Establishing A Retail Fund In Ireland For Sale In Japan - Fund Structures And Features

Author:Mr Brian Dillon
Profession:Dillon Eustace
  1. Introduction to Establishing a Retail Fund for Sale in


    The issuing of securities of offshore funds for public sale

    into Japan is governed by a combination of the Securities and

    Exchange Law of Japan (the "SEL") which is enforced

    by the Japanese Ministry of Finance ("MOF"), the Law

    Concerning Investment Trust and Investment Company of Japan

    (the "Investment Funds Law") which is enforced by the

    Financial Services Agency of Japan ("FSA").

    In addition, the distributing securities companies must

    comply with the SEL and the selfregulatory rules of the

    Japanese Securities Dealers' Association

    ("JSDA"), including regulations relating to trading

    in foreign securities and the Standard Rules for the Selection

    of Foreign Investment Trust Funds (the "Selection


    The Financial Product Sales Law which became effective in

    April, 2001, introduced additional measures for the protection

    of investors including additional risk disclosure requirements

    and heavier civil liabilities in order to compensate investors

    for losses suffered from distributors' non-compliance with

    the requirements.

    The SEL, the Investment Funds Law and the Financial Product

    Sales Law have been amended by the recently introduced

    Financial Instruments and Exchange Law.

    1.1 Distribution

    Offshore funds are primarily sponsored and distributed in

    Japan by Japanese brokers although foreign brokers whose

    Japanese branch is registered for securities business with the

    relevant Japanese authorities may also sell securities of

    offshore funds. Public offerings of such securities are

    primarily marketed to individual investors and small sized

    corporations but may also be purchased by larger


    1.2 Fund Types

    In terms of the types of fund being publicly offered in

    Japan traditionally domestic funds established in Japan have

    been structured as investment trusts. This investment trust

    structure would be similar to the unit trust structure

    (contractual-type fund) used in Ireland.

    The primary historical reason for this preference, until

    recently, was the favourable tax treatment afforded to

    individual investors investing in such foreign contractual-type

    funds. Prior to 31 December, 2003, income from the sale of

    units in such foreign stock investment funds was not subject to

    tax. Recent changes to the taxation system have resulted in

    such gains now being subject to tax at a rate of 10% (due to

    increase to 20% from 1 January, 2008). The rate for dividends

    has been reduced from 20% to 10% until 31 March, 2008 (when it

    will revert to 20%).

    Additional reasons why the contractual-type of fund is

    favoured for Japanese public offerings include such cases where

    in excess of 50% of a fund is owned by Japanese residents or in

    excess of 5% by a single Japanese institutional investor; in

    these cases the Japanese tax authorities may determine that

    such an investment, if in a corporate type fund, represents an

    equity shareholding in a tax haven company.

    Similarly, the Japanese Foreign Exchange Law provides that

    the acquisition of 10% or more of a foreign company, including

    a corporate-type fund, by a Japanese resident requires prior

    notification to the MOF through the Bank of Japan. To avoid

    filing such notification, contractual type structures are used


    Whilst corporate-type funds are allowed by law to be offered

    publicly in Japan, their suitability will clearly depend on the

    investor profile in Japan and indeed in other jurisdictions

    where it is intended to market the product. Where it is not

    envisaged that any single Japanese investor may hold in excess

    of 10% of the fund's securities, there should not be any

    difficulty using the corporate structure.

    Funds have also been established in Ireland, by Japanese

    promoters, for Japanese retail investors with "limited

    liquidity". These funds are typically closed-ended for

    repurchase for a period of time (usually 1-3 years), while

    continuous sales may be made during this period.

    1.3 Selection Rules

    As indicated above, the public sale of offshore funds into

    Japan is regulated by, amongst others, the Selection Rules.

    According to the Selection Rules:-

    a distributor may only sell securities in foreign

    investment funds where the distributor confirms that the

    issuer of these securities is established under the laws of a

    country or jurisdiction which has well established laws and

    regulations governing:

    the establishment of such funds

    the disclosures to be made in respect of such securities;


    the supervisory requirements for the issuer of such


    the net assets of the fund after the initial offering

    must be at least JPY 100 million and those of the management

    company must be at least JPY 50 million

    the fund's financial statements must be audited by an

    independent auditor

    a bank or trust bank must be designated as custodian for

    the fund's assets

    a JSDA member company (usually the securities company

    which acts as the primary distributor in Japan) must be

    appointed as an agent member company in Japan to act as the

    agent of the management company to ensure compliance with

    JSDA rules and requirements

    a legal representative in Japan, usually the Japanese

    legal adviser to the fund, must be appointed and maintained

    within Japan to ensure Japanese jurisdiction over any related

    litigation and a clear provision must be made for the

    management company to submit to the Japanese courts in

    respect of any litigation regarding the units in the fund

    acquired by Japanese investors

    the value of securities sold short may not exceed the

    fund's net asset value

    borrowing must not exceed 10% of total assets (except

    temporarily in the event of a merger or similar event)

    where a restriction from investing more than 15% of the

    fund's assets in privately placed equity shares, unlisted

    shares and other assets without liquidity is not imposed,

    measures must be taken to ensure the clarity of the price

    determination of the fund's non-liquid investments.

    the total issued and outstanding shares in one company

    (excluding a securities investment company) held by the

    management company on behalf of the funds managed by it may

    not exceed 50% of the total issued and outstanding shares of

    such issuing company

    redemption or repurchase methods must be clearly

    prescribed in the country where the fund is established

    the management company, its affiliates, directors and

    holders of more than 10% of its issued and outstanding stock

    may not buy or sell the securities of the investment fund or

    grant or receive loans to or from it

    a fund may not enter a transaction that is not in

    accordance with proper management or is detrimental to the

    interests of the fund's investors

    changes to the composition of the board of directors of

    the management company must be subject to the approval of the

    supervisory body, the investors or the trustee

    adequate disclosure of the fund's investments must be

    made to the fund's investors and the supervisory


    No such restrictions except for jurisdictional requirements

    apply to offshore funds that are offered privately to Japanese


    Both a UCITS and a non-UCITS retail unit trust established

    in Ireland (further details contained in Part B, below) would

    fit well within the Japanese regulations in terms of exposure

    to a single issuer and leverage. The exposure with a single

    issuer and leverage in the case of a UCITS unit trust is

    obviously more restricted than what is permitted by the

    Japanese regulations whereas the Japanese regulations are

    slightly more restrictive than those applicable to a non-UCITS

    retail unit trust in terms of leverage.

    1.4 Public Offering in Japan

    Where an offering of securities to Japanese investors does

    not come within the scope of the private placement exceptions

    set out below, it will be deemed to be a public offering and

    subject to the various rules governing such offerings.

    A public offering is the only method by which foreign

    investment fund securities can be distributed to the public in

    Japan in substantial quantities.

    Typically, a new public offering is initiated by a foreign

    investment management company or a Japanese securities company

    (the "Promoter"). The Promoter selects the relevant

    service providers, such as the custodian / trustee,

    administrative agent, manager, investment manager and

    sub-investment adviser, etc. In selecting these parties the

    following points should be borne in mind:-

    (a) Neither the fund nor its management company may sell

    foreign investment fund securities directly in Japan. Only a

    securities company registered in Japan or a financial

    institution registered for handling investment fund

    securities may sell such securities and all contact with the

    JSDA is handled by that securities company. Typically,

    Japanese legal counsel will liaise with the MOF and Financial

    Services Agency ("FSA") on behalf of the fund. It

    is clear therefore that a non-Japanese Promoter must firstly

    appoint a securities company registered in Japan or a bank or

    an insurance company registered for handling investment fund

    securities as a "partner" in the project;

    (b) Distribution of foreign investments fund securities in

    Japan can only be made by registered securities companies,

    banks or insurance companies. In most cases, there is only

    one distributor in Japan for each fund, which is also the

    Agent Member Company. However, funds can, if required, be

    established with multiple distributors appointed by the


    One restriction imposed by the Investment Funds Law which is

    of particular importance is that not less than 50% of the net

    assets of a fund must be invested in "securities" as

    defined by the Securities and Exchange Law of Japan. Japanese

    counsel will advise on the suitability of proposed investments

    on a case-by-case basis and may, if necessary, consult with the



    The time schedule of filings for a public offering in Japan

    is crucial and the Irish Financial Services Regulatory

    Authority (the "Financial Regulator") has

    demonstrated time and again that it is...

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