Nomura Penalized by FSA After Market Information Leaked

(Bloomberg) -- Nomura Holdings Inc. has been told to bolster internal controls by Japan’s financial regulator after employees shared sensitive stock-market information with clients, the latest setback for the struggling brokerage.

The business improvement order was the first for Nomura since 2012, when the company was embroiled in an insider-trading scandal that led to the then chief executive officer’s resignation. There were inadequate systems for managing information and employees lacked awareness of compliance, the Financial Services Agency said in a statement Tuesday.

Nomura cut the pay of CEO Koji Nagai over the latest incident last week, but he vowed to remain in the post. The revelations have roiled Japan’s biggest securities firm just as Nagai tries to turn it around from its first annual loss in a decade. Several bond issuers have dropped Nomura as an underwriter because of the incident, which the FSA said bore similarities to the 2012 insider-trading case.

An internal investigation by Nomura revealed that a researcher at an affiliate shared information on potential changes to the composition of the Tokyo Stock Exchange sections with a strategist at the brokerage. The information was then circulated within the firm and with institutional investors.

Undermine Fairness

The conduct was likely to significantly undermine the credibility, integrity and fairness of capital markets, the FSA said. Employees lacked awareness of compliance and salespeople “prioritized improving their own reputations by showing that they have valuable sources of information,” the regulator said.

In a statement on Tuesday, Nomura said it took the incident very seriously. “We will further strengthen our compliance and internal controls frameworks. We are committed to preventing a recurrence and will work towards regaining trust,” Nagai was quoted as saying.

The agency told Nomura to clarify where responsibility lies for the incident, including senior executives. The firm must submit an improvement plan and ensure that prevention measures are firmly implemented.

To prevent a recurrence, Nomura outlined measures to raise compliance awareness and oversight, and said it will close one sales department. The staff involved and their supervisors have faced “strict disciplinary actions,” and Nagai will forgo 30% of his salary for three months, the firm said Friday.

The case doesn’t amount to the legal definition of insider trading because the information didn’t concern a particular company, an FSA official said at a news briefing in Tokyo. However, it’s just as serious in terms of its impact on fairness in financial markets, the official added, speaking anonymously in accordance with the agency’s policy.

In 2012, the FSA told Nomura to fix lapses that had enabled employees to give tips to investors on public equity offerings it was managing. The investors traded on the inside information by selling shares of the stock issuers before the deals were announced.

Nomura’s investigation at the time revealed that employees were “willing to do anything to meet sales targets.’’ It pledged to educate staff on compliance and business ethics, and make those topics a key component of performance appraisals. CEO Kenichi Watanabe resigned, and he was succeeded by Nagai, who vowed to restore public trust in the firm.

To contact the reporters on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net;Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward, Katrina Nicholas

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