Japan's Hedge Funds To Register Under New J-SOX Law

by Mary Swire, LawAndTax-News, Hong Kong

13 August 2007

Japan's answer to Sarbanes-Oxley, the Financial Instruments and Exchange Law (FIEL), also known as J-SOX, is due to come into effect in the next few months, and the country's Securities and Exchange Surveillance Commission said last week that it will begin monitoring hedge funds shortly, something that is mandated by the law.

The law requires registration of certain types of financial business, including investment management institutions, financial instruments trading businesses, and investment advisory firms. Funds with fewer than 10 Japanese investors or whose total investment amounts to less than a third of the fund will not be subject to the new regulations. In addition to these domestic registration requirements, FIEL will impose additional burdens on the use of a branch office by foreign funds, which will probably have to use local limited companies in future to hold local funds, rather then LLCs, with possible tax consequences.

The hedge fund sector in Japan is not thought to be very large, with less than $40bn under management, and has not performed very well recently. Singapore-based Eurekahedge's index of Japanese hedge funds was off 3.4% in 2006 and is up 1.3% year to date.

The SESC suspects hedge funds of illicit or damaging practices such as insider trading and market manipulation. Funds that register with the SESC under the new law will be subject to inspections.

Recommended