Newsletter
Financial Supervisory Commission allows securities firms to directly participate in management of private equity funds (PE Funds)
To encourage institutional investors to invest their funds in domestic industries and assist the industries with fundraising, in 2018, the Financial Supervisory Commission (FSC) began to allow securities firms to invest in private equity funds, and subsidiaries of securities firms may act as the general partner (GP) of a venture capital fund (VC) or private equity fund (PE Fund). On April 21, 2020, the FSC further issued a letter to allow securities firms meeting certain criteria to participate in management of PE Funds under mandate as well as to introduce professional institutional investors to invest in PE Funds.
Below is a summary of certain major points of this recent letter by the FSC (April 21, 2020; Ref No.: Jin-Guan-Zheng-Quan-Zi No. 1090361034):
I. Securities firms may apply to the FSC (with filing documents such as documents evidencing that the criteria are met, board meeting minutes, business plan, internal control system, etc.) for the approval to conduct the businesses listed below as (a) and (b).
(a) Managing private equity funds (PE Funds) under mandate. Securities firms conducting this business must not be involved in the operation of "securities investment trust business", and must meet the following requirements:
1. Set up a dedicated department with sufficient number of competent personnel.
2. Set up relevant internal control system and risk control and management mechanism (including management principles, operating procedures, anti-money laundering (AML) and countering the financing of terrorism (CFT), prevention of conflicts of interests, etc.).
3. If the managed PE Fund invests in securities listed on a centralized exchange market or traded over-the-counter, such investment shall be made on behalf of the fund by other commissioned securities broker(s).
4. In principle, the managed PE Fund must not trade securities or securities related products with securities discretionary investment accounts, proprietary accounts, wealth management trust asset accounts and proprietary trading accounts under the securities firm's management.
5. If the managed PE Fund invests in business which has a conflict of interest with the securities firm, it must be agreed to by the client in writing in advance or otherwise agreed in the management mandate agreement.
(b) Accepting appointment by the relevant entity of the private equity fund (PE Fund) to introduce professional institutional investors (as defined under Article 4 of the Financial Consumer Protection Act) to invest in, and to provide relevant services in connection with, the PE Fund managed under mandate. Such securities firm must meet the following requirements:
1. Set up relevant internal control system and risk control and management mechanism (including know-your-product, know-your-customer (KYC), AML/CFT, prevention of conflicts of interests, etc.) for this business.
2. There must be no general advertisements or public solicitation for introducing professional institutional investors to invest or provide relevant services.
II. There are certain criteria which the securities firm applying to conduct the above businesses must meet, and the major ones among these criteria include:
1. Limited to general securities firms which conduct securities underwriting, proprietary trading (dealing) and brokerage businesses.
2. In the most recent financial statements audited by a CPA, its net worth must not be lower than its paid-in capital, and its financial conditions must meet certain requirements under the Regulations Governing Securities Firms.
3. The most recent reported regulatory capital adequacy ratio prior to the application must be at least 200%.
III. The personnel of the dedicated department for the above I. (a) business (i.e., manage PE Funds under mandate) must comply with relevant requirements related to securities firm personnel registration and holding concurrent positions. The major points include:
1. Prior to performing duties or when there is a personnel change, registration with the Taiwan Securities Association is required.
2. Business outside of the dedicated department's scope must not be conducted, and business within the dedicated department's scope must not be handled concurrently by any person not registered as personnel of the dedicated department.
3. In addition to the existing relevant limitations on the responsible persons of securities firms holding concurrent positions under the Regulations Governing Responsible Persons and Associated Persons of Securities Firms, a responsible person or employee of a securities firm also must not act as a manager of a business invested by the PE Fund managed under mandate.
4. If the securities firm assigns a staff member of the dedicated department to hold a concurrent position at the PE Fund managed under mandate or a business invested by such PE Fund, registration with the Taiwan Securities Association is required.
5. The securities firm must establish an internal review and control system to ensure that there are no conflicts of interests or violation of relevant securities regulations or internal control system.
IV. Securities firms approved to conduct the above businesses must report the relevant information pursuant to the Taiwan Securities Association's regulations by the 10th day of each month.
If you wish to further understand the details on application for the above businesses, as well as the legal aspects and issues regarding PE Funds and PE investments, please feel free to contact our firm for more details.