TOKYO (Reuters) - Nomura Holdings (>> Nomura Holdings Inc.) CEO Kenichi Watanabe faces shareholders on Wednesday with no clear answers as to how to resolve a damaging insider trading probe that is hitting business at Japan's top brokerage and has raised doubts over his leadership.

The 59-year-old looks to have broad enough support to be reappointed at an annual shareholders' meeting in Tokyo, despite a call by an influential proxy advisory firm for his ouster and pressure from regulators to explain how Nomura allowed staff to tip off clients ahead of three share offerings it underwrote in 2010, and what it will do to stop it happening again, sources with knowledge of the matter said.

The stand-off between regulators and Nomura is part of a wider crackdown on insider trading that has ensnared some of Japan's largest financial firms. On Monday, prosecutors arrested a former SMBC Nikko Securities executive and three others in what was the first arrest of a securities company employee related to insider trading.

Earlier this month, Nomura confirmed regulators' findings in admitting it was the source of leaks on planned share offerings by energy firm Inpex (>> INPEX Corp), Mizuho Financial Group (>> Mizuho Financial Gr.) and Tokyo Electric Power (>> Tokyo Elec. Power). In all three cases, employees at its institutional sales department tipped off clients who profited by selling the shares short ahead of the offering and then buying them back at a lower price.

Nomura had hoped to complete its own investigation into the matter ahead of Wednesday's annual shareholder meeting, but its report - overseen by three external attorneys - is not now expected until at least the weekend. The findings of Nomura's investigation will be key in determining the scale of the sanctions it will face, sources said.

Regulators want to give Nomura a chance to clean its own house rather than be dragged into a protracted fight, but officials are frustrated with the broker's unwillingness to acknowledge the problems were widespread, sources said.

"At this point, it's unthinkable that Nomura would be able to submit a fully convincing report," said a senior official at the Securities Exchange and Surveillance Commission (SESC), the securities watchdog carrying out the investigation. Like others, the official did not want to be named as the probe is ongoing.

Nomura declined to comment.

Shares in the brokerage fell more than 2 percent on Tuesday, while the broad TOPIX index <.TOPX> was down less than 1 percent.

CHANGE AT THE TOP?

The cases involving Nomura have prompted discussion within the Financial Services Agency over whether to push for a leadership shake-up at Nomura, especially as Watanabe was at the helm during insider trading scandals in 2008 and 2009, sources said. The FSA oversees the SESC.

The FSA does not have explicit authority to force senior management changes, but it has previously used its influence, and last year was widely seen to have played a hand in a management overhaul at Mizuho, Japan's second-largest bank.

"If Watanabe's departure would lead to a cleaning up of the market that would be ideal, but it's not clear that would necessarily be the outcome," a senior FSA official told Reuters.

Proxy advisory firm Institutional Shareholder Services (ISS), which didn't push for board changes after the 2008 and 2009 scandals, has this time called for Watanabe's removal along with board chairman Nobuyuki Koga, saying earlier this month that the recent cases "appear to be evidence of systematic failures of internal controls."

ISS caters to foreign investors, who collectively owned close to one third of Nomura's stock as of March. When ISS urged a vote against director Tsuguoki Fujinuma last year, he was approved - but with just 62 percent of votes cast compared with over 90 percent for other directors.

Any move to replace Watanabe would pose fresh issues for investors as there's no obvious successor.

Watanabe joined Nomura in 1975 and took over as CEO four years ago, carving out a reputation for making key decisions on his own. Chief Operating Officer Takumi Shibata, who helped orchestrate the acquisition of Lehman Brothers' Asian and European assets during the financial crisis, is not viewed as a strong CEO candidate due to his lack of experience managing the mainstay retail operations.

LOSING OUT

The investigation has shone a light on the aggressive sales tactics and cozy ties that were the backdrop for leaking non-public information to clients.

The SESC and FSA will want to see how far Nomura's investigation goes in holding individuals accountable and putting tough countermeasures in place to prevent any recurrence, sources said. The announcement of penalties - which could include an official order to improve internal controls or even the suspension of some of Nomura's operations for weeks - now looks likely by mid-July.

Whatever the outcome, Nomura will be keen to move on.

It is already losing out on some underwriting deals, such as a government sale of around $6 billion worth of shares in Japan Tobacco (>> Japan Tobacco), and some asset managers have halted orders because of the uncertainty around the probe, sources said.

"The absolute worst thing is to have this just drag on and on," one senior Nomura executive said. ($1 = 79.6100 Japanese yen)

(Additional reporting by Nathan Layne, Taro Fuse and Taiga Uranaka; Editing by Ian Geoghegan)

By Emi Emoto and Noriyuki Hirata