The Tokyo Stock Exchange (hereinafter, the "TSE") has imposed disciplinary action (censure) against Cosmo Securities Co., Ltd. (hereinafter, the "Company") pursuant to Rule 34, Paragraph 1, Item 8 of the Trading Participant Regulations.
Additionally, the TSE has requested the submission of a business improvement report pursuant to the provisions of Rule 19 of the Trading Participant Regulations. The business improvement report shall include:
- Explanation of the details of this disciplinary action and proper response toward the customers against whom the Company conducted actions in violation of laws and regulations, such as inappropriate solicitation of switching investment products.
- Clarification of the locus of responsibility of the manager and within the management involved in this case.
- Development of management supervision systems and frameworks which properly facilitate management supervision and mutual checks by the board of directors and auditors.
- Preparation of internal supervision and internal auditing units and securing of proper functionality in such areas from the standpoint of ensuring proper business operation.
- Fundamental revision of rules, regulations and business procedures concerning regulatory compliance related to the marketing of investment trusts in order to reinforce such compliance, and concentrated effort to familiarize officers and employees with such matters, based on this case. In addition to this, the strengthening of regular instruction/training, and effort to familiarize employees with the related laws and regulations.
Outline of Violation
Situation deemed seriously lacking in management supervision and business supervision systems and frameworks, such as conduction of organized and multiple violations of laws and regulations, including inappropriate solicitation, and that such actions went undetected.
Starting in November 2008, the Company began handling bull-type and bear-type investment trusts (hereinafter, "Bull-Bear Investment Trusts") as staple investment trust products, and from March 2009, focused on the sale of four issues of monthly-distribution-type investment trusts (hereinafter, the "Four Monthly-Distribution-type Investment Trusts"). It was deemed that violations of laws and regulations, such as inappropriate solicitation, were conducted multiple times through the business organization, based on the idea of prioritizing profit (fees, etc.) over compliance in relation to the business related to such staple products, and such actions went undetected.
1. Bull-Bear Investment Trusts
(1) Promotion of Business Prioritizing Profit
Starting from November 2008, the sales department supervising sales at the Company, including the senior sales director who was both a board member and executive officer (hereinafter, the "senior sales director"), issued direction over the phone to each division and branch manager from the senior sales director himself, set a balance-goal regarding Bull-Bear Investment Trusts for sales personnel, in addition to collecting and analyzing daily balance, changes thereof, and fees related to Bull-Bear Investment Trusts for each employee. In this way, business was strongly promoted toward achieving such profit-based goals (fees, etc.) with priority over compliance.
(2) Violations of Laws and Regulations, such as Inappropriate Solicitation of Switching
- Inconsistent Solicitation
Of the transactions related to 2,885 customers examined from November 2008 to August 2009, there were a total of 3,111 cases for 1,154 customers resulting from 183 sales personnel in which the same sales personnel offered separate customers differing market views, etc. without logical reasoning on the same day, and solicited the switching between bull-type and bear-type investment trusts in order to increase profits (fees, etc.). The fees assumed by customers totaled approximately JPY237 million for such 3,111 cases. - Solicitation to Switching without Explanation of
Important Matters
From the examination of the transactions of a sampling of 38 customers during the period between November 2008 and August 2009, it was recognized that 237 transactions were induced by 30 sales personnel without explanation of the approximate profits and losses of investment trusts sold at the time of solicitation for switching. It was further recognized that explanation of important matters related to such switching did not take place. This was due to a mistaken interpretation of investment trust switching solicitation.
Additionally, of the above 38 customers, there were 11 customers who switched investment trusts over 5 times in February 2009, and were deemed as frequent switching.
(3) Non-functioning Internal Mutual Checks, etc. related to Compliance
In April and May 2009, the business operation audit department's sales inspection division and the inspection department conducted a survey and special inspection regarding Bull-Bear Investment Trusts. In monthly reporting meetings, etc., the business operation audit report and special inspection results were reported, and warning, etc. was raised regarding Bull-Bear Investment Trusts. However, such warning, etc. was not thoroughly released to sales personnel, etc., and afterward the Inconsistent Solicitation in the above (2)a. occurred, developing into a situation inadequate to correct inappropriate solicitation related to Bull-Bear Investment Trusts. Additionally, the situation was recognized as not preventing inappropriate solicitation related to the Four Monthly-Distribution-type Trusts in the below 2.
2. Four Monthly-Distribution-type Trusts
(1) Promotion of Business Prioritizing Profit
From March 2009, the sales department at the Company promoted business in order to achieve profit-based goals (fees, etc.) with priority over compliance, in continuation of the promotion of business related to Bull-Bear Investment Trusts in the above 1.(1). Due to this, it was recognized that the sales department tolerated the business activities prioritizing profit occurring in each sales division and branch office, despite actual awareness of such activities.
(2) Violations of Laws and Regulations such as Inappropriate Solicitation of Switching
From the examination of transactions of a sampling of 128 customers from during the period between March and August 2009, there were a total of 84 cases recognized involving 56 customers, 40 sales personnel at 18 divisions and branch offices in which the inappropriate solicitation in the below a. and b. were conducted in order to achieve the profit-based goals based on direction from the sales department in the above (1). In these 84 cases, the fees assumed by customers totaled approximately JPY24 million.
- Disguised Non-solicitation
The prohibition of switching advice within 6 months of a purchase and the transaction regulations such as solicitation restrictions for elderly individuals are prescribed in the Company's compliance manual. When offering switching advice, it is prescribed that sales personnel prepare an "Investment Trust Switching Advice Explanation Form" explaining important matters related to switching, and that approval of the division manager/branch manager/person responsible for internal supervision be received. However, 84 cases were recognized, as stated above, as disguised non-solicitation in order to avoid such solicitation restrictions, etc. At such time, such sales personnel did not create the above "Investment Trust Transfer Advice Explanation Form". - Lack of Explanation of Important Matters
As a result of masking actions as non-solicitation in the above a., solicitation for switching was repeated through contradictory, inconsistent, and biased explanations, and it was recognized that switching solicitations were occurring without explanation of important matters with influence over customers' investment decision including the rationality of such switching.
(3) Insufficient Internal Supervision Systems and Frameworks
All managers of the 18 divisions and branch offices in the
above (2) were aware that the solicitation for switching which was disguised as
non-solicitation as in the above (2)b. was conducted at each sales division and
branch office, and tolerated such action based on the idea of prioritizing
profit. In 2 branch offices out of these, the branch manager and assistant
branch manager themselves conducted solicitation for switching which was
disguised as non-solicitation.
Additionally, the Company provided an Investment Trust Alarm/Attention system
where, in addition to monitoring that excessive solicitation for investment was
not conducted, the daily monitoring of the economic rationality in solicitation
for switching was conducted by the business operation audit department. However,
neither monitoring failed in detecting the inappropriate cases related to the
Four Monthly-Distribution-Type Investment Trusts in the above (2).
3. Furthermore, it was not found during this inspection that the management, including the company president responsible for planning proper business operations, conducted instruction or supervision to correct the violations of laws and regulations, such as inappropriate solicitation for switching or insufficient internal supervision systems and frameworks.
As above, as a result of strong business promotion based on the idea of prioritizing profit (fees, etc.) over compliance by the sales department, including the senior sales director who was a member of the management,, in the sales relating to staple investment trusts, inappropriate solicitation was conducted multiple times through the business organization of the sales department, sales divisions, branch offices, etc. and customers were charged high amounts of fees. Additionally, sufficient mutual checks, etc. were not carried out by the internal supervision unit with regard to such kinds of inappropriate solicitation, such activity went undetected, and moreover there was no detection, supervision, etc. of this type of inappropriate business operation on the part of the management. It was recognized that there were serious insufficiencies in management supervision and business supervision systems and frameworks.
Furthermore, despite being in a position expected to plan for proper business operations, particularly in relation to sales, the senior sales director promoted business with the idea of prioritizing profit (fees, etc.) over compliance, while understanding that his instructions, etc. had the possibility of leading to inappropriate solicitation. As a result, the inappropriate solicitation in the above 1.(2) and 2.(2) occurred multiple times, and each case of inappropriate solicitation was deemed as if such solicitation was conducted by such director.
The situation where important matters were not explained at the time of the solicitations for switching in the above 1.(2)b. and 2.(2)b. related to the Company and the Company's directors is deemed to fall under "situations where explanation was not given to a customer regarding important matters related to switching of investment trust beneficiary certificates, etc. when solicitation of such switching occurred", as prescribed in Article 123, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Financial Instruments Business, Etc., under Article 40, Item 2 of the Financial Instruments and Exchange Act.
Additionally, the above business operation situation at the Company was deemed in great need of business improvement by administrative measures regarding the inappropriate solicitations not falling under violations of laws and regulations and the serious insufficiencies in management supervision and business supervision systems and frameworks. Such situation was deemed to fall under "When ...necessary and appropriate for the public interest or protection of investors, with regard to ... business operation" of Article 51 of the Financial Instruments and Exchange Act.