Maintaining and developing a sound securities market is a key responsibility of the Daiwa Securities Group. In order to accomplish this, we must live up to the confidence placed in us by our customers and society by practicing compliance at a higher level than just complying with the laws and regulations.

— What do you think of compliance at Daiwa Securities?

Shimazu: Compliance doesn't just mean complying with the letter of the law. Daiwa Securities Group's sense of compliance means all the actions to build a true relationship of trust with customers and society. It includes all the actions to be taken in order to establish a sound and reliable securities market, including an appropriate sales attitude that takes customer needs into account, a check system to eliminate securities incidents and the like, and the elimination of antisocial forces.
   As a company that deals with financial products, we must have a strong sense of ethics. After a long period of low interest rates, the flow from savings into investment is accelerating, and the ratio of direct financing is increasing. Precisely because this is a huge business opportunity, we also have a huge responsibility.

— But don't salespeople tend to focus on profits?

Shimazu: What would happen if our salespeople acted like the only thing that mattered was selling financial products? While performance might increase over the short term, selling products to customers who do not have a good sense of risk and return without informing them of the risks, and repeatedly performing unnecessary trades, would cause our customers to lose faith in the act of investing itself, as well as their confidence in us. We don't give high ratings to employees who only create transient profits. We promote a system that rates employees on how well they propose investments that are suited to their customers, and how well they build a true relationship of trust, and this system is becoming universal throughout our organization.

—What are you doing to firmly establish the concept of compliance among our front-line staff?

Shimazu: We continually provide compliance training to everyone from junior employees up to management. We particularly emphasize to superiors that educating, checking, and protecting subordinates is a key attitude that enables our internal-control system to function. Our personnel evaluations also emphasize sales approach that is suited to their customers and compliance. We will also centralize the chain of command for our Sales Division and Compliance Division, and show a clear course of action.

Kagawa: Creating, managing, and continually revising internal rules is also part of compliance practices. Rules need to be changed when new products are created, and when the market environment changes. We also focus on making our rules as simple and easy to understand as possible, because that makes them more effective.

—What kind of compliance system have you built at the organizational level?

Kagawa: We need a system to continually check whether our operations are being carried out appropriately. The Compliance Department in our headquarters has compliance officers who are responsible for the sales branches in each area and group. Each sales branch also has an internal administration supervisor. This role is separate from the branch manager, who is responsible for sales. The internal administration supervisors report to our Compliance Division each month.
 Additionally, the Legal and Planning Section in the Compliance Department accepts consultations on laws and regulations from our sales branches, and the Examination Section accepts consultations on compliance operations. The Trade Surveillance Department responds to inquiries regarding share and other trades.

Maeda: In order to practice a customer-oriented sales approach, we have a system that requires sales staff to apply for authorization before switching products. Under this system, a salesperson must obtain the authorization of the branch manager before recommending to the customer to sell a holding product, such as an investment trust, and purchase a new one. This prevents recommendations to inappropriately switch products, and also helps grow our assets by increasing the retention period of our investment trusts.
 We also perform sampling to check whether our trades match our customers' needs, and implement a system for consultations between superiors and customers.

— How do you judge the results of your initiatives?

Kagawa: One of the indicators we focus on is the number of telephone calls that our Customer Support Center receives from customers, and the details of the calls—inquiries, complaints, and so on (see Calls received by our Customer Support Center). Over 70% of all calls are inquiries, and the remaining slightly less than 30% are complaints. The proportion of complaints is declining, and I believe that this indicates that our initiatives are showing results. We also analyze the complaints, and this helps us find areas in need of improvement.

 Compliance structure

—What caused our Himeji branch to undergo administrative sanction (see Administrative sanction, subsequent improvement measures, and the status of their implementation) in fiscal 2006?

Shimazu: It was caused by insufficient awareness within the branch of one of the most important duties of a securities company: to maintain the reliability of the securities market. The administrative sanction was for insider trading by a customer that we should have been able to prevent, but didn't. In subsequent training, we are emphasizing the importance of recognizing this duty we have to society.

—What was the reaction by employees like?

Maeda: Within two months of the incident, our directors visited every sales branch and personally conducted training, in order to thoroughly communicate the background of the incident, and that employees must exercise caution. This training was given to everyone, from managers, to salespeople, to drivers. People were sent from nearby branches to staff the phones during training.
   After the training, the employees were given questionnaires. The responses in the questionnaires showed us that the training gave many employees a renewed awareness of the need to remain conscious of compliance in all actions.

Shimazu: Based on this incident, we studied ways to enhance our internal control system, including personal identification and preventing illicit trading, from the perspective of the duties of branch managers and ensuring that our salespeople execute their duties appropriately, and we formulated measures to improve operations.
   We take this incident very seriously, and we are committed to regaining trust by enhancing our structural regime in order to prevent illegal activities, and ensuring thorough knowledge and understanding of compliance and internal controls.

—What are your future goals?

Shimazu: Outstanding compliance is a major business advantage. It makes us more valuable as consultants.
   By having each individual understand his or her mission, and recognize and execute his or her duties based on this understanding, I believe that it is possible to differentiate the Daiwa Securities Group from our competitors on the strength of our compliance. Our goal is to make Daiwa Securities Co. Ltd. the finance industry's compliance leader.

Administrative sanction on Daiwa Securities Co. Ltd. by Financial Services Agency

   In October 2005, an executive of a chemical manufacturer asked the assistant manager of the Himeji branch to open an account in the name of one of the manufacturer's business partners, and placed a purchasing order for 1,500 shares of the manufacturer's stock. Based on the way in which the account was opened and other factors, the branch assistant manager was suspicious that the executive of the chemical manufacturer was using this account under the business partner's name. These actions were subject to sanction because " …accepted the customer's security-trade order despite knowing the risk of insider trading."
   The FSA also determined that the Himeji branch manager " …recognizes that not enough was done to prevent unfair trading relating to corporate information," and further that the assistant manager " …accepted the customer's security-trade order without confirming customer identity in accordance with the Customer Identification Law," and that these actions were subject to sanction.
   Daiwa Securities Co. Ltd. takes this administrative sanction very seriously, and we deeply regret the inconvenience we have caused our shareholders and everyone involved. In accordance with an order by the FSA to halt operations, we halted operations by our Himeji branch for two days: December 19 and 20, 2006.

Our response to business improvement order and correction order

   We created a business improvement plan designed to prevent such violations from occurring again, and submitted a Business Improvement Report to the FSA on January 4, 2007. Below are described the business improvement order and correction order consequent to the administrative sanction, and our main responses to these orders.
   We are committed to improving our internal management and checking system, and enhancing our regime to prevent violations from occurring, as well as ensuring thorough awareness of compliance in order for each employee to think carefully about the reasons behind laws and rules, act in accordance with commonly accepted norms, and build a relationship of trust with our customers and society.