NRI Papers
No. 190 November 1, 2013
  Regulatory Reform in the Wake of Insider Trading Incidents Related to Public Offerings of New Shares  
Sadakazu OSAKI

The period from 2009 to 2010 has seen successive, large-scale issues of new shares by Japan's listed companies through public offerings. Under these circumstances, cases frequently occurred where a rapid increase in sell orders such as by short selling before and after the announcement of public offerings led to a sharp drop in the share price, causing the public to talk about suspicions of insider trading related to the public offerings.

Since March 2012, Japan's Securities and Exchange Surveillance Commission (SESC) has disclosed cases of insider trading one after another. The result of such revelations was that this so-called suspicious insider trading has gone beyond mere suspicion and developed into a serious scandal that has shaken market confidence. As preventive measures, the short selling regulations in force were reviewed and consideration was given to an appropriate way of issuing new shares through public offerings.

In June 2013, the Japanese Diet passed a bill to amend the Financial Instruments and Exchange Act. The Amendment Act prohibited the disclosure of inside information and trade recommendations by insiders, etc. The Act also increased the monetary penalty for violations committed by asset managers "on client accounts."

These revisions are expected to contribute to the achievement of some effects in terms of restoring investor confidence in the fairness of the market. However, from the mid- and long-term perspective, more thought should also be given to Japan's formalistic insider trading regulations. In addition, even if new incidents occur in the future, it is vital not to adopt an approach for emphasizing only the aspect of further strengthening regulations.

Contents
I Revelation of Insider Trading Incidents Involving Capital Increases
II Regulatory Reform Beginning to Develop
III Amendment to the Financial Instruments and Exchange Act
IV Issues Surrounding Insider Trading Regulations

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