Recognize heavy responsibility as major securities firm

It is extremely serious that a major securities firm, which is supposed to protect healthy markets, has distorted stock prices. SMBC Nikko Securities Inc. must clarify its management responsibilities and make company-wide efforts to prevent such an incident from happening again.

The Financial Services Agency ordered SMBC Nikko, which illegally propped up certain stock prices, to suspend some of its operations for three months under the Financial Instruments and Exchange Law. The FSA also issued a business improvement order over the scandal, urging the company to strengthen its internal management system. It is unusual for a major securities firm in Japan to be ordered to suspend operations.

Securities firms are special entities that are allowed to buy and sell stocks with their own funds as well as to act as intermediaries for stock transactions. It goes without saying that a high level of discipline is required of them. It is only natural that the FSA imposed a severe punishment on SMBC Nikko.

The FSA ordered SMBC Nikko to suspend part of its operations for three months because the firm engaged in transactions called “block offerings.” In block offerings, when major shareholders and others sell off their stock holdings, brokerages buy all their shares and then resell them to investors during off-hours trading. The scandal is related to these transactions.

Between 2019 and 2021, SMBC Nikko placed buy orders with its own funds on a total of 10 stocks it had bought in block offering transactions to keep the stock prices from falling. The move is believed to have been prompted by fears that trades could have been cancelled if stock prices had fallen.

Six former executives of the company, including the deputy president at the time, have been arrested and indicted. SMBC Nikko itself has also been indicted as a corporation. It is reportedly the first time a major brokerage has been indicted for market manipulation. The fundamental nature of corporate governance has been called into question.

Internal mechanisms to prevent irregularities did not work properly. For eight of the 10 stocks, the brokerage firm’s internal monitoring system detected the wrongdoing, but the company failed to take the necessary steps, such as alerting the sales floor, according to SMBC Nikko.

President Yuichiro Kondo and other management members were clearly negligent in their duties. The FSA has asked SMBC Nikko to submit measures to prevent a recurrence by early November. The company needs to clarify in the measures where the responsibility lies and work toward a fresh start with the aim of restoring trust.

The FSA also issued an improvement order to SMBC Nikko’s parent company, Sumitomo Mitsui Financial Group Inc. (SMFG), urging it to strengthen its supervision of SMBC Nikko.

SMBC Nikko was acquired by SMFG and made into a subsidiary in 2009. This is the fourth administrative punishment against SMBC Nikko since then. If these irregularities cannot be stopped, the responsibility of the parent company will be severely questioned.

SMFG also should play a role, implementing thorough measures to promote awareness and educate employees in corporate compliance.

(From The Yomiuri Shimbun, Oct. 12, 2022)