Type 2 Securities Sales Representative Examination cheat sheet

Japan's FIEA (Financial Instruments and Exchange Act) is the core statute; a Type 2 Financial Instruments Business registration permits solicitation of interests in collective investment schemes and certain other products but does not permit Type 1 activities such as underwriting or proprietary dealing in shares and bonds.

Type 2 registration covers, among others, interests in silent partnerships (tokumei kumiai), trust beneficiary interests, and interests in foreign collective investment schemes; sales of listed shares, bonds, and fund shares generally require Type 1 registration or an exemption.

Solicitation of interests in a fund falls outside the definition of 'solicitation for subscription' under FIEA Article 2(8) where the interests are not transferable (uketori fuka) and the scheme is not a de facto collective investment scheme; the exemption is narrow and fact-specific.

The JSDA (Japan Securities Dealers Association) self-regulatory rules include the Rules Concerning Solicitation for Investment and the Rules Concerning Suitability, which bind member firms in addition to FIEA and cabinet office ordinances.

Market structure: TSE runs auction (Itayose/Zaraba) trading for cash equities, JSCC clears, and JASDEC provides settlement; Japanese government bonds trade mainly OTC with JGBCC clearing.

FIEA Article 38 prohibits acts such as providing false information, making misleading statements about uncertain matters, and promising to cover losses; Article 39 prohibits loss compensation and advance provision of profits to clients.

A registered financial instruments business must maintain a sales representative register, appoint a compliance officer, and notify the regulator of the appointment or removal of officers and of changes to registered particulars.

Cross-border: a foreign fund manager marketing to Japanese investors typically needs a Japanese Type 2 registrant (or its own registration) as the intermediary; the 'professional investor' (tokutei toshi-ka) regime allows lighter conduct rules for qualified investors.

Equity securities confer residual claims on earnings and assets; bonds confer contractual interest and principal claims ranked ahead of equity; preference shares sit between the two and may carry cumulative or participating dividend features.

Investment trusts (toshi shintaku) are contractual schemes managed by an asset management company with a trust bank as trustee; the investor holds beneficiary interests, not shares in the manager.

Silent partnership (tokumei kumiai, TK) interests give the investor a share of profits and losses but no voting rights, no management authority, and no direct claim on the operator's assets; TK interests are typically illiquid and not transferable without operator consent.

Derivatives include futures, options, swaps, and forwards; their value derives from an underlying, and they embed leverage, counterparty risk, and (for options) time decay.

Convertible bonds combine a fixed coupon with an equity option: conversion value = conversion ratio x share price, and the bond floor supports the price when the equity falls.

Structured notes and other 'specified' products may embed derivatives; under FIEA these can require Type 1 registration for solicitation, and their payoff formulas must be explained to clients in writing.

Money market and short-term instruments include CP, CDs, and treasury discount bills; they carry low credit and duration risk but are not principal-guaranteed unless explicitly stated.

Product risk mapping: principal risk, credit risk, market risk, liquidity risk, and currency risk should each be identified and disclosed before solicitation; 'no principal guarantee' language is mandatory for funds and TK interests.

TSE trading units are generally 100 shares (single-stock margined and some foreign shares differ); odd-lot trades are handled outside the standard auction.

Price limits (yasui/takane seigen) are set daily per stock based on the previous close and widen for high-priced and volatile issues; a limit-hit halts trading at that band.

Rights issues in Japan usually take the form of shareholder allotment (wariate zōshin) or public offering (kōbo zōshin); a wariate gives existing holders subscription rights that are tradeable only if the terms say so.

Tender offer (kōkai kaitsuke) rules under FIEA require a public notice and a 30-business-day offer period unless a shorter period is permitted; the bidder must file a tender offer registration statement.

Stock splits and consolidations change the share count without changing equity value; the exchange adjusts the reference price and, for margin trading, the position is adjusted accordingly.

Equity-linked products include CBs, warrants, exchange-traded options, and equity swaps; gearing amplifies both gains and losses, and the maximum loss on a long option is the premium paid.

Dividend mechanics: ex-dividend date, record date, and payment date are distinct; a buyer on or after the ex-date does not receive the declared dividend.

Insider trading rules under FIEA Article 166 prohibit trading on material undisclosed facts by corporate insiders and tippees; short-swing trading rules also restrict officers' round-trip trades.

Bond price and yield move inversely; for a given maturity, a lower coupon means higher duration and greater price sensitivity to yield changes.

Duration approximates percentage price change for a 1% yield change: modified duration = Macaulay duration / (1 + y/n); DV01 = price x modified duration x 0.0001.

Accrued interest is calculated from the last coupon date to settlement; the full (dirty) price equals the clean price plus accrued interest.

JGBs are issued as 2-, 5-, 10-, 20-, 30-, and 40-year bonds plus T-bills; 10-year JGB yield is the benchmark for Japanese rates.

Credit spread = bond yield minus the yield on a comparable-maturity government bond; spread widening signals rising perceived credit risk or liquidity stress.

Call and put features affect yield to call or yield to put, which may differ from yield to maturity; investors should compare on the basis of the earliest call date if the bond is likely to be called.

Money market instruments: CP (unsecured short-term corporate paper), CDs (bank negotiable deposits), and T-bills (government discount paper); all are typically quoted on a discount or yield basis.

Interest rate risk is measured by duration; reinvestment risk rises with coupon frequency and falling rates; the two offset over an investor's horizon (immunization).

A Japanese investment trust has three parties: the settlor/manager (asset management company), the trustee (trust bank), and the beneficiary (investor); the manager holds the investment discretion.

Open-end funds issue and redeem at net asset value (NAV) calculated daily; NAV = (total assets - liabilities) / units outstanding, typically struck at the close of the business day.

Load and fee structures include subscription (sales) charges, redemption charges, management fees, and trust fees; front-end loads reduce the amount actually invested.

Hedge funds and other private funds are typically offered only to professional investors (tokutei toshi-ka) or qualified institutional investors, with restrictions on advertising and on transferability.

A fund of funds invests in other funds and adds a second layer of fees; look-through analysis is needed to assess true exposure and total cost.

Benchmark and tracking error: an index fund's tracking difference includes fees and sampling error; a large persistent gap versus the index is a red flag.

Valuation of illiquid holdings (real estate, private equity, unlisted debt) relies on appraisals or models and may lag market prices; redemption gates and side pockets are liquidity risk mitigants.

FIEA requires delivery of a prospectus (or, for private placements, equivalent disclosure) before subscription, and periodic reporting to investors thereafter.

Suitability assessment matches the product's risk/return profile to the client's knowledge, experience, financial position, and investment objectives; documented evidence is required.

Professional investors (tokutei toshi-ka) may opt into lighter conduct rules; the firm must confirm and document the client's status and the client's consent to the reduced protections.

Know-your-customer requirements include identity verification (anti-money-laundering), beneficial ownership checks, and source-of-funds review for higher-risk clients.

Account opening requires delivery of pre-contract documents (setsumeisho) explaining the product, fees, and risks before the client signs.

Elderly and vulnerable clients warrant extra care: confirm understanding, avoid aggressive products, and record the rationale for the recommendation.

Suitability breaches are a common enforcement ground; a recommendation of a high-risk, illiquid product to a retail client with conservative objectives is a red flag.

Client money and securities must be segregated from the firm's own assets; a Type 2 firm handling client assets must maintain separate custody arrangements.

Record-keeping: solicitation records, suitability assessments, and order records must be retained for the period prescribed by FIEA (generally 5-10 years depending on record type).

Best execution requires the firm to execute orders on terms most favorable to the client, considering price, cost, speed, and likelihood of execution; the policy must be disclosed.

Order types: market, limit, stop, and IOC/FOK; a limit order may go unfilled, and a stop order can execute at a worse price than the trigger in a gap.

Front-running (trading ahead of a client order) and churning (excessive trading to generate commissions) are prohibited; both are enforcement priorities.

Solicitation must be made at a time and in a manner appropriate to the client; unsolicited calls to retail clients outside reasonable hours are restricted.

Trade allocation: when a firm aggregates client orders, the allocation method must be fair and pre-disclosed; partial fills should be allocated pro rata or by a stated rule.

Confirmation and reporting: clients must receive trade confirmations with price, quantity, fees, and settlement date; errors must be corrected promptly.

Settlement cycle for Japanese equities is T+2; fails and buy-ins follow JSDA rules, and the firm bears the cost of its own settlement errors.

Order handling records must capture the time of receipt, the client instruction, and the execution details to allow reconstruction of the trade.

Fiduciary duty: act in the client's best interest, avoid conflicts, and disclose any conflict that cannot be avoided.

Prohibition on loss compensation and advance profit guarantees (FIEA Article 39) applies to both solicitation and post-trade conduct; even informal promises are prohibited.

Gifts and entertainment must be reasonable, documented, and not intended to influence a client's decision; excessive gifts are a conduct breach.

Confidentiality: client information may not be used for the firm's proprietary trading or shared with third parties without consent, except as required by law.

Market abuse includes insider trading, market manipulation (including wash trades and marking the close), and spreading false rumors; all are criminal or administrative violations.

Whistleblowing and escalation: employees must report suspected misconduct internally; retaliation against a reporter is prohibited.

Advertising must be fair, balanced, and not misleading; past performance must be shown with the required caveats and must not be presented as a guarantee of future results.

Continuing education and conflicts-of-interest policies must be maintained and reviewed; a sales representative must keep product knowledge current for the products they solicit.