Dealers selling "funds for professional investors" to less-experienced investors
The following shows one of the cases where funds for professional investors have been sold to people with less investment experience including elderly people, causing many consumer troubles.
Details of the inquiry
I checked a deposit book of my mother and noticed that 1.5 million yen had been paid to an unknown dealer. After reading a contract document concerned and contacting the dealer, I found out that my mother had made a contract to invest 1.5 million yen to a fund run by the dealer. I asked the dealer for cancellation of the contract, explaining that my mother had been diagnosed as dementia and had a certification of long-term care need as well as that she was in the process of obtaining adult guardianship. The dealer replied that they were unable to give an instant answer and would like to consider about it.
At a later date, I checked her deposit book again and found out that she paid one million yen to the dealer after I asked for cancellation of the first contract. When I asked the dealer for explanation on the second remittance, they told me that the second one was for paying part of the money for another contract independent of the first contract.
Although I told the dealer that my mother suffering from dementia was unable to determine things properly and asked for cancellation of the first contract, the dealer did not inform me of the second contract and made her partly pay for the second contract. I asked the dealer for explanation on a series of problems, but the dealer did not give me any convincing answer and just said "It is a matter of personal information, so I did not inform you of it" and refused to cancel the two contracts. I can't understand why the dealer made her pay one million yen a few days after my explanation that she suffered from dementia. I want to cancel both of the two contracts for her and want the dealer to return all the money to her.
(Contract signatory: women, unemployment)
After receiving this inquiry, the National Consumer Affairs Center of Japan (hereinafter called NCAC) read the contract document and the important description concerned. We found out that the dealer had notified the Financial Services Agency of their fund for professional investors and that the two contracts made were those for investing in funds for professional investors. However, the document at the contract signatory's home did not describe the actual status of running the fund and what specifically she invested in.
Based on the above, NCAC contacted the dealer to ask their perception about their way of soliciting and about judgment of the contract signatory. The dealer replied that they would not refund the money due to the following reasons:  When soliciting consumers by phone using a telephone book or a name list, the dealer do not inform that they are soliciting investments, but no problem was reported;  Both of the contracts were made by the contract signatory herself, so the dealer see no problem;  The dealer considers that the contract signatory has sufficient judgment and sees no problem.
NCAC considers several points including the following are questionable:  Whether or not the dealer understands the system of funds for professional investors (1. Mass telemarketing; 2. Words in the contract clauses implying that several anonymous associations would be organized within one fund);  risk which banks decide not to bear will be taken by general investors;  After hearing from her family that the contract party has dementia, the dealer should have considered the fact based on an objective material (e.g. by checking the diagnosis of dementia by the doctor).
NCAC communicated the above questionable points to the dealer and urged the dealer to reconsider handling of the two contracts. After repeated negotiations, the dealer proposed to refund about 90% of the money (deducting the application fee and the managerial reward) in installments. NCAC communicated the proposal to the inquirer, however, the inquirer and her family told that they want the whole money back and would like to consider legal action. Therefore, NCAC concluded the consultation.
Funds for professional investors are basically intended to be sold to and run by professional investors, so they are subject to a simplified regulation not taking into account of general investors. These funds are not operated by the registration system and not subject to administrative punishment (i.e. business improvement order, business suspension order, or rescission of registration). Since the legal system allows 49 or less general investors as members to acquire a fund, some dealers have made up funds for professional investors for which they actually intend to solicit many and unspecified general investors. Consequently, less-experienced general investors including elderly people have been improperly solicited to invest in these funds. The following problems have been pointed out.
- High-risk and complicated funds for professional investors are sold to elderly people who have less investment experience and are not so willing to make a contract through sudden door-to-door sales or telephone solicitations.
- False, deceitful or inadequate explanations of risks are given and unwanted solicitations are conducted.
- Fraudulent dealers appear to concern this kind of businesses (e.g. theatrical sales schemes).
- Consumers are not fully informed of details of how funds are operated.
- In many cases, it is difficult to recover losses.
In light of these growing consumer troubles particularly among elderly people, in December 2013, NCAC  introduced a mechanism based on the aim of the system for funds for professional investors;  requested the government to rigidly cope with dealers which registered their businesses of funds for professional investors and improperly soliciting consumers. Currently, the Financial Services Agency is in the process of discussing how to revise the regulation of funds for professional investors. The current system allows a dealer to raise money from 49 or less general investors if the dealer meets a certain requirements and submit a simple notification to a Director-General of a Local Finance Bureau. It is proposed to revise the legal system so that selling of funds for professional investors to general investors will be allowed only if they have a certain amount of financial assets (i.e. wealthy people).
Funds for professional investors (Specially Permitted Businesses for Qualified Institutional Investors, etc.) refer to business activities soliciting people to acquire securities aiming at private placement of interests in collective investment schemes (fund) by one or more Qualified Institutional Investor(s) (securities corporations, banks, etc.) and no more than 49 investors other than Qualified Institutional Investor (amateur investors).
Usually, when a dealer intends to deal in interests in collective investment schemes (fund), the dealer needs to be registered as a Type II Financial Instruments Business. However, dealers are allowed to deal in funds for professional investors just by a notification since these are basically for "professional investors". In addition, the regulation concerned eases solicitations for sales thereof (e.g. no obligation of delivery of documents, no principle of conformity, etc.).