The Financial Services Agency on Aug. 3 ordered Nomura Securities Co., Japan’s securities industry leader, to improve its internal controls in the wake of a series of confidential information leaks to clients on upcoming share offerings. The order was based on a special investigation of more than three months by the Securities and Exchange Surveillance Commission into the scandal that involved information leaks on the planned public offering of a large number of shares by Inpex Corp., Mizuho Financial Group and Tokyo Electric Power Co.

The agency stopped short of ordering Nomura to suspend operations. But the brokerage should be aware of its grave responsibility for violating trading ethics. It should realize that as the nation’s largest brokerage, it has the responsibility of making every effort to make Japan’s financial markets transparent. It needs to strictly examine itself over the question of whether it was poisoned by the profits-first corporate culture to the point of violating basic industry ethics.

The SESC pointed out that although Nomura had internal rules aimed at preventing the leak of insider information, the reality was that such leaking had become ordinary practice. In a securities company, a firewall is supposed to be erected to prevent the flow of information between the section handling corporate capital increases and the sales section, which recommends selling or buying of shares to clients. The SESC said that by using argot or an expression like “that firm that is recently in the news,” the section in charge of corporate capital increases was providing information on capital increases through public offering to the sales section.

The SESC noted that in the sales section, a perception prevailed that if its workers refrained from mentioning the names of particular companies while communicating with workers in the section that deals with capital increases, they would not be regarded as insiders. The commission said that even though it pointed out concrete problems in the company to executives during the special investigation, it appeared that they were not aware of the problems. It said that since the Nomura management was overconfident about the company’s internal rules to control the flow of information, it failed to take action to stop the insider information leaks that were going on.

Unless Nomura moves quickly on measures to prevent the recurrence of insider information leaks and restores trust in the company, customers will choose to conduct their business elsewhere. This applies to other brokerages like Daiwa and SMBC Nikko, which were also found to be involved in similar scandals. The FSA on its part should ask why it did not detect the scandal earlier. The government should also consider revising the Financial Instruments and Exchanges Act to punish organizations and people who leak insider information. At present, only investors who profit by using insider information are punished.

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