Deacons
  August 29, 2005 - Hong Kong

Taiwan: A New Era for Overseas Funds Offering

The Taiwan Financial Supervisory Commission ("FSC") on 2 August 2005 promulgated new rules governing the offering of overseas funds in Taiwan ("the New Rules"). The New Rules take immediate effect and significantly change the existing rules and landscape for overseas funds being offered in Taiwan. Executive Summary Previously, overseas funds were available to Taiwanese investors as a form of foreign securities approved by the supervisory authority for consultation and recommendation by securities investment consulting enterprises ("SICE"). Overseas funds were passively distributed to potential investors through banks or securities companies under separate distribution arrangements. The New Rules introduce a "two-tier" regime for all overseas funds that involves the appointment of a master agent as the key point of contact and as representative for the overseas funds in Taiwan. The master agent will then appoint sub-distributors (banks, securities brokers, securities investment trust enterprises or securities investment consulting enterprises) who may now actively promote, advertise and sell overseas funds. This will significantly broaden the sales channels for overseas funds and potentially increase sales substantially. New overseas funds are required to submit an application through master agents in order to be approved by the FSC to be offered to the public in Taiwan ("the Approval Process"). Overseas funds already approved under the previous regime for consultation by SICE are required to put in a new application through a master agent to register with the FSC under a 'simplified' process ("the Registration Process") before such funds may be offered to the public in Taiwan. Such overseas funds are required to submit the application under the Registration Process for registration before August 2006, failing which the funds may not accept new subscriptions from Taiwanese investors, and the FSC may withdraw or cancel the current approval. The New Rules also contain provisions on the private placement of overseas funds involving less stringent requirements and a simpler filing process where the fund is offered only to a select limited number of target investors. Promoters or managers of overseas funds being offered or to be offered in Taiwan need to take the necessary steps to comply with the New Rules in order to market their funds in Taiwan going forward. The New Rules enhance the role of the industry regulatory body, the Securities Investment Consulting and Trust Association ("SITCA"), in many aspects of the regulation of overseas funds being offered in Taiwan. Master-Agency Regime Under the New Rules, managers of overseas funds ("Overseas Fund Managers") are required to appoint a master agent in Taiwan for their funds to be offered and sold to the public in Taiwan. The master agent may in turn appoint distributing agents for the overseas funds. In its explanatory notes to the New Rules, the FSC indicates that this regime is modelled after the requirements in Hong Kong and Singapore to have a main local representative of overseas funds. Any securities investment trust enterprise ("SITE"), SICE or securities broker may be appointed as master agent of overseas funds provided that it meets the qualifications stipulated in the New Rules. While each Overseas Fund Manager may only appoint one master agent, a master agent may be appointed to act for one or more Overseas Fund Managers. As there are significant requirements on master agents in terms of both the qualifications and the responsibilities, Overseas Fund Managers need to select and negotiate master agency agreements with entities that are able to meet the relevant qualifications and are able to discharge the relevant responsibilities. Among other matters, a master agent must have a paid-up capital or operating capital of at least NT$70,000,000 (approximately US$2,200,000) and net equity per share of not less than the nominal share value based on the most recent audited accounts. In addition, a master agent must place an operating assurance deposit with financial institutions recognised by the FSC as having a suitable credit rating. The required amount of assurance deposit depends on the scope of activities of the master agent as follows: i. master agent is appointed for one Overseas Fund Manager – NT$30,000,000; ii. master agent is appointed for two Overseas Fund Managers – NT$50,000,000; iii. master agent is appointed for three or more Overseas Fund Managers – NT$70,000,000. The assurance deposit must be in the form of cash, bank deposits, government bonds or financial bonds and deposited with one single financial institution. The role and responsibilities of the master agent include preparing a set of prescribed information required for investors (the "Investors’ Note") and the Chinese translation of the offering document of the overseas fund, acting as the Taiwan process agent to accept the service of process and documents on behalf of the Overseas Fund Manager, being the point of contact between investors and the overseas fund in relation to the offer and information exchange, forwarding to the overseas fund all subscription, redemption and switching requests, and assisting investors on matters to protect investors’ interests. The master agent is also subject to rather extensive reporting requirements to the FSC in relation to dealings of and material changes to the overseas funds for which it acts as agent. All distribution of an overseas fund in Taiwan must be handled through the master agent. The master agent and the relevant Overseas Fund Manager will enter into distribution agreements with sub-distributors, such as SICE, SITE, securities brokers, banks or trust enterprises for the distribution of the overseas fund. The required qualifications of the sub-distributors are less stringent than those of the master agent. The master agent will play a very significant role in the marketing of overseas funds in Taiwan. The appointment of the master agent and the distributors must be all under contracts in writing, containing certain requirements to be prescribed by SITCA and be approved by the FSC. With the aim of improving the standards of the local financial industry, the FSC has imposed a requirement under the New Rules that the Overseas Fund Manager shall implement training for its master agent covering key areas to be announced by SITCA and approved by the FSC. The Approval Process A new application for an overseas fund involves an application through its master agent to SITCA for prior vetting for the purpose of obtaining approval by the FSC before the fund may be offered or sold to the public in Taiwan. Overseas funds applying for approval must meet the following key requirements: • comply with certain prescribed investment restrictions on derivatives, gold, commodities and real estate investments, and investment in PRC companies; • Taiwanese investors may not hold in excess of a prescribed percentage of the net asset value of the fund – the current percentage is 90%; • the fund’s portfolio may not focus in Taiwanese securities beyond a prescribed percentage – the current percentage is 70%; • the fund must have obtained approval for public offer in its jurisdiction of domicile; • the fund must not be denominated in NT (New Taiwan dollar) or RMB (Renmimbi); • the fund must be established for at least one year. The New Rules provide that the above requirements would apply unless specifically exempted by the FSC or unless the jurisdiction of domicile of the fund is recognised by Taiwan. The latter reflects the intention of FSC to introduce a recognised jurisdiction scheme. The FSC has to-date not published a list of recognised jurisdictions although we understand that the regulators are working on this and it may include commonly used jurisdictions for the set up of offshore funds. The Registration Process Overseas funds already approved by FSC before the promulgation of the New Rules may take advantage of the expanded power to conduct marketing and distribution under the New Rules following a ‘simplified’ process of registration with FSC through its master agent. Registration under this process may be done within a one year grace period up to August 2006, and thereafter application will have be made for formal approval under the Approval Process. The registration must include an assessment opinion issued by SITCA. We understand from SITCA that this will be issued subject to an initial review by SITCA of the application. The registration will be effective 12 business days after the date of receipt of the registration by FSC. Under both the Approval Process and the Registration Process, an extensive application package containing an application form completed by the master agent together with a full set of supporting documents, including copies of master agency agreement, personnel training program, proof of qualification of the master agent and operating assurance deposit, proof of qualification of the distributors and copies of distribution agreements, proof of qualification of the overseas fund and the Overseas Fund Manager, Investors’ Note, the offering document of the fund with the Chinese translation, financial reports and other documents must be submitted. A legal opinion must be submitted that the investor protection conferred under the jurisdiction of domicile of the relevant fund and of the Overseas Fund Manager is not less than that in Taiwan. However, such legal opinion will not be required if the jurisdiction of domicile of the fund is recognised by Taiwan. A considerable amount of work will be involved in putting together an application package which complies with the requirements of the FSC. SITCA will play an increased regulatory role in reviewing applications for approval or registration of overseas funds. According to a senior officer at SITCA, the existing Auditing Division within SITCA will handle all such applications. Private Placement of Overseas Funds The New Rules also establish a regime for the private placement of overseas funds. Private placement may be made to specific targets such as (i) banks, bills companies, securities companies, trust companies, insurance companies, financial holding companies or other legal entities or organisations approved by the FSC, and (ii) to individuals, legal entities or funds not exceeding 35 in number that meet requirements prescribed by the FSC. The interests of subscribers of overseas funds through a private placement are subject to certain transfer restrictions. The private placement involves making a filing with SITCA as the FSC designated entity for this purpose within five days of raising funds under the private placement but the requirements on overseas funds for public offerings do not apply. Deacons Financial Services Practice Group will work closely with our Taiwan affiliate office and local industry contacts to assist clients to comply with the New Rules on overseas funds. For more information on the Taiwan's new Overseas Funds Rules, please contact the following lawyers in our Hong Kong office: Taylor Hui, Partner Email: [email protected] Telephone: +852 2826 5368 Vivien Teu, Associate Email: [email protected] Telephone: +852 2825 9616