Japan Brokers to Review Internal Controls
Twelve large banks and brokers in Japan have been ordered by the country’s financial regulator to review their internal controls for handling sensitive information and report back on the results in a month as a crackdown on insider trading builds.
The Financial Services Agency has told the 12 brokers, which were underwriters to recent large new share issues, to report on the structures of their underwriting, institutional sales and compliance divisions, how information about institutional clients is managed and any issues that arise from those inspections and how they are dealing with them.
The 12 are Nomura, Daiwa, Nikko SMBC, Mitsubishi UFJMorgan Stanley, Mizuho as well as the Japanese units of JPMorgan , Deutsche Bank , Goldman Sachs , Citigroup , UBS , Merrill Lynch and Morgan Stanley .
The FSA’s latest move comes amid a crackdown on insider trading, which found that all top three Japanese brokers as well as JPMorgan had leaked non-public information that was used by funds to profit ahead of large new share issues. It signals it is serious about cleaning up Japan’s capital markets by clamping down on insider trading and information leaks and other breaches of the rules, officials at the brokers said.
Japanese regulators have stepped up their efforts to stamp out insider trading, but the cases unearthed have been smaller and the penalties handed out have been considerably milder than those in the U.S. and UK.
The decision to require the brokers to re-examine controls follows an internal investigation at Nomura, which showed some employees were transmitting inside information at the request of salespeople seeking to obtain the schedule of public offerings, according to a report on the probe. In addition to Nomura, Daiwa, Nikko SMBC and JPMorgan also admitted to leaking non-public information but none has been sanctioned.
The revelations that large brokers leaked non-public information have resulted in business sanctions against both Nomura, which leaked non-public information in three insider trading cases, as well as Daiwa.
The Development Bank of Japan and Resona Bank on Tuesday both confirmed that Nomura was not chosen as an underwriter to their upcoming bond issues, due to the insider scandal.
“Investors who might buy our bonds have told us that it is clear that Nomura will be sanctioned by the regulator and that it would be difficult for them to buy product from a financial institution that receives an administrative order,” said a DBJ representative.
The moves follow Kawasaki Heavy Industry’s decision to exclude Daiwa from a planned bond issue, due to the insider trading scandal.