Monitoring
To prevent the occurrence of conditions leading to members not being able to smoothly return their customer assets, JIPF collaborates with the administrative authorities and the Japan Securities Dealers Association (JSDA) in monitoring the financial and other conditions of its members based on the operating standards given below. JIPF also provides guidance to Financial Instrument Business Operators regarding ensuring their ability to return assets held in custody in a timely manner. Furthermore, when necessary, the JIPF cooperates with the JSDA in inspecting, holding hearings, and other activities regarding member securities and other companies.
Due to these activities and other efforts, JIPF has only had to compensate the customers of one member—the bankruptcy of Minami Securities in 2000—since its establishment.
Operating Standards
When the FIEA capital adequacy ratio falls below 140%
The FIEA and Cabinet Office regulations require that Financial Instruments Business Operators notify the regulatory authorities when their FIEA capital adequacy ratio falls below 140% and when it recovers to that level. In conjunction with that process, the member is asked to voluntarily share the materials submitted to the regulatory authorities (Calculation of the FIEA capital adequacy ratio, expected changes in the capital adequacy ratio, etc.) with the JIPF, which then holds hearings, etc. to determine the causes, etc. of the deterioration in the capital adequacy ratio and examines the member’s plan and schedule for improving the FIEA capital adequacy ratio.
When the FIEA capital adequacy ratio falls below 120%
To ensure a sound financial base for operations, the FIEA requires that Financial Instruments Business Operators must not allow their FIEA capital adequacy ratio to fall below 120%. Under the FIEA, when they deem it necessary or appropriate, the regulatory authorities may issue business improvement orders to companies in default of this requirement in the interest of protecting the public and investors. In addition to making the voluntary report to the JIPF mentioned in above compulsory, the authorities will confirm the status of the required segregated custody of customer assets by requesting the external depository (Japan Securities Depository Center, Inc., etc.) to issue a certificate, etc. or the trust banking corporation, etc. to issue an account balance statement.
In addition to the above, the regulatory authorities will consider the member’s plan and schedule for improving the FIEA capital adequacy ratio. If said Financial Instruments Business Operator is leaning toward liquidation or some other form of failure, the regulatory authorities will discuss the prompt return of assets held in trust to customers with related bodies and urge such action.
The regulatory authorities may also use business improvement orders or other method to promote the return of customers’ assets. In such a case, the JIPF and JSDA also collaborate in instructing the member to promptly return the customers’assets.
When the FIEA capital adequacy ratio falls below 100%
When the FIEA capital adequacy ratio declines below 100%, the regulatory authorities are empowered by the FIEA to issue an order to the Financial Instruments Business Operator to suspend all or part of its business for a period of up to three months. If said operator has no hope of achieving a quick recovery in the capital adequacy ratio, it is common for this suspension order to result in the return of assets held in custody to customers. After a further three months has passed, if the capital adequacy ratio is still under 100% and the operator has no prospects of making a recovery, the regulatory authority may cancel the operator’s registration in the interest of protecting the public and investors. Typically, when the capital adequacy ratio falls below 100%, most operators cease operations, either because of a business improvement order from the regulatory authorities or because they submit a notification, etc. of business suspension on their own. This mechanism serves to provide protection for investors.
Requirement to notify JIPF of changes in status
Members are required to promptly notify JIPF in the case that their registration is revoked; they file for bankruptcy, etc.; terminate their Financial Instruments Business; receive a business suspension order; and other similar material changes in their status.
Similarly, the regulatory authorities must immediately notify the JIPF in the event that they revoke the registration of, issue a business suspension order to or file for bankruptcy, etc. proceedings regarding a JIPF member. In such cases, the JIPF must confirm whether reimbursement by the member will be difficult.
Inspections
Before confirming whether customers assets can be smoothly returned or not, JIPF verifies the status of the required segregated custody of customer securities of the JIPF member that has received a notification (hereinafter referred to as a “Notifying Financial Instruments Business Operator”) by checking the ledgers and requesting the external depository (Japan Securities Depository Center, Inc., etc.) to issue a certificate, etc.; investigating the amount of cash deposited by customers; and getting the trust banking corporation, etc. to issue an account balance statement. Based on this inspection, JIPF confirms whether the amount held in trust as segregated custody is more than sufficient to return all assets to customers of the Notifying Financial Instruments Business Operator.
Decision on indemnification
Within two weeks of the JIPF member becoming a Notifying Financial Instruments Business Operator, the Board of Governors will consult with the Governing Council and based on their reply will confirm whether the customers assets can be smoothly returned or not.
Execution of rights to customers' segregated monetary trust
When a member or regulatory authorities notify JIPF in accordance above mentioned, JIPF then notifies the trust banking or other company that as provided for in the trust agreement, JIPF will be replacing the Notifying Financial Instruments Business Operator as the beneficiaries’ agent. In addition, JIPF will require the Notifying Financial Instruments Business Operator (in case there is a provisional administrator, the provisional administrator, etc.) to issue a report on the status of the segregated custody account.
Through the Notifying Financial Instruments Business Operator, the JIPF will go through the process of verifying the balance. If the JIPF can confirm that the amount being held in trust by the trust banking company, etc. in the segregated custody account is in excess of that required to return customers’ assets, JIPF will execute its rights as the beneficiaries’ agent and repay the funds to customers. In contrast, if the amount is less than that required to return customers’ assets, JIPF will reimburse customers pro rata for the shortfall up to a limit of ¥10 million per customer.
The repayment of the segregated custody amount of customers is commissioned to said Notifying Financial Instruments Business Operator based on an agreement between it and the JIPF.
Indemnification
When it has confirmed that the member will find it difficult to smoothly return customer assets and compensation will be necessary, JIPF promptly decides and publicly announces the period, location, and other details for submission of claims by general customers of said Notifying Financial Instruments Business Operator (hereinafter referred to as “Certified Notifying Financial Instruments Business Operator”)
Limited to those claims related to the assets held in custody, the claims submitted against the Certified Notifying Financial Instruments Business Operator by general customers shall be calculated and paid according to the specified method starting with the day the above public announcement is made.
The compensation limit for general customers is, as previously mentioned, ¥10 million per customer.
Legal rights of JIPF concerning bankruptcy or related proceedings against members
Under the Act on Special Treatment of Corporate Reorganization Proceedings and Other Insolvency Proceedings of Financial Institutions, JIPF has the right to initiate necessary legal procedures to protect customer claims when financial institutions and other companies start bankruptcy, reorganization, and rehabilitation procedures (hereinafter referred to as “bankruptcy or related proceedings”). The following are JIPF’s main legal rights.
a. Start of bankruptcy proceedings
When determining whether to start legal proceedings regarding the bankruptcy or related proceedings of financial institutions and other companies, the courts must listen to the opinion of JIPF during the submission period.
When the courts to decide to commence bankruptcy or related proceedings, they do not have to notify the customers with bankruptcy claims, however, they do have to notify the JIPF of the publicly announced items regarding the start of proceedings.
b. Production of the customer list
After the notification from the courts, in order to protect the claims of customers, the JIPF must without delay produce a customer list regarding all customer claims, excluding its own, that it is aware of and include all items stipulated by law.
On producing the customer list, the JIPF must announce in an official gazette a location and other details where the customer list will be available for viewing by customers. The customer list must be available for viewing for a period of two weeks or more before the day previous to the submission deadline for claims. If after the customer list becomes available for viewing, the JIPF becomes aware of customer claims that are not recorded on the list, it must without delay add those claims to the customer list.
The JIPF must submit a customer list to the courts by the final day of the submission period. The submission of the customer list by JIPF has the same legal force as if individual customers submitted their own claims.
Individual customers may participate in the bankruptcy proceedings even after the JIPF has submitted the customer list to the courts. However, in such a case, they must notify the courts of their intention.
c. JIPF’s participation in bankruptcy or related proceedings on behalf of customers
JIPF can represent the customers on the customer list including any later additions to the list as the claimant in all legal actions regarding bankruptcy or related proceedings.
Furthermore, in accordance with the FIEA, JIPF has the right to take any necessary action in or outside the courts to preserve the legality of customer claims.
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