Insider-Trading Tipsters to Face Prison Under Japan Plan

Japan’s financial regulator is proposing imprisonment as part of stiffer penalties for people who leak information used for insider trading, according to a document obtained by Bloomberg.

Individuals who provide tips for insider traders to help them gain profits would face up to five years in prison and 5 million yen ($53,000) in fines, the document from the Financial Services Agency shows. Institutions would be subject to fines of as much as 500 million yen.

Japan is clamping down on insider trading after regulators last year found that employees of brokerages including Nomura Holdings Inc. gave tips on share offerings they managed. Under existing rules, only those who trade on nonpublic information can be imprisoned or fined.

“We welcome the tightening of regulations as a market participant,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo. “The new rule will act as a deterrent against insider trading as brokerages are improving internal controls.”

The proposal for imprisonment is more severe than recommendations made by an FSA advisory committee in December. The panel had urged that the names of brokerage employees who leak confidential information be disclosed to the public in egregious cases.

Reform Bill

“We are preparing to submit a regulatory reform bill on insider trading in this ordinary Diet session, in cooperation with parties in the government,” said Hiroshi Okada, an FSA spokesman, while declining to comment on the proposals. The Nikkei newspaper reported the plans earlier today.

The agency’s proposed law change would bring Japan into line with the U.S., where former Goldman Sachs Group Inc. Director Rajat Gupta was convicted in June of passing insider tips to Galleon Group LLC founder Raj Rajaratnam in a conspiracy that ran from 2007 to January 2009. Gupta, sentenced to two years in prison, is free pending his appeal.

Since Japan’s insider-trading scandal emerged a year ago, politicians have urged that rules barring the government from imposing fines against information leakers be toughened to restore confidence in the nation’s financial markets.

Staff at Nomura, Japan’s biggest brokerage, gave tips on four equity offerings it managed in 2010 and 2011, regulators found last year. While the FSA didn’t fine the investment bank, it ordered the firm to improve securities operations and its top two executives resigned.

The Japan Securities Dealers Association in October fined Nomura 300 million yen, the biggest penalty by the self-regulatory group against any firm in 12 years. SMBC Nikko Securities Inc. was docked 200 million yen by the association in June after being found to have solicited clients by giving them confidential information on a public offering.

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