Japan's securities watchdog on Friday recommended that the banking and securities units of Mitsubishi UFJ Financial Group (MUFG) be penalized for what it said was unauthorized sharing of client information.
The Securities and Exchange Surveillance Commission (SESC) made the recommendation to the Financial Services Agency banking regulator, which hands out such punishments in Japan.
The recommendation, which was widely expected, followed the SESC's investigation into MUFG's banking arm and its two brokerage ventures with Morgan Stanley: Mitsubishi UFJ Morgan Stanley Securities (MUMSS) and Morgan Stanley MUFG Securities.
Japanese law prohibits the sharing of customer information between banks and securities firms without consent. Japanese banks have for years lobbied to ease the firewalls, saying they are obstacles to merger advisory and business succession planning.
The "three firms repeatedly exchanged non-public client information knowing that the clients had refused to share their information with other group firms, and some of the information contained material information that would impact investment decisions,” the agency said in a statement.
In order to boost group-wide revenue, the performance of employees at MUFG Bank was in part measured by how much business they brought to MUMSS, the SESC said.
"The MUFG Group companies have taken the contents of this notice very seriously,” MUFG said in a statement. "We sincerely apologize for any inconvenience and concern this may cause to our customers and other concerned parties.”
MUMSS is at risk of losing more bond underwriting deals as the financial regulators consider penalizing the unit for sharing nonpublic information on client companies.
MUMSS lost at least three yen debt deals in Japan ahead of the decision from the SESC. Aeon dropped MUMSS on Friday, following Kanagawa Prefecture and Japan Housing Finance Agency the day before.
The probe is the latest financial scandal to surface in Japan and is a setback to the nation’s largest lender after clients last year lost more than $700 million on Credit Suisse’s riskiest bonds purchased through its brokerage venture with Morgan Stanley.
Scandals have a history of resulting in bond underwriters losing deals in Japan. SMBC Nikko Securities, the brokerage unit of Sumitomo Mitsui Banking, also lost business in 2022 following allegations of market manipulation. That year, regulators found firewall violations as part of a probe into market manipulation at the brokerage unit.
NEC said it is discussing the option of dropping MUMSS as underwriter for a planned yen bond sale, which may be followed by other issuers planning bond deals including Tokai Carbon and Macromill.
"As a company with a strong public profile, MUFG may suffer an impact on its underwriting and trade businesses,” according to Tetsuo Seshimo, head of the multimanager investment division at Saison Asset Management. "There may be a short-term impact on its business performance for about a year.”
"We made a comprehensive judgment in light of the situation where stable bond management may not be possible,” said Takuya Matsumoto, an official at Aeon’s finance department.
The group’s units are facing potential penalties for sharing nonpublic information on client companies without their permission.
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