The Financial Services Agency on Friday ordered Nomura Securities Co. to improve its internal controls to prevent further insider trading, but fell short of instructing Japan’s largest brokerage to suspend operations.
The agency’s leniency was apparently due to the resignation of senior officials at its parent company, Nomura Holdings Inc., to take responsibility for the scandal, which the government said shook investors’ trust in the nation’s financial markets.
The administrative order focused on Nomura Securities’ flawed internal controls, including insufficient compliance procedures and its failure to establish a firewall between its investment banking and brokerage divisions.
It is the first such order slapped on Nomura since 2008, and comes after the company apologized for leaking confidential information about new share offers by large companies that benefited its clients.
“Taking into account the fact that (the information leaks) were repeated, we believe Nomura has to bear a heavy responsibility,” financial services minister Tadahiro Matsushita told reporters.
But he said the FSA took into account the group’s management reshuffle, adding, “We strongly hope (Nomura) will press ahead with reforms to rebuild its company structure fundamentally.”
The Securities and Exchange Surveillance Commission earlier this week recommended that the agency punish the brokerage.
The commission has separately suggested the FSA should fine some of Nomura’s institutional clients, including domestic and foreign financial institutions, for using insider information to trade stock in new share issues it lead-managed for major companies, including Mizuho Financial Group Inc. and Inpex Corp.
Insider trading can damage the financial standing of listed companies by triggering massive short-selling on expectations that issuing new equity will dilute the per-share value and depress a firm’s stock price. In such circumstances, public offerings can fail to raise the hoped-for capital.
Analysts have long pointed out that the volume of stock trading on domestic bourses swells abnormally before the announcement of large new share issues, apparently due to short-selling based on insider information.
Under current law, heavier penalties are imposed on investors who profit from such misdeeds than on those who leak sensitive information — in many cases brokerage employees . They are only subject to minor fines based on their broker fees.
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