By Tomoko Fuminaga

Associate, White & Case-Kandabashi Law Office, Tokyo, Japan1

A variety of factors have converged in recent years to cause discretionary investment managers ("DIMs") to need to provide a variety of ancillary services to their clients, particularly their international clients. These factors have included (i) an overall consolidation in the Japanese asset management industry; (ii) a significant increase in the assets being allocated to alternative investment managers by institutional investors and pension funds; and (iii) the desire of DIMs to use the provision of value-added services to differentiate their products from those of their competitors. Many of these requested auxiliary services were not contemplated as being within the normal scope of a DIM’s business when Japan’s Investment Advisory Business Law2 (the "IABL") was enacted in 1986. As a result, the undertaking of such activities by DIMs has inevitably given rise to the question of whether the DIM is engaged in a business not within the scope of its license and the possibility of the imposition of sanctions by Financial Services Agency ("FSA") inspectors.

This Article explores the types of ancillary ("side") businesses which have been registered by DIMs in Japan with the competent regional finance bureaus in order to ensure that they remain in compliance with the IABL. In the process of reviewing these registered side businesses, the structure and intent of the relevant licensing and registration3 provisions of the IABL are also explored.

I. Background

In Japan, the provision of discretionary investment management services is governed by the IABL. Under the IABL, an investment manager engaged in the discretionary investment management business (the "DIM Business") is required to be registered as an investment advisor (an "IA") with a supplemental license permitting the conduct of such DIM Business4. According to the data published by the Japan Securities Investment Advisers Association (the "JSIAA")5 as of March 31, 2003, there are 538 individuals and entities (98 of them capitalized by foreign entities) registered as IAs. Of the 538 IAs, 133 (61 of them capitalized by foreign entities) are licensed as DIMs .

Under the IABL, a DIM is required to focus primarily on its "core business". For a DIM, the "core business" is (i) providing general investment advice (the "IA Business") and (ii) conducting its DIM Business6 However, under certain conditions, a DIM may be permitted to engage in other "non-core" businesses as a "side business".

Article 31.1 of the IABL permits the following specific "side businesses": (i) the investment trust management business and the investment corporation asset management business as defined by the Law concerning Investment Trusts and Investment Corporations (the "ITML") (the "ITM Business"); (ii) the securities business (together with the ITM Business, the "Side Businesses Permitted by Other Laws") and (iii) activities related to the IA Business and DIM Business (the "Related Side Businesses")

II. Current Status of DIMs’ Side Businesses

IA registration applications for registered IAs are filed and maintained at the IA Registry in the 9 regional finance bureaus and the Fukuoka branch office. Approximately 85 % of the IAs are registered at the Kanto Finance Bureau (the "KFB") and the IA Registry listing these registered IAs is available for public review at the KFB7. One of the required disclosure items set forth in the IA Registry requires the IA to list businesses that the IA is involved in other than the IA Business and the DIM Business. According to the IA Registry maintained at the KFB, as of September 19, 2003, there were 532 registered IAs under the jurisdiction of the KFB of which 125 were DIMs8 The IA Registry shows that 87 of the DIMs engage in some kind of side business of which the most common side business is the ITM Business. There are 72 DIMs engaging in the ITM Business as a side business of which 47 DIMs engage in the ITM Business as their sole side business (i.e., 25 DIM firms have additional side businesses). Three DIMs engage in a securities business as their side business. The specific Related Side Businesses that DIMs are engaging in include the following:

  • 29 DIMs engage in providing information services,
  • 20 DIMs engage in consulting services,
  • 16 DIMs engage in support services for foreign parent companies or affiliates9,
  • 9 DIMs engage in the business of providing currency overlay10 services, and
  • 4 DIMs engage in other businesses11. The table below reflects these subdivisions of the overall DIM license and its side businesses.



Side Business


Side Business Permitted by Other Laws


ITM Business


(ITM only)


Securities Business


Related Side Business


Related Side Business Only


Providing Information




Supporting Foreign Affiliates


Currency Overlay




No Side Business


III. Side Businesses Permitted By Other Laws

A. Current Regulations

As stated above, under the current IABL, a DIM is allowed to engage in an ITM Business and the securities business as its side businesses.

(1) The ITM Business

Under Japanese laws, the license required to establish investment funds is separate from the license required to engage in managing investment funds. Thus, in order to establish investment funds, a DIM needs to be licensed as an investment trust manager or an investment corporation (each an "ITM") and engage in the ITM Business as a side business. It is interesting to note that, as of August 31, 200312, there are 89 ITMs in Japan and 137 DIMs13 (61 of them capitalized by foreign entities) and 70 of the ITM Business licensed registrants are engaged in both the ITM Business and the DIM Business.

(2) The Securities Business

Certain aspects of promoting a DIM Business are closely related to the soliciting of potential investors in investment funds. The current Japanese Securities and Exchange Law (the "SEL") only allows trained staff14 at registered securities broker-dealers to solicit potential investors in connection with securities, which include shares and unit interests in most investment funds.15 The SEL thus does not currently allow a professional working at a DIM to meet with potential investors to solicit sales of particular shares or interests in investment funds that it manages. Thus, a DIM representative may not accompany a registered securities broker-dealer (such as a distributor) to meeting with potential investors and provide information about a specific investment product under its management to potential investors, even if a registered securities broker-dealer (such as a distributor) accompanies the DIM representative, as such communications are deemed to constitute a solicitation of a security by an unregistered person. A DIM may, however, provide information and discuss its general investment strategies and past performance, without being deemed to be engaging in the solicitation of a security.

In order to overcome such limitation, many DIMs in the past have considered seeking registration as a securities broker-dealer. However, given the onerous registration process, solvency maintenance requirements and compliance burden, no DIM has been registered as a securities broker-dealer.

Although the technical legal prohibition against engaging in both the DIM Business and securities broker-dealer business was removed in 1998, contrary to expectations, very few securities companies became licensed to conduct a DIM Business. As of July 31, 200316, there were 272 companies registered as securities broker-dealers, of which only 13 companies are registered as IAs, of these only 3 have a DIM license. No Tokyo branch office of a foreign securities broker-dealer is licensed as a DIM.

One possible reason for lack of DIMs seeking securities licenses may be that the FSA interprets the IABL to require a DIM is required to focus primarily on its "core business." So, although a securities company may, in addition to conducting its securities business, engage in certain other businesses listed in the SEL as side businesses by filing a notification to the KFB, once a securities company is licensed as a DIM, Japanese regulatory policy to date has been that the securities company must give up other side businesses in order to ensure that its "core business" remains a DIM Business and securities business, as required by the IABL the securities company gives sufficient attention to its DIM Business. Such a securities company may maintain the other side businesses, but it will need to obtain separate approval from the KFB to continuously engage in such side businesses. To date no such permission has been granted.

However, effective April 1, 2004, an amendment to the IABL will reverse this regulatory policy position and permit a registered securities broker-dealer, also licensed as a DIM, to engage in businesses other than the core securities business by simply filing a notification to the KFB. Thus, the existing requirement to obtain an approval for each side business would no longer apply. This amendment is expected to encourage securities broker-dealers to become licensed as DIMs.

B. Changes To Scope of Business Authority Under 2003 Amendments

(1) The Trust Business

Currently, only trust banks engage in the trust business in Japan. Although the laws regulating trust banks permit trust banks to engage in a DIM Business, the current IABL does not allow trust banks to engage in a DIM Business. The two barriers under the IABL are: (i) that the IABL, in principle, limits the DIMs’ side business to the Side Business Permitted by Other Laws and the trust business is not included as such a side business, and (ii) that the IABL prohibits DIMs from accepting cash deposits17 from customers. However, effective April 1, 2004, through an IABL amendment, trust banks will be permitted to engage in a DIM Business as the amendment will add the trust business to the list of Side Businesses Permitted by Other Laws and will also allow DIMs with a trust bank license to accept cash deposits.

(2) The Securities Sales Agency Business

Pursuant to 2003 amendments to the SEL, a new securities sales agency system will be introduced in Japan from April 1, 2004. Under this new system, upon executing a contract with a securities company, a securities sales agent may act as an intermediary in the selling and buying of securities and handle public offerings, secondary offerings and private placements of securities.18 Of particular interest to asset managers, from April 1, 2004, qualified staff of a DIM will be allowed to act as securities sales agents upon completion of the registration with the Prime Minister. As discussed above, a DIM is currently prohibited from discussing specific investment products for which it acts as manager with potential investors. However, if relevant staff of a DIM are registered as a securities sales agents under the amended SEL, these DIM employees will be able to provide specific information about investment products, coordinate subscription documentation and delivered offering and disclosure information as a registered securities sales agent. This means that the DIM can interact directly with investors from a sales and marketing perspective without the need to obtain onerous securities broker-dealer registration.

IV. Related Side Businesses

A. Regulations Applicable To Related Side Businesses

DIMs may also engage in Related Side Businesses, which are businesses related to either the IA Business or the DIM Business and which are not detrimental to the best interests of investors.19 DIMs are required to obtain an approval from the Prime Minister20 in order to engage in such [Related] Side Businesses.

According to the guidelines issued by the FSA (the "FSA Guideline")21, the financial authorities will principally take into consideration the following factors when deciding whether to approve a particular application for a [Related] Side Business license:

  1. whether such side business is likely to hinder the fair and efficient performance of the IA Business and the DIM Business, or is otherwise detrimental to protecting the interests of investors;
  2. whether a proper system is in place designed to ensure that the various functions related to such business will be performed properly;
  3. whether an appropriate internal control system will be in place to ensure that conflicts of interest between the IA business, the DIM Business and such side business are prevented from occurring; and
  4. whether the applicant has complied with the applicable laws and regulations.

These standards are rather vague and general in nature. The FSA Guidelines themselves are not very specific as illustrated by the "provision of information/consulting services" being listed as an example of a side business description22. As for businesses other than the "provision of information/consulting services", the relevant supervisory staff of the KFB ("Supervisory Staff") examine applications on a case by case basis. Supervisory Staff generally have broad discretion over whether to approve a particular application for a side business.

B. Existing Descriptions of Related Side Businesses

Approximately seventy percent of the 39 DIMs that engage in a Related Side Business are capitalized by foreign entities. This is most likely explained by the fact that DIMs fundedcapitalized by foreign entities often anticipate providing information or consulting services in connection with Japan-related general market conditions, specific companies, laws and regulations, other Japanese-related matters to their foreign parent company or affiliates ("Foreign Affiliates") and assist these Foreign Affiliates in communications with investors in Japan. Furthermore, many of these activities are compensated by Foreign Affiliates on an arm’s length or cost-plus basis. In order to ensure that such activities (which their domestic competitors do not normally undertake) are viewed as proper and not illegal (because they fall outside the scope of a DIM’s licensed business), these DIMs seek "coverage" through a Related Side Business approval. The following are descriptions of Related Side Businesses which have been approved by the KFB/FSA:

(1) Provision of Information

This authority includes providing Foreign Affiliates (or investors) with information in connection with the condition of the Japanese economy and the financial economy in Japan, market trends in equities and bonds, Japanese companies, potential needs of investors in Japan with regard to foreign securities and foreign investment funds, and accounting and tax treatment of securities. It is likely that the various descriptions in the underlying application under this authority identify a large variety of information that may be obtained, processed and disseminated under this authority. As a general matter, the broader the description of this information provision function, the better when making an application. A large variety of functions performed for or with Foreign Affiliates can be covered under this authority if properly drafted.

(2) Consulting

The consulting [Related] Side Business includes consulting in connection with asset allocation in the Japanese market and product planning and packaging of foreign products that are designed and authorized for investors in Japan. This authority is very often obtained together with the Provision of Information authority and one can imagine this authority as being an extension of the information provision function.

(3) Supporting Foreign Affiliates

This type of [Related] Side Business appears in the IA Registry as "providing services on behalf of Foreign Affiliates" or "marketing", etc. Within the authority are included a large variety of activities; however, some of the most common services are as follows:

(a) Translation and Delivery

  • This authority includes translating a company’s brochures, prospectuses for products established and managed by the Foreign Affiliates and other documents and delivering those documents to existing or potential customers located in Japan, or to existing and potential distributors of the Foreign Affiliates.
  • This authority also includes, translating management reports, management policies and other documents in connection with products designed and managed by the Foreign Affiliates and delivering those documents to the customers and distributors of such products for or on behalf of the Foreign Affiliates.
  • Some applications also include within this authority translating and delivering management reports, management policies and other documents in connection with a discretionary investment management agreement between the Foreign Affiliates and its customers located in Japan.

(b) Communication Support Service

  • Under this authority is included the relaying of questions, making requests for explanation or other inquiries received from customers located in Japan who have invested in products established and managed by the Foreign Affiliates or who enter into a discretionary investment management agreement with the Foreign Affiliates, and the receiving and relaying answers from such Foreign Affiliates to the appropriate customers, all for or on behalf of the Foreign Affiliates.

(c) Providing Services to Distributors on Behalf of Foreign Affiliates

Obtaining this authority is essential where the DIM is seeking to market offshore fund products through major Japanese securities distributors (such as the largest Japanese securities companies).23 The authority includes the following activities:

  • Selecting and introducing potential distributors to the Foreign Affiliate.
  • Explaining outlines, business contents and investment methods of the Foreign Affiliates.
  • Explaining investment policies, investment methods of foreign investment funds established and managed by the Foreign Affiliate that are being distributed in Japan.
  • Giving lectures in connection with internal training programs of distributors (i.e., securities companies).
  • Assisting in the preparation of promotional materials for foreign funds distributed by a distributor.
  • Translating and delivering materials with regard to relevant laws and regulations and legal systems in the country where funds subject to distribution are established or materials required for application or notification to the authorities.
  • Providing translation or other support for a fund manager of the Foreign Affiliates giving a presentation to distributors in Japan.

(d) Support Services for Compliance with the Applicable Laws and Regulations

The "compliance" ancillary business authority is typically described to include the following functions.

  • Assisting in the preparation and submission of notifications and attachments required distributing foreign investment products in Japan under the SEL and the ITML.
  • At the request of Foreign Affiliates, monitoring to ensure that foreign funds are managed appropriately under Japanese laws and regulations.

(4) Currency Overlay Services

As noted above, the ancillary business authority to provide currency overlay services involves services related to the hedging of portfolios under management by the investment manager, including by outsourcing such function to a third party.24 The function is typically described as follows:

  • Activities to collectively and effectively hedge price fluctuation risks of foreign exchange which occur in connection with investment assets dominated in a foreign currency, including entering into an advisory agreement or discretionary management agreement to manage the exchange risk of all or a part of assets dominated in the foreign currency.

V. Analysis and Recommendations for Regulatory Improvement.

A. Analysis

Traditionally, the FSA has chosen to require a DIM to focus primarily on its "core business" (i.e., the IA Business and the DIM Business), largely because the DIM manages the assets of third parties and having a high fiduciary responsibility. The logic of the FSA seemed previously to be that by requiring a DIM to focus on its "core business" and limit its other activities, the DIM would be more likely to meet these fiduciary duties and obligations. This somewhat paternalistic attitude appears to have evolved into a more mature view that DIMs should not be hampered in providing their clients a comprehensive and valuable product through the inclusion of other types of services which the market views as necessary to a healthy asset management market in a developed economy. In any event, this change in regulatory policy is a welcome change for the asset management community in Japan, since many believe previously existing limitations on the scope of a DIM business were unnecessarily limiting innovation inhampering the healthy development of the industry.

The upcoming amendments expanding the scope of the Side Businesses Permitted by Other Laws can be seen as FSA’s first step toward granting DIMs greater commercial freedom. In particular, the introduction of the Securities Sales Agency system will provide a reasonable solution to the solicitation concern which DIMs have faced in the past. It will also help DIMs better manage their regulatory compliance exposures, since many observers have noted that the non-solicitation restricted is widely ignored in the asset management industry in Japan.25 Moreover, the amendments will also significantly improve the level of disclosure made to investors, since often the DIM is far more familiar than its domestic distributor with the structure and details of the specific investment funds and products under its management,, particularly where offshore products are concerned.

Fortunately, under the new amendments, a DIM with the requisite securities sales agent registration will be able to interact directly with investors thereby facilitating their understanding of the underlying investment and associated risks. Moreover, since the amendments will require that the staff of the DIM who handle such agency activities are trained to the same high level required for staff of Japanese securities companies, it will in turn help insure that Investors will presumably be better protected and informed before making their investment decisions.

With regard to the Related Side Businesses, as discussed above, the Supervisory Staff to date have only provided vague and general standards and little guidance has been provided with respect to the scope of the authority granted under each registration. Moreover, existing registrations appear inconsistent in their wording and coverage giving rise to the concern that an "uneven playing field" is being created in the asset management industry. Moreover, since the financial authorities have retained broad discretion over whether to approve a particular application for a side business, there appears to some basis for the sometimes voiced concern that the regulator is "playing favorites" in granting side business licenses. Thus, it is possible that a particular DIM may receive approval to conduct a certain side business, but a similarly qualified DIM applying for a similar side business will have its application denied for reasons that are neither fair nor transparent. DIMs continue to have to grope their way through these applications for approval to conduct their Side Businesses with little certainty that the authorities they obtain do not leave them at a competitive disadvantage to other firms.

B. Recommendations.

The uncertainties, ambiguities and possible inconsistencies in the current supervisory process for Ancillary Businesses Related Side Businesses are obstacles to an efficient and regulatory system and tend to impede growth and the healthy development of the investment management business in Japan. The increasing anxiety of market participants with the fairness of the system should be address by the Supervisory Staff.

At this point it would appear that the FSA and KFB appear to have accumulated sufficient precedents regarding past side business applications to categorize and define in a clear and objective manner the types of businesses that DIMs can reasonably conduct as Related Side Businesses. The Side Business approval regime would be greatly clarified if the Supervisory Staff would categorize such precedents and provide meaningful descriptions of the approved Related Side Businesses in the FSA Guidelines. Such categorization and definition will provide all DIMs with meaningful guidelines and concrete basis on which to determine whether a particular business can be conducted or whether it must seek separate approval by filing the application.

Such clarifications will serve to make the existing Related Side Business regimen more transparent to both investors and licensed DIMs applicants and would undoubtedly contribute to much higher levels of regulatory compliance by industry participants. Development of these categories and descriptions will also help ensure a more consistent approach to Related Side Business approvals generally both for the Supervisory Staff and for DIMs. Further transparency and more effective communication of relevant requirements would also be greatly facilitated by making the details of Related Side Business approvals available on the FSA or KFB website. In general, increasing the available information and knowledge base will improve compliance, reduce the high levels of unlicensed IA and DIM activity, increase compliance generally and promote the healthy development of DIM Businesses and the asset management industry generally in Japan.


1. Graduated from Waseda University in 1988; Admitted in Japan 1997.

2 The Law Concerning Restrictions, etc. on an Investment Advisory Business related to Securities (Law No.74, 1986, as amended). Except as otherwise specifically noted below, the regulatory discussion herein is based on Japanese laws and regulations as of January 1, 2004.

3 Japanese regulatory administrative process distinguishes several levels of permissions to engage in regulated activities. For purposes of this article, the following English terms refer to the various levels of permission which may be obtained. Ranked in order of difficulty (most difficult to least difficult) these permissions are: license ("ninka"), registration ("touroku") approval ("shounin") and notification ("todokede").

4 See Article 24.1 of the IABL.

5 Based on "Breakdown of Members" and "Number of Members and Registration of Each Competent Finance Bureau". According to this material, there are in total 614 individuals and entities registered as an IA, and of the 614 IAs, 76 are registered as an IA without a branch in Japan.

6 See Article 31.1 of the IABL.

7 Under the IABL, when there is a change to the information contained in an IA application, including the receipt of the supplemental DIM license, the registered investment advisor is required to update and supplement its IA registration.

8 The data indicated in this article has been compiled primarily based on the information contained in the IA Registry available to the public at the KFB with adjustments made based on data obtained from other materials, such as the data available to the public on the FSA’s home page and each IA’s home page. There are several cases in which the IA does not describe its supplemental DIM license and its side business in its IA Registration. The other materials suggest that IAs are likely conducting the DIM Business and side businesses, but without providing descriptions of such businesses to the IA Registry. The foregoing conclusion in suggested by the fact that each IA is separately required to submit a notification to change the IA Registry, even if the IA is licensed as a DIM or approved to conduct a side business by the FSA/KFB. In certain circumstances, the relevant IA will complete the necessary steps to conduct the DIM Business or a side business when the IA is licensed or approved by the FSA/KFB but then neglect to submit the required notification to change the IA Registry. In order to improve the accuracy of the IA Registry, some observers have advocated introducing a system whereby the KFB automatically fills the complete DIM and side business information into the IA Registry when the IA is licensed as a DIM or approved to conduct a new side business by the FSA/KFB.

9 The descriptions are varied, but generally include descriptions such as "executing business on behalf of foreign affiliates" or "supporting marketing", etc. The services generally include translating brochures or management reports and other documents, and facilitating communications with foreign affiliates.

10 "Currency overlay" services involve the hedging of foreign currency portfolios into Japanese yen and related hedging services. It also may involve the outsourcing of currency risk management to a specialist firm, known as the overlay manager.

11 The "other businesses" consisted of (i) the evaluation of investment trusts, (ii) the investigation or recommendation of management companies, (iii) the investment advisory businesses other than business with regard to securities investments, (iv) currency trading or intermediation of currency trading which a securities company originally engages in, and (v) the intermediation services in connection with the marketing and conclusion of "kumiai" (partnership) investment agreements.

12 "List of the Licensed/Registered Firms" as shown on the FSA home page. See (August 31,2003).

13 In total, 137 DIMs are registered in Japan and of the 137 DIMs, 125 DIMs are registered at the KFB.

14 These staff are referred to as "securities sales representatives." In order to become a securities sales representative, staff that have marketing contract with clients or perform trading activities must pass a qualifying examination similar to the "Series 7" examination administered by the NASD in the United States.

15.Securities in Japan are specifically defined under the Japanese SEL and relevant regulations rather than following a common law "pragmatic" approach as in the United States. All foreign unit trusts and similar interests are currently considered securities for Japanese law purposes, but, notably, foreign limited partnership interests are not considered securities.

16."List of the Licensed/Registered Firms" as shown on the FSA home page. See (July 31, 2003).

17 See Article 19 of the IABL.

18 See Article 66-2 and Article 2.11 of the amended SEL.

19 See the proviso to Article 31.1 of the IABL.

20 See the proviso to Article 31.1 of the IABL. The Prime Minister has delegated his authority in this regard to the KFB.

21 See Section 3-7-4 of "Important Notices in Connection with Supervision, etc. of Securities Companies, Investment Trust Managers and Investment Corporations and Securities Investment Advisory, etc."

22 See Section 3-7-3(1) of the FSA Guideline. "Providing information or consulting services" means a business which is independent of the IA Business and DIM Business and which themselves can be described as providing information or advice in connection with securities (excluding the IA Business).

23 Obtaining this authority is becoming an increasingly sensitive concern for foreign fund groups, because of concerns raised by distributors regarding their potential "accessory" regulatory risk with the KFB/FSA if they are found to knowingly work with a DIM not acting within the scope of its license.

24 It should be noted that the number of DIMs (mainly DIMs capitalized by foreign entities) which engage in the Currency Overlay Business as side business has recently increased. It seems likely that this is not because hedging activities have spontaneously increased significantly. Rather, some observers speculate that many DIMs previously assumed that such activities were included within a DIM’s normal portfolio management authority and have only recently decided to obtain additional regulatory "cover" by seeking the ancillary business registration as well.

25.Abuse of the non-solicitation rules appears to occur at some registered IAs because of their lack of familiarity with the relevant restrictions under Japanese securities laws and the dividing line between authorized IA activities and those requiring a securities license.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.