the items required to be included in such management reports.
 
Restrictions on certain investments.  In response to recent complicated financial products and complex risks posed by such products, and in order to protect retail investors, restrictions on funds' investments based on degrees of credit risk and derivative transaction risk will also be introduced into regulations governing investments by Investment Trusts and Foreign Investment Trusts.  The FSA will also enhance regulations on disclosures to investors regarding investment risks in order to allow investors (in particular retail investors) to understand investment risks faced by the Investment Trusts and Foreign Investment Trusts in which they are investing.
 
Amendments to Investment Corporation Regulations
 
Need for fundraising measures
 
Rights offering.  Fundraising options for Investment Corporations are limited under the current ITICA. Due to such limited fundraising options, cash flow and other financial issues faced by Investment Corporations became especially apparent during the Lehman crisis.  Accordingly, the FSA will be introducing rights offerings as an additional fundraising option to Investment Corporations in order to improve the stability of Investment Corporations.
 
Convertible bonds, etc.  The FSA had initially also contemplated introducing the issuance of (i) convertible investment corporation bonds and (ii) classified equity units in an Investment Corporation, as further fundraising options to investment corporations.  However, the FSA ultimately decided against making these options available at present in order to further analyse how the conflicting interests of various equity holders under the current relatively simple corporate governance structure may be balanced.
 
Transparency of system & trading
 
Corporate governance.  The ITICA will also be amended to enhance the corporate governance system of Investment Corporations to facilitate the monitoring of asset trades between Investment Corporations and parties related to the investment management company thereof.
 
Insider trading regulations.  The trading of equity units in Japan-listed Investment Corporations is currently not subject to the insider trading regulations under the Financial Instruments and Exchange Act of Japan (the "FIEA").  However, considering that such trading is generally subject to insider trading regulations in other countries, and in order to enhance investor confidence in the securities market as well as transparency in trading, the scope of insider trading regulations under the FIEA will be expanded to cover listed equity units in Investment Corporations.
 
Other measures
 
Offshore real property.  Since the current ITICA prohibits Investment Corporations from being majority shareholders of other corporations, Investment Corporations are restricted from acquiring real properties located in other countries through the use of special purpose corporations established in such countries (especially in countries that prohibit foreign investors from directly acquiring real properties).  In order to facilitate the acquisition of offshore real properties by Investment Corporations, the ITICA will be amended to allow Investment Corporations to be majority shareholders of corporations which are set up to acquire offshore real properties.
 
Conclusion
 
The FSA is currently preparing both an ITICA amendment bill and a FIEA amendment bill, and proposes to submit them to the regular Diet session in 2013.  Assuming that these bills are passed, the amended ITICA and FIEA can be expected to come into effect after the latter half of 2014.
 
Mr. Osamu Adachi is a partner at Anderson Mori & Tomotsune.  He has extensive experience in advising both Japanese and foreign clients on financial transactions and regulations (including fund regulation), mergers and acquisitions and other corporate matters.  Osamu is admitted to the bar in Japan and New York.  He has an LL.B. from The University of Tokyo and an LL.M. from Columbia University School of Law.
 
Mr. Osamu Adachi can be contacted by phone at +81 3 6888 1078 or via email at osamu.adachi@amt-law.com
 
Mr. Takahiko Yamada is an associate at Anderson Mori & Tomotsune, and has been involved in a broad range of matters.  His main practice areas are in financial regulations, asset management and investment funds, real estate investments, and financial transactions.  Takahiko also served on secondment from July 2009 through February 2012 as deputy director of the Financial Markets Division, Planning and Coordination Bureau of the Financial Services Agency of Japan, where he was responsible for all aspects of law and regulations governing investment management businesses and participated in the development of new legislation.  Takahiko received his LL.B. from Keio University.
 
Mr. Takahiko Yamada can be contacted by phone at +81 3 6888 5861 or via email at takahiko.yamada@amt-law.com