SEC Division of Investment Management staff letter: Japan Securities Depository Center

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

iJlVISION OF

INVESTMENT MANAGEMENT
August 31, 1993

r:-'W 1 . -~1'
VIA TELECOPIER AND U. S. MAIL. Act -r L It - L-O -J i i Sect 10n Mr. Seiji Tanaka Japan Securities Depository enter . l Daini -Shoken Kaikan Building R!.le 17,p~ S-(~)C;;)(ir /) .. 1-1, Nihombashi-Kayaba-Cho Public \ ¡p 2-Chome, Chuo-Ku, Tokyo 103 AV'allabl11 ty g / ~ 1/ 7 _3 ~ . ~"'''"".....s::. Japan RE: Japan Securities Depository Center ("JASDEC"); No- Action Request under section 17 (f) and Rule 17f-5(c) (2) (iii) of the Investment ComDanv Act of 1940

Dear Mr. Tanaka:

Enclosed please find our response to JASDEC i S request under

Rule 17f-5(c) (2) (iii) of the Investment Company Act of 1940 to

act as a foreign custodian for U. S. registered investment

companies. In accordance with our standard practice, this

response and your incoming letters will be publicly available as

of today.

Again, I was pleased to have met you on your trip through

the united States and I also enj oyed working with you on this

project. If you have any further questions, please feel free to

contact me at (202) 272-2072. Our fax numer is (202) 504-2395.

Sincerely,
í,,1 ~.I ' /
/ /.-~ ,;
. . -~~. ,S j,~'-£ __ ~ ~-"L

Robert B. Carrol 1
Senior Special Counsel

A UG 31 1993

,'PBLI Our Ref. No. 93-333-CC
Japan Securities
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Deposi tory Center

DIVISION OF INVESTMNT MAAGEMENT File No. 132-3

Your letter of June 3, 1993, as supplemented by your letters

of July 9 and August 11, 1993, requests our assurance that we

would not recommend enforcement action to the Commission under

Section 17(f) of the Investment Company Act of 1940 ("1940 Act")

and Rule 17f-5(c) (2) (iii) thereunder if Japan Securities

Deposi tory Center ("JASDEC") acts as a foreign custodian for U. S . registered investment companies. 1/

You state that JASDEC is a non-profit, public interest

corporation that was established in 1984 under the Law Concerning

Central Depository and Book-Entry Delivery for Share Certificates

and Other Securities (the "Law"). JASDEC's capital was

contributed by securities companies, stock exchanges, securities

finance companies, commercial banks, long-term credit banks, and

trust banks.

JASDEC provides depository and book-entry transfer services

with respect to certain "eligible securities." These are

securi ties that have been designated by the Ministers of Finance

and Justice and whose issuers have consented to having their

securities deposited in the JASDEC system. The Ministers of

Finance and Justice have designated securities that are listed on

a Japanese securities exchange -2/ or that are registered or

designated by the Japan Securities Dealers Association as over￾1/ Section 17(f) of the 1940 Act provides that every registered

management investment company shall maintain its securities

and similar investments in the custody of (1) a bank meeting

certain requirements, (2) a member of a national securities

,exchange, (3 ) the company itself, in accordance with

Commission rules, or (4) a system for the central handling

of securities pursuant to which all securities of any

,particular class or series of any issuer deposited wi thin

the system are treated as fungible and may be transferred or

pledged by bookkeeping entry without physical delivery of

such securities, in accordance with Commission rules. Rule

17f-5 provides .an exemption from Section 17 (f) to allow a

registered management investment company to deposit foreign

securities in the custody of an "eligible foreign custodian." Rule 17f-5(c) (2) (iii) defines the term "eligible foreign custodian" to include "a securities

depository or clearing agency, incorporated or organized

under the laws of a country other than the United States,

which operates the central system for handling of securities

or equivalent book-entries in that country."

1/ Japan has eight securities exchanges: Tokyo, Osaka, Nagoya,

Kyoto, Hiroshima, Fukuoka, Niigata, and Sapporo.

the-counter securities. JASDEC has obtained the required consent

of 2,562 issuers of such securities, representing 99.4% of the

issuers approached. Presently, approximately 5% of all eligible

securi ties are deposited in JASDEC. 1/ Except with respect to

the system for Japanese government bonds, you state that JASDEC

is the only central securities depository and the only central securi ties clearing agency in Japan. !/ wi th respect to JASDEC' s central depository functions, you

state that participants in JASDEC, â/ whose customers wish to

deposit their securities in the system, open an account with

JASDEC, and JASDEC maintains an account book in each participant · s name. Participants deposit their customers' share certificates with JASDEC for central holding in a vault of its

Tokyo office which is operated by the Japan Securities Clearing

Corporation ("JSSC") under a commission from JASDEC. fl To

accomplish purchases, sales, or pledges of share certificates as

collateral by customers, JASDEC transfers the ownership of the

share certificates by book-entry, rather than delivering the

certificates physically. 1/

1/ You state that JASDEC does not expect ever to hold all eligible securities because most of these shares are held by affiliate companiès of the issuers and are not traded.

JASDEC holds. approximately 13% to 14% of eligible securities

that are traded. The remaining eligible securities and

other non-eligible securities (those issued by privately

held companies) are held in the vaults of various

custodians, such as banks and securities companies.

!/ Japanese government bonds are centrally held and settled by

the Bank of Japan ("BOJ"). Although JASDEC is authorized to

provide services with respect to Japanese government bonds,

it has decided against doing so because of BOJ' s dominance in this area. . '

â/ Participants in the system include securities companies, banks, securities finance companies, and other persons

designated by the Ministers of Finance and Justice. As of

May 1993, JASDEC had 269 participants.

§/ JSSC, a subsidiary of the Tokyo Stock Exchange, processes

share certificate deposits and withdrawals for the JASDEC

system. We understand that, prior to the implementation of

JASDEC' s depository system, JSSC provided custodial and

transfer services for the Tokyo Stock Exchange.

1/ We understand that a shareholder may instruct its

participant to withdraw shares deposited in JASDEC on its

behalf.

You state that JASDEC' s operations are subj ect to joint

oversight by the Ministers of Finance and Justice. In addition

to approving JASDEC' s business regulations and any amendments

thereto, the ministries have the authority to order changes to

such regulations to ensure reliable business operations. Prior

to the beginning of each fiscal year, JASDEC submits a business

plan and a budget to the ministries for approval. Under its

periodic reporting obligations, JASDEC must submit, within three

months of the end of each fiscal year, an annual report, a

balance sheet, a statement of revenue and expenditures, and a

list of assets. The ministries also require JASDEC to report new

participant accounts, fees charged for new accounts, and fees

charged for the depository, book-entry, custodial, and withdrawal

services. The ministries are authorized to examine the books and

records of JASDEC and to enforce the provisions of the Law.

Further, you state that JASDEC and its participants are jointly

and severally liable for missing share certificates regardless of

faul t. JASDEC has obtained insurance coverage for certain losses

arising from the system.

,On the basis of tpe facts and representations in your

letters, we would not recommend that the Commission take

enforcement action against JASDEC if, with respect to ~ligible

securities~ it acts as an eligible foreign custodian for U.s.

r~gistered investment companies. Because our posi tionis based

on the facts and representations in your letters, you should note

that different facts or representations may require a different

conclusion. Further, this response expresses the Division' s position on enforcement action only and does not. purport to express any legal conclusions on the issues presented.

~~~~
Barbara Chretien-Dar

Attorney

JAPAN SECURITIES DEPOSITORY CENTER
OAlNI-OKEN KAIKA 6L.OG ACJ ,i:C ~
, -I. NlHOM6ASHI.KA YAS-CHO SECTON ~

2-CHOE. CHUQ-KU. TOKYO 103
RULE l1f- 5 (C) (2)C'II) . FAX 03-61.2810

TEL. 03-61-016 I PUBLIC
A V li.LABILITY g - 3 \ - ,:~

. June 3, 1993

Mr. Robert B. Carrol i
Senior Special Counsel

Division of Investment Management

Un i t e d S tat e sSe cur i tie san d Ex c h a n g e Co mm i s s ion

450 Fifth Street. N. W.

Washington. D. C. 20549

U. S. A.

Dear Mr. Carro i i
Re: No-action Request under Section 17(f) and Rule 17f-5(c)(2)(iii)

'of the Investment Company Act of 1940

Japan Securi ties Deposi tory Center( "JASDEC" ) is the only central securi ties

depository in JAPAN. JASDEC respectfully requests assurance from you that the

Division of Investment Management would not recommend tha~ the Untted States

Sec~rities ind Exchange Commissi~n (th~ "Commission") take any enforcemènt action

under Section 17(f) of the United States Investment Company Act of 1940 ( the "1940

Act") or the Commission's Rule 17f-5 thereunder if JASDEC acts as a foreign

custodian pursuant to sub-paragraph (c) (2) (iii) of Rule 17f-5 for the assets of

investment companies registered under the 1940 Act.

1. Genera i

JASDEC was established as a public-interest corporation pursuant to the Law

Concerning Central Depository and Book-Entry Delivery for Share Certificates

and Other Securities( "the Law" ) in December 1984 under a permit granted by

the Minister of Finance and the Minister of Justice pursuant to Article 34 of

the Civil Code.

JASDEC was designated as a depository by the Minister of Finance and the

Minister of Justice pursuant to the Law in May 1985.

JASDEC has a Board of Directors composed of eleven directors.

JASDEC is.a non-profit organization (zaidan hojin), not a joint stock company.

Its capital stands at ¥3 billion ($27 million at ¥110 to the dollar). and

was contributed by securities companies. stock exchanges. securities finance

companies. commercial banks. long-term credi t banks. and trust banks - covering all of the major financial-service institutions of Japan.

2. Purpose and Business of JASDEC

The purpose and the business of JASDEC are prescribed in the Law and the Act

of Endowmen t.

"With a view to rationalizing the custody and delivery of share.certificates and other securities. JASDEC shall facilitate securities trading by properly and accurately executing businesses delegated to JASDEC by the Law. and thereby contribute to the development of the economy." And the actual businesses which JASDEC is engag~d in are:
C1 ) Serv ices relating to the custody of securities:
( 2) Serv ices relating to the transfer of securi ties; (3 ) Other services which a deposi tory system is expected to pro v ide as ma y be pr'escr i bed by the Law. an'd. (4 ) Bus i nesses cnns i dered necessary for JASDEC to achieve its purpose. 3 Eligible Securities The Law stipulates that JASDEC.may handle share certificates which are

s p e c i f i c a i i y des i gb ate d by the M i n i s t e r 0 f Fin a n c e and the M i n i s t e r 0 f Justice and that JASDEC must obtain the consent of the issuing companies' of

such share certificates.

On 0 c t 0 b e r 24, 1990, the M in i s t e r 0 f Fin a n c e and t h~ M in i s t e r 0 f Jus tic e

designated the share certificates listed on a stock exchange and those

registered with. or designated by the Japan Securities Dealers Association as

over-the-counter securi ties. In the ensuing months, JASDEC sought the consent

of the companies issuing these stocks, and as of the end of March 1993. out

of the 2576 companies approached, the 2562 or 99.4% had given their consent.

The number of share certificates listed on any stock exchange stood at

347.060 million and the number of share certificates registered with the Japan

Securities Dearlers Association stood at 5,857 million, so the total is

352.917 million shares as of the end of March 1993.

Meanwhile, the number of share certificates held in custody by JASDEC stood at

14.108 million. (We could not classify the number into two group (listed and

OTe) )
Therefore 4.0% of share certificates (listed and OTC) are deposited with

JASDEC as central deposi tory.

4 The deposi tory. central custodial and book-transfer services

(1 Deposit of share certificates

Customers including shareholders wishing to utilize this system deposit their

share certificates with JASDEC through their accounts opened with a

participant of the system, such as a securi ties company or bank. etc. On

application from such participants. JASDEC opens an account and maintains an

account book in their name.

Those eligible to participate in the system are securities companies. banks.

securities finance companies, and other persons designated by the Minister of

Finance and the Minister of Justice.
æiCentralized custody of share certificates Share certificates. which the holder deposits with a participant. are

deposi ted wi th JASDEC wi th the consent or under the instructions of the holder.

and then transferred in the name of JASDEC to be centrally held by JASDEC.

When a customer instructs a securities c¿mpany or bank (participant) to that

effect. the share certificates deposited with JASDEt are delivered to the

said customer.

ffi Boo k - e n try t ran s fer 0 f s h are c e r t if i cat est r a d e d 0 r pIe d g e d as co i i ate r a i ' When a customer purchases. sells. or pledges as collateraL, share certificates

deposited with JASDEC, such transactions are processed by transferring the

~wnership of such share certificates between the accounts of the participants

concerned by JASDEC or between those of the customers concerned maintained by

such participants. instead of physically delivering the stocks.

5. Participant

Institutions eligile to act as participants in the system include securities

companies. banks, securities finance companies. the Norin-Chukin Bank, the Shoko, -Chukin Bank, Credit Associations, National Federation of Credit Associations,

Labor Credit Associations. National Federation of Labor Credit Associations,

Credit Cooperatives and The National Federation of Credit Cooperatives.

Insurance Companies. Stock Exchanges. and the Japan Securities Clearing

Corpora t ion.

Upon request from a participant, JASDEC establishes an account on the

participant's behalf.

As of the end of May 1993. a total of 269 participants have opened their

accounts with JASDEC. Participants are as follows. secur it i es compan i es mm____m.............................,........____......___.. 2 1 3

Japanese secur i ties compan ies........................--m...........------l 7 2

fore i gn secur it i es compan i es ..--...........-------m--..-.........--m......-.41

ban k s ,.............. ......... 00 .... - m'." - 00 --... ..-............ ..... ........ -... -... -... -... -.--. m - --- - -- 3 7

Japanese banks --.........................m--..-.--.m------..-----.............-.--'m---1 6

J a pan e set r u s t bank s "m, 00_____________,..,.'., --.. ---- 00 00_' .-.,........ 00 ----. 7

for e i gn ban k s ..-- --.. -.. -... - -.--... ---- 00 - m, ---- ---- --., --....., --- .'00 - 00 ---- .'-. m ----. 6 for e i gn t r u s t ban k s '00 'm_m____'__ ---- ........_m_m_m____m;...___.._m ..., 8

financial institutions other than banks ,.,--............---00-00..--00----.----.. 2

insurance compan i es 'm_______..........'.m...-'..m_m____m___________..._._m__mm' 5

secur it i es f i nahce compani es ..'...m..'~'m--.------------m-----..-..-.....'m--.. 3 eight stock exchanges and JSC ..m_m_................_____..,..____, 9
6. Beneficial shareholders

(1) JASDEC is supposed to notify issuing companies the names and addresses of

the i r be n e f i cia Ish are h 0 Ide r s as 0 f tb e i r d ate 0 f r e cor d . the c i ass and the number of shares owned by such shareholders on the basis of reports submitted

t 0 J AS DE C by its par tic i pan t s.

The issuing companies are to draw up a i ist of their beneficial shareholders

on the basis of notifications sent to them by JASDEC. and the entries thus

made in the i ist of beneficial shareholders have the same effect as that of

the list of shareholders with respect to the stock certificates deposited with

JASDEC. Therefore. persons whose names appear on the list of beneficial

shareholders are presumed to be beneficial shareholders. entitling them to

exercise their shareholder rights with the issuing companies.

(2) Under the Law. JASDEC may demand that the issuing companies transfer share

c e r t i f i cat e sin its c u s to d y to J AS DE C. S u c h de ma n d m us t be f i led wit hi n a reasonable time from the date of deposit of share certificates concerned.

Therefore. stock certificates which are placed in the custody of JASDEC are

transferred to it as their nominee.

(3) While JASDEC will thus become the nominee of stock certificates placed in its

custody for the purpose of shareholders i ist. the rights it can exercise as a

shareholder are restricted to procedural matters such as the receipt of new

share certificates issued following a stock consolidation or a stock split. filing an application with the issuing company for a consolidation of small-

denomination share certificates into larger-denomination ones. an application

for the issuance of a public peremptory notice in case share certificates were

lost. or filing a declaration of non-holding of physical stock certificates.

etc.
7. Other Clearing Agents in Japan

J AS D E Cis the on ly leg a i i y des i g n ate d s e cur i tie s c e r t i f i cat e depostoryjclearing agency in Japan. JASDEC presently holds and transfers by

book-entry Japanese domestic stock (i isted and OrC).
Participants. with contracts with the Bank of Japan. already settle Japanese

government bo~ds via the BOJ Net system.

8. Protection

(1) Under the depository system of Japan. JASDEC and its participants with a

ledger of customer accounts are primarily held liable to compensate, jointly

and severally. for missing stock certificates regardless of their fault or no-

fault. rhus. JASDEC is held liable to compensate for losses of stock

certificate even when the loss is blamable on an illegal act of a third party

or on causes beyond its control (force majeure) wi th a view to ensuring the

protection of the interest of customers utilizing the services provided by.

and in reliance of, JASDEC. And this constitutes a major feature of the

deposi tory. system of Japan.
. (2) Cases where JASDEC is liable, in the first instance, to compensate for a loss

are very i imi ted. Nevertheless. JASDEC has entered into a property-casual ty

insurance agreement wi th an insurance company to provide for contingencies.

An outline of the property-casualty insurance agreement JASDEC has entered is

as follows:
A. Scope of coverage

• all risks. However. losses caused by willful or gross negligence

of JASDEC or its employees. by a faul t on the part of a trustee are

not co v ere d by the ins u ran c e. Wh e nth e t r us tee has ani n sur a n c e covering the stock certificates. the coverage of the insurance

taken out by JASDEC will become effective only after the insurance

of the trustee has been paid.

B. Ce i I I ngs on compensa t Ion

• The maximum amount of compensation payable ¥3 billion (per case).

9. Regulatory Authorities

As a public-interest corporation (juridical person), the activities of JASDEC

are subject to the oversight of competent ministers -- the Minister of

Justice and the Minister of Finance. Prior to the start of each fiscal

year. JASDEC draws up a business plan and a budget for the 12-month

fiscal year and submits them to the competent ministers for their approval

before executing them. Wi thin three months from the end of the preceeding

fiscal year, JASDEC is required to submit to the competent ministers an

annual report. balance sheet. a statement of income covering the

immediately preceding fiscal year. In addition. the relevant ministries

investigate from time to time books and records of JASDEC to ensure the

appropriateness of its business activities.

A s a for e s aid. J AS D E Cis the 0 n I y c e n t r a I s ~c u r i tie s c I ear i n gag e n c y and deposi tary in Japan. Therefore, JASDEC respectfully requests assurance from

you that the Division of Inv~stment Management would not recommend that the

Commission take any enforcement action under Section 17(f) of the 1940 Act or

Rule 17f-5 if JASDEC acts as a foreign custodian pursuant to sub-paragraph " (c) (2) (iii) of Rule 17f-5 for the assets of investment companies registered

under, the 194U Act.

If you will have any further questions or if you will ask any materials.

pIe a s e let me 'k now a tan y t i me, we w 0 u i d be hap p y top r 0 v ide fur the r i n formation as soon as possible. Yours sincerely. xf~'/~e?l-~ Sedí Tanaka , Senior Managing Director

J AP AN SECURITIES DEPOSITORY CENTER

OAINI-SHOKEN KAIKAN 6L.OG. FAX, 03.366 I .28 I 0 1- I. NIHOMBASHI.KAYABA-CHO TEL, 03-366 1-0 I 6 I 2-CHOME, CHUO-KU, TOKYO 103 Mr. Robert B. Carroll Senior Special Counsel

Division of Investment Management

United States Securities and Exchange Commission

45~ Fifth Street, N. W.

Washington, D. C. 20549
U. S. A.

J u 1 y 9, 1993
RE: No-Action Request under Section 17(0 and Rule 17f-5(c) (2) Ciii) of the Investment Act of 1940

Dear Mr. Carroll:
Thank you very much for your letter of June 28, 1993 requesting further

questions regarding the above matter. I am pleased to answer your questions as

fol lows:

Answer to Question No. 1

(1) The figure of 4% as the ratio. of the share certificates deposited with

JASDEC to the total number of eligible shares has increased to 4.8% as of the

end of
June. The number of the share cert i f icates depos i ted wi th JASDEC now stands at more than 17 billion. Only 20 m6nths have passed since the

commencement of our depository business. and the ratio is still in the low

level. The other 96% certificates are still held in the vaults of banks.

securities companies. insurance companies, trust banks. etc, We are

anticipating that this ratio will grow steadily as the depository system strikes

its roots deeper in Japan.

But. even if this ratio grows in the future, we don't expect it will ever'

reach 100% eventually, because it is hardly possible to take in the whole

number of el igible shares existing in Japan. In the Japanese corporate

culture, most eligible shares are fixedly held by affiliate companies of the

issuers. This pract ice has been maintained in order to keep the corporate

management stable. and these kinds of shares will not be traded in the market.

Since only marketable shares could be deposited with us. the following shares

can be deposited. i.e.. the shares deposited by securities companies on behalf

of their customers. those deposited by banks working as the standing agents of

foreign investors. those entrusted wi th trust banks by customers, etc. I

would roughly estimate the total number of the above mentioned shares should

stand somewhere between 120 billion and 130 billion shares. So the current

ratio of the shares deposited with JASDEC to the total marketable eligible

shares wou I d be 13 to 14%.

(2) The non-eligible shares are those issued by privately held companies. They

are not traded in the Japanese stock market. and are held physical certificates

at the vault of custody agents, such as banks, securities companies and

agenc i es.

(3) Bank of Japan ( "BOJ") has been providing the central depository and

clearing serivice only for the Japanese Government Bonds. Even if JASDEC is the

only central depoitory organization designated under the Law ("Law Concerning

Central Depository and Book-Entry Delivery for Share Certificates and Other

Securi ties"), BOJ can do such business by a contract wi th the users. JASDEC is

legally allowed to provide its service concerning the Japanese Government

Bonds, too, but since BOJ has been long dominant in this area of business.

JASDEC decided not to provide this service.

Answer to Question No.2
The share certificates deposited with JASDEC are physically held in the

vault of its Tokyo regional office. JASDEC has commissioned the business of

its Tokyo regional office to the Japan Securities Clearing Corporation ( "

JSCC" ). and those of the other regional offices to the seven regional stock

exchanges. Any share certificate placed in any regional office shall be moved

to the Tokyo office. Therefore, the actual vault is the one maintained by the

JSCC. All share certificates deposited with JASDEC are held in this vault.

Answer to Question No.3
(1) One of the most unique characters of the Japanese depository system is that

the issuers shall maintain the "list of beneficial shareholders", as well as the" list of shareholders". The former lists are compiled based on the notices

issued by JASDEC, for the identification of the real shareholders existing

behind the name of.JASDEC in the latter list. The list of beneficial

shareholders have the same effect as the i ist of shareholders under the Law,

hence the beneficial shareholders can exercise their rights as shareholders.

(2) As stated above. the notices given by JASDEC to the issuers are only

related to the shares deposi ted wi th JASDEC.

(3) JASDEC itself does not maintain the list of beneficial shareholders.

because such needs has been eliminated by the "direct system" adopted in this

coun try.

This "direct system" is one of the features that distinguishes the Japanese

central depository system from that of other major countries. Under this

system. the issuers are linked directly with their beneficial shareholders by

means of the list of beneficial shareholders. There exist two kinds of

mechanisms in the world. through which beneficial shareholders can exercise

their rights represented by share certificates placed in the custody of the

depository. .
One of them is the direcrt system under which beneficial shareholoders can

exercise their rights direcrtly with the issuers without going through an

intermediary ( a depository organization or its participants ), and the other is

the indirect system under which they exercise their rights through an

intermediary. Other countries follow the indirect system, while Japan follows

the direct system, largely due to the fact that Japanese corporations have long

developed the mechanism of directly grasping and managing the status of their

shareho i ders.

Answer to Quest ion No. 4
Under the Law. JASDEC is empowered to demand the issuers to reregister the

share certificates in its custody to JASDEC within a reasonable time from the

date of the deposit. As a matter of practice, such reregistrations are made in

order. as share certificates come into deposit and get' accumulated. The reason

why the Law has gran ted JASDEC so is to enab 1 e shareho 1 ders to exerc i se the i r beneficial rights by reregistering the shares to the nominee, the JASDEC, who

acts on behalf of the beneficial shareholders as to the procedural matters as

explained in my letter of June 3, 1993.

Answer to Ques t ion No. 5
The Law states both the Ministry of Finance and the Ministry of Justice

shall be the competent authori ty of JASDEC. The Law. however, states nothing

about the distinction between the two Ministries concerning the regulatory

responsibility and power. Therefore, both Ministries stand on a completely

equal basis in terms of the areas and the power of regulation. Practically. when JASDEC needs to seek any approval under the Law, it

never fails to apply to both Ministries at the same time. . Further more. the

instructions JASDEC has received from the Ministri.es have never differed

between the two Ministries.
I hope this has sufficiently answered your Questions. For your

information. 1 would like to advise you of a new development which has taken

place in conncetionwith the international acknowledgment of JASDEC. In an

effort to have JASDEC approved by overseas regulators, we have just lately

received the approval from the SFA, the U. K. self-regulatory organisation, as

the attached copy of the letter self-explains.

If you have any further questions. I would be happy to answer them.

Sincerely yours,

p ", 7' .L
~7.(,/ ~ ¿: ;x~ Se 1 j i Tanaka
Senior Managing Director

J AP AN SECURITIES DEPOSITORY GENTER , ' OAINI-SHOKEN KAIKAN SLOG, FAX, 03-366 1-28 I 0 , " .. I-I, NIHOMSASHI-KAYABA-CHO TEL 03-661-0 I 6 I 2-CHOME, CHUO-KU, TOKYO I 03 .. Mr. Thomas S. Harman

Associate Director ( Chief Counsel)

Division of Investment Management

United States Securities and Exchange Commission

450. Fifth Street, N. W.

Washington, D. C. 20549
U. S. A.
August 11. 1993

RE: No-Action Request under Section 17(0 and Rule 17f-5(c) (2) Ciii) of the Investment Act of 1940

Dear Mr. Harman:

Thank you'for your letter of July'22, 1993, advising us of the necessity of

further discussion on the regulation side. Your letter did not duly reach me,

which was actually mis-transmi tted to the Korean deposi tory and finally reached'

me ónlythe 3rd August. I regret that I could not respond to your letter much more quickly. In this letter, I would like to discuss how the "Law Concerning Central

Depository and Book-Entry Delivery for Share Certificates and Other Securities"

( the "Law" )has been implemented and th~ Joint Jurisdiction of the Mininister

of Finance and Minister of Justice ( the "Ministers" ) works under the Law. Both Ministers have equal regulatory power as the competent authority and they always act together in harmony as I stated in my former letter. Hence, the regulatory powers described below are equally shared by two ministers.

1. Power to Designate

The Ministers are empowered by the Law to designate the followings.

(1) To designate a deposi tory

A dopository can never carry out its business without designation. In

order to be designated, an applicant depository must meet the following

requirements given by the Law:

(i) the applicant shall be a corporation formed under Article 34 of the Civil

Code ( i. e.; a non-prof i t corporat ion);

(ii) the applicant must not have a record of having its designation been

revoked;
(iii) the applicant must not contain among its directors any person who has been

adjudged incompetent or quasi-incompetent or any person who has been

adjudged bankrupt and has not been reinstated. and;

.
'.
(iv) the applicant must not contain among its directors any person who has been

sentenced to imprisonment or to a fine under the Law.

Practically, JASDEC is the sole entity that has been designated by the

Ministers as the deposi tory.

(2) To designate eligible securities

The securities that the depository may handle must be designated as

eligible securities. As discussed in my former letter, designated as eligible

securi ties are so far the shares i isted on any Japanese stock exchange and those

registered wi th Japan Securi ties Dealers Association ( the self-regulatory

organization regarding the OTC market). For designation. securities are

required to have sufficient liquidity equivalent to that of listed securities.

(3) To designate el igible part icipants of the deposi tory. Only designated institutions are eligible to participate in JASDEC.

Detai Is of participants were discussed in my last letter.

2. Power to Au thor i ze
   The Ministers can authorize a depository to commission part of its business

to a third party. The Ministers does such authorization from the respect "of

efficiency since the depository business can contain some specialized work that

require~ highly technical skill. However it is restricted to only part of

business, not all of the business, that can be commissioned to a third party,

from the reason that such commissioning may cause evasion from the governmental

supervision intended by the Law. The Law has imposed various obligations on a

deposi tory, and violation thereof is to cause criminal offense. .

Practically, JASDEC has commissioned its work of processing

deposit and withdrawal of share certificates to the Japan Securities Clearing

Corporation, a subsidiary of Tokyo Stock Exchange, which has long experience

and expertise in that area since before the Law was created.

3. Power to Approve

JASDEC must obtain approval from the Ministers in connection with the

following matters.
(1) Establishment of. and amendment to, its Business Regulations. Further. the

Ministers may order changes to the Business Regulations. when they recognize

such Regulations are no longer appropriate for the purpose of conducting proper

and re 1 iab 1 e bus iness by JASDEC;
(2) Establ ishment of business plan and budget prior to the commencemnet of the

concerned bus iness year, and any change thereto; and

(3) Election or dismissal of its directors. Further, the competent ministers

may even order dismissal of any of its directors if such a director has violated

any provisions of the Law or any provisons of ordinances or any governmental

action under the Law or any prOViSions of the Business Regulations. Such an

order may be issued when any of the directors shall cuase JASDEC not to meet

the requirements set out by the Law.

4. Power to Order for Governance

The Ministers may. when they deem it necessary to enforce the provisions of

the Law. issue to JASDEC such orders as shall be necessay to perform their

duities of supervision. Amongst the regulatory powers possessed by the

Ministers in connection with assuring the reliability of a depository. this

power is the most fundamental and most directly linked to the governace of a

depository. Any restriction shall not apply to this power throughout the

framework of the Law as long as the order is necessary in i ight of the purpose

of the Law.

5. Power to Inspect

The Ministers may. when they deem it necessary to secure the proper

operation of business by JASDEC. order JASDEC to submit any information or

material relating to its business. The Ministers may also cause any of their

officials to enter the office of JASDEC to inspect the state of its business or

assets.' account book. documents. or any other things and address questions to any related person.

6. Report ing .

(1) JASDEC must report to the Ministers any change in its name. address or

location of office(s) in advance.

(2) JASDEC must submi t to the Ministers its annual' report. balance sheet.

statement of revenue and expenditure. and list of assets within three months of

the end of each f i sea i year.
(3) Besides the above legally required reporting obligations. JASDEC has been

instructed by the Ministers to report on the following matters related to the

Business Regulations:
(i) Grant of opening a new accout of a participant;

(i i) Decis ion of the amoUnt of fee for opening an account;

(iii) Approval of a special participant;

(iv)' Decision of the amount of coinision fees to be charged for deposi t.

book-entry delivery. withdrawaL. and custody of securities. etc.. and;

(v) Establishement of a new rule or taking of an action. pursuant to

the Business Regulations. to tackle issues that are out of the

scope of the Business Regulations.

These reporting facilitates the supervision by the Ministers of the daily

conduct of business by JASDEC. Wi th those informat ion. the Ministers can make judgement regarding the necessi ty of issuing of any order stated above.

These are the overview of the regulatory power possessed by the Minister of

Finance and Minister of Justice. If there still remain any matter unclear,

please do not hesitate to contact me.

With bes t regards,
Sincere I y yours,
~~'~c?L
Se i fi Tanaka
Senior Managing Director