Stricter law forces companies to tighten funds pitch

by Tomoko Yamazaki and Finbarr Flynn

Bloomberg

Mitsubishi UFJ Financial Group Inc. and Nomura Holdings Inc. are among Japanese financial companies being forced to tighten marketing of mutual funds as a law to protect individual investors comes into effect next week.

Regulators in the world’s second-biggest securities market will require clearer disclosure of risks when selling funds to protect individual investors. The law is Japan’s first effort at integrating regulations of all types of financial investments, including those by hedge funds.

The Financial Instruments and Exchange Law takes effect on Sunday, and is part of the government’s drive to offer greater investor protection after several financial scandals. It comes as Nomura, Japan’s biggest securities firm, and Daiwa Securities Group Inc. posted better than expected first quarter earnings on higher sales of funds.

“It will certainly push up the banks’ operating costs,” said Kristine Li, a Tokyo-based analyst at KBC Securities Japan. “It will require banks to put more people into explaining products and compliance.”

The move comes after Takafumi Horie, former president of Internet provider Livedoor Co., and Yoshiaki Murakami, Japan’s leading shareholder activist, were both arrested for securities violations, helping cause a decline in Japanese small-cap stocks.

The Mothers and Hercules indexes that track Japan’s smaller companies were Asia’s worst performers last year. It also follows several cases where the financial regulator fined institutions for mis-selling products.

In June, Mitsubishi UFJ, Japan’s largest banking group, was ordered to improve compliance after the Financial Services Agency discovered cases of administrative errors due to negligence, including misplaced orders for investment trusts.

The Securities and Exchange Surveillance Commission in February recommended the Financial Services Agency penalize an employee at a branch of Nomura, after the person failed to explain to investors the correct level of risk attached to structured bonds, the commission said.

Consumers are shifting more savings to riskier investments such as securities in search of returns higher than the near-zero interest paid on bank deposits. Net assets of investment trusts doubled to ¥82 trillion in Japan in the two years and six months to June 2007, according to the Investment Trusts Association in Tokyo.

The consumer banking units of the nation’s three biggest banks — Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. — sold a record ¥7.9 trillion of mutual funds as of Aug. 31, the Nikkei newspaper reported on Wednesday.

To comply with the new law, Mitsubishi UFJ this month stopped allowing individuals to open up accounts for mutual funds online, said Takashi Miwa, the bank’s spokesman.

Nomura, Japan’s biggest brokerage, has reprinted almost half of its product brochures, said Michiyori Fujiwara, a company spokesman. Nikko Cordial Corp., the Japanese securities firm acquired in April by Citigroup Inc., sent 30 people from its compliance department to its 110 branches in order to retrain staff, said Shinichi Wada, Nikko’s spokesman.

Japan is reforming its rules on stocks, bonds and other securities to cover a wider range of investment products, including privately sold funds, credit derivatives and weather derivatives.

Under the new rules, managers of funds that are sold to Japanese investors without using banks will also have to be registered at regulators by the end of the year.