Report on Insider Trading Incident at Japan Exchange Group

In light of the fact that an employee of the Tokyo Stock Exchange, a subsidiary of Japan Exchange Group (JPX), was under investigation by the Securities and Exchange Surveillance Commission (SESC) on suspicion of violation of insider trading regulations, JPX established an Independent Directors' Investigation Committee on September 27, 2024, to investigate the cause of the incident and enhance the effectiveness of recurrence prevention measures based on the findings.

The incident involved the employee transmitting confidential information about upcoming takeover bids to his father, who then profited from trading the relevant stocks.

The Committee has been evaluating JPX’s employee education and training systems, business processes, and information management systems, among other things, and verifying JPX’s recurrence prevention measures in relation to this incident. The Committee's Investigation Report has been published on January 30, 2025.

Overview of the Investigation

The investigation was launched in response to an on-site investigation by the Securities and Exchange Surveillance Commission (SESC) into the Investigated Employee's suspected violation of insider trading regulations. The JPX Board of Directors established the Independent Directors' Investigation Committee to investigate the incident's root causes and recommend preventive measures.

The Committee comprises Independent Directors who also serve on the Risk Policy and/or Audit Committees, ensuring neutrality and expertise. The investigation spanned from September 27, 2024, to January 30, 2025, and involved document reviews, interviews with JPX executives and employees, site inspections, and an employee survey. The Committee relied on the facts presented in the SESC's criminal complaint and did not conduct a separate investigation into the incident itself to avoid hindering the SESC's proceedings.

Facts Related to the Incident

The SESC's criminal complaint alleges that the Investigated Employee, a member of the TSE Listing Department's Corporate Disclosure Office, became aware of upcoming takeover bids through his work. He transmitted this unpublished information to his father on three separate occasions, involving Lawson, Riso Kyoiku, and JASTEC. His father then purchased shares of these companies before the public announcement of the takeover bids, profiting from the subsequent price increases.

JPX's existing insider trading prevention systems include:

• Charter of Corporate Behavior: This document outlines JPX's ethical guidelines and emphasizes the importance of maintaining market fairness, complying with regulations, and protecting confidential information. It specifically addresses insider trading prevention and the potential damage to market trust caused by such violations.
• Internal Rules: JPX has a Code of Conduct that prohibits employees from trading stocks and certain other financial products, regardless of the trading method. This rule is more stringent than legal requirements and aims to prevent any appearance of impropriety. The Employment Rules also include a duty of confidentiality and prohibit the disclosure or misuse of confidential information.
• Training and Education: JPX provides comprehensive training programs for new employees, including specific instructions on insider trading regulations, the Financial Instruments and Exchange Act, and the Code of Conduct. Ongoing training and education on compliance-related matters are provided to all employees after hiring, including annual e-learning courses and understanding tests on the Employee Code of Conduct.
• Engagement Survey: JPX conducts an annual employee engagement survey to assess employees' awareness of and commitment to the company's values, philosophy, and policies. The survey results indicated a high level of engagement and understanding among employees.

The Listing Department is organized into seven groups, three under the Listing Department and four under the Corporate Disclosure Office. The Investigated Employee belonged to the latter. The department's workflow for handling timely disclosures from listed companies involves a system of checks and edits by Disclosure Supervisors to ensure accuracy and compliance with regulations. Information management within the Listing Department included classifying information based on its level of secrecy and sharing unpublished information within teams and groups for backup and coordination purposes. Unpublished information was also shared with other related departments within JPX on a need-to-know basis.

The Investigated Employee was hired through the standard recruitment process, including interviews, aptitude tests, and background checks. He received compliance training and signed a written pledge to adhere to internal rules. He had no prior history of disciplinary issues, although he had an issue with unpaid credit card debt that was subsequently resolved.

Investigation into the Causes of the Incident

The Committee focused its investigation on the organizational causes of the incident, rather than the individual motivations of the Investigated Employee, which are being addressed through criminal proceedings. The investigation examined insider information management systems, the sharing of values and philosophy, internal rules, and education and training practices.

The investigation revealed that the Listing Department's information management system had a bias towards sharing rather than limiting access to insider information. This made it relatively easy for employees to access information beyond their direct responsibilities. While some information sharing is necessary for operational efficiency and collaboration, the scope of sharing was broader than strictly necessary, particularly with other teams within the same group and with other departments. This broad access created an environment where insider information could be easily obtained by individuals not directly involved in the relevant transactions.

The investigation also highlighted a potential gap in the effectiveness of JPX's efforts to embed its values and philosophy within the organization. While employees generally demonstrated high awareness and understanding of JPX's mission and ethical principles, this understanding may not have been deeply ingrained enough to prevent the Investigated Employee's actions. The COVID-19 pandemic and resulting shift to remote work may have also contributed to a decline in communication and a weaker sense of shared values among employees.

The investigation concluded that JPX's internal rules were adequate in clearly prohibiting insider trading and setting stricter-than-required limitations on employee trading activities. However, the incident highlighted the need for more effective education and training to reinforce the importance of compliance and instill a stronger awareness of the consequences of violating insider trading regulations.

Evaluation of Possible Recurrence Prevention Measures

JPX proposed several recurrence prevention measures based on the investigation's findings:

• Tighter Information Management:
  • Narrowing the scope of information sharing for both timely disclosure operations and related operations to a minimum need-to-know basis.
  • Implementing new rules within the Listing Department to formalize and control information sharing practices, including requiring approvals for changes to sharing scopes and conducting regular checks on compliance.
• Clarification of Internal Rules:
  • Revising the Code of Conduct to explicitly prohibit insider trading by family members or acquaintances and to clarify the prohibition on transmitting information or recommending trades to others.
  • Revising the employee pledge to reflect these changes and requiring all employees to resubmit the pledge.
• Implementation and Strengthening of Education:
  • Conducting annual training sessions focused on insider trading regulations for all employees.
  • Enhancing training programs for new hires and mid-career hires to emphasize insider trading regulations and related compliance matters.
  • Developing and distributing a booklet on insider trading regulations to all employees.
• Promotion of Communication:
  • Expanding the use of the mentor system to promote regular communication and consultation between junior and senior employees.
  • Creating opportunities for small-group discussions to address ethical considerations and foster a sense of shared values within departments and offices.

The Committee evaluated these measures as generally appropriate and effective in addressing the identified weaknesses in JPX's existing systems. However, the Committee also emphasized the importance of ongoing implementation and monitoring to prevent the measures from becoming mere formalities. The Committee also suggested that JPX regularly measure the effectiveness of the implemented measures and make adjustments as needed.

Conclusion

The incident highlights the challenges in preventing intentional criminal acts committed outside the scope of an employee's duties. While systems and rules can deter and detect such behavior, they cannot fully eliminate the risk. The incident underscores the importance of fostering a strong ethical culture within JPX and ensuring that employees not only understand the rules but also internalize the company's values and philosophy.

The Committee emphasized the need for continuous efforts to improve and strengthen JPX's compliance systems, particularly in light of the company's role as a vital social infrastructure. The proposed recurrence prevention measures, if implemented effectively and consistently, should significantly reduce the risk of similar incidents in the future.

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