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Introduction to the New Regime of the Financial Supervisory Commission Allowing a Bank Holding the Trust License to Invest in Non-Offshore Securities Investment Fund



 I.   Background of the New Regime

For continuing the promotion of the wealth management business towards local high asset customers, the Financial Supervisory Commission ("FSC") issued a letter on August 15, 2022 ("FSC 2022 August Letter") which allows qualified banks in Taiwan to carry out trust investment service for the high asset customers through the trust license by using the entrusted assets to invest in an offshore fund which does not have the nature of securities investment trust fund ("Non-Offshore Securities Investment Fund") pursuant to subparagraph 8, paragraph 1 of Article 5 of the Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers ("New Regime"). Such new service can be implemented immediately as long as the bank has the relevant internal procedures and rules in place and thus, the application with the FSC for approval of carrying out this new service is not required. 

According to the press release of the FSC, considering the liquidity and transparency of the Non-Offshore Securities Investment Fund are different from the offshore fund having the nature of securities investment trust fund ("Offshore Securities Investment Fund"), generally a Non-Offshore Securities Investment Fund is suitable for an investor having (i) certain professional knowledge, experience and financial capability, (ii) the willingness and capacity to bear risks and (iii) preference in long-term investment.  A key reason for creating such New Regime is that such investor may have been contacted by offshore entities or have made investment in certain alternative investment products such as the offshore hedge fund or offshore private equity fund through offshore channels in the past, the FSC expects to expand the possibility of business and diversity of investment products provided to local investors by allowing a qualified local bank, through the trust mechanism, to use the entrusted assets to invest in the Non-Offshore Securities Investment Fund for its customers.

II.    Major Points in the FSC 2022 August Letter

Below is the summary of the major points of the FSC 2022 August Letter: 

1.     The target customers are limited to "professional institutional investors", "high net-worth corporate investors" and "high assets investors/customers" and the total number of investors shall not exceed 99 (please refer to Paragraph 1 of Point 1 thereof).

2.     In order to help the bank to implement the control over the number of investors, the management company (or an entity designated by such fund management company) of the relevant offshore fund ("Offshore Fund Institution") and the local bank shall enter into an engagement agreement for the provision of service, which engagement agreement should include a clause specifying that the Offshore Fund Institution will not engage other local entity to provide such service (please refer to Paragraph 2 of Point 1 thereof). 

3.     To understand the status of sale of Non-Offshore Securities Investment Fund in the local market, the bank shall file a report of the information relating to the investment status of the offshore fund to the Securities Investment Trust and Consulting Association of the R.O.C. (please refer to see Paragraph 3 of Point 1 thereof).

III.  Comparison of the New Regime with the Existing Regime

Before the issuance of the FSC 2022 August Letter, the FSC has, by issuing (i) a letter in May 2021 ("FSC 2021 May Letter") allowing sale and consulting activities of Non-Offshore Securities Investment Fund conducted through a licensed securities investment trust enterprise ("SITE") or a licensed securities investment consulting enterprise ("SICE") which meets certain qualifications and (ii) another letter in August 2021 ("FSC 2021 August Letter") allowing sale of Non-Offshore Securities Investment Fund conducted through a licensed securities brokerage firm which meets certain qualifications. As a matter of fact, these two letters were firstly published by the FSC since 2014. Until the issuance of the FSC 2022 August Letter which allows a qualified banks to carry out trust investment services for the high asset customers through the trust mechanism by using the entrusted assets to invest in Non-Offshore Securities Investment Fund, this aligns with the existing regime for providing with wealth management services to local high assets customers and further extend the scope of service providers to local banks in relation to sale of Non-Offshore Securities Investment Fund to their customers (for the purpose of this introduction, the New Regime published in the FSC 2022 August Letter and the existing regimes published in the respective FSC 2021 May Letter and FSC 2021 August Letter are collectively named "Special Approach"). 

1.     Special Approach v. Private Placement

Under current legal regime of Taiwan, the "offshore fund" that can be offered through private placement are defined under Item 6 of Article 5 the Securities Investment Trust and Consulting Act ("SITC Act") as a fund established outside of Taiwan "having the nature of a securities investment trust fund" and the regulator holds the view that such term should mean the offshore fund must invest primarily in securities, instead of gold, commodity, real estate or the derivatives relevant thereto.  In this connection, for a local investor who intends to invest in an offshore hedge fund or private equity fund, since it is the local regulator's position that such type of fund does not fall into the definition of the Offshore Securities Investment Fund under the SITC Act and thus, is not permitted to make investment in such Non-Offshore Securities Investment Fund through private placement in accordance with the applicable laws and regulations of Taiwan but it may be offered by qualified local financial intermediary through the Special Approach only.

2.     Differences in Permitted Type of Investors and Maximum Number of Investors

The offerees under the Special Approach regime shall be limited to qualified investors which include (1) qualified institutional investors ("QI Investors"), (2) qualified high net-worth corporate investors ("HNW Corporate Investors"), and (3) qualified high asset investors ("High Asset Investors"). According to the abovementioned letters issued by the FSC, we summarize the permitted type of investors and applicable restrictions on the maximum number of investors in the table below:

Qualified Intermediary

Qualified Investor*

Maximum Number of Investor

Bank

QI Investors

No more than 99 in total

High Asset Investors

HNW Corporate Investors

SITE or SICE

QI Investors

No restriction

High Asset Investors

No more than 99

Securities brokerage firm

QI Investors

No restriction

(FSC 2021 August Letter is silent in this regard and we reasonably to believe the regulator does not intend to set restriction.)

High Asset Investors

No more than 99 in total

HNW Corporate Investors

*     Details of the scope of each of the QI Investors, HNW Corporate Investors and High Asset Investors are set forth in Article 4 of the Financial Consumer Protection Act, relevant provisions of the Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers and the Regulations Governing Securities Firms Accepting Orders to Trade Foreign Securities and paragraphs 3 of Article 3, of the Regulations Governing Offshore Structured Products. 

To sum up, the issuance of the FSC 2022 August Letter provides a comprehensive regulatory regime with respect to the scope of services relating to sale of Non-Offshore Securities Investment Fund by different types of local financial institutions to their customers. It deserves long-term observation of the expected effect and benefit of the New Regime aiming for promoting licensed banks' provision of wealth management services to local high assets customers.

 

 

 

 

 

 

 

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