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Securities Investment Trust & Consulting Association of R.O.C. 2016 Taiwan Country Report 1 Economic and financial background Table 1: Key Economic Indicators 2015 Total Population June-2016 23,462,914 23,502,588 523,009 (Estimated) 253,376 Average GDP per capita (USD) 22,294 (Estimated) 10,783 Rate of real GDP growth (%) 0.65% (Estimated) 1.22%* CPI rate (%) 0.14% 0.90% Unemployment rate (%) 3.78% 3.89% Stock market capitalization (USD Billion) 767.90 786.94 Bond market capitalization (USD Billion) 277.64 271.59 31.91 32.44 GDP (USD Million) Foreign exchange rate (USD:TWD) (Data Source: National Statistics, R.O.C. (Taiwan) * For the whole year of 2016, estimated by Directorate-General of Budget, Accounting and Statistics, Executive Yuan, R.O.C. 2 Data on funds under management and portfolios Please find the second column of the below table. 3 Key trends in flows and assets under management 3.1 Total AUM 2015.12.31 Table 2: Statistics of Assets under Management and Net Flow (USD Million) Mutual Fund Assets Net Flows Types of Fund December 2015 Market Share Jan. 2015 ~ Dec. 2015 Equity Fund 15,507 23.10% (880) Balance Fund 2,784 4.15% 713 Bond Fund 6,475 9.64% (1,538) Money Market Fund 30,746 45.80% 7,081 Fund of Funds 3,915 5.83% (272) 458 0.68% 47 587 0.87% 12 6,157 9.17% 1,453 Principal Guaranteed Fund REITs Fund ETF 1 506 0.75% 155 67,134 100.00% 6,771 Index Fund Total 2016.6.30 Table 3: Statistics of Assets under Management and Net Flow (USD Million) Mutual Fund Assets Net Flows Types of Fund Jun. 2016 Market Share Jan. 2016 ~ Jun. 2016 Equity Fund 15,478 22.48% (49) Balance Fund 2,776 4.03% (122) Bond Fund 6,548 9.51% (189) Money Market Fund 29,635 43.05% (1,693) 4,211 6.12% 204 491 0.71% (12) 858 1.25% 241 8,384 12.18% 2,244 464 0.67% (32) 68,844 100.00% 591 Fund of Funds Principal Guaranteed Fund REITs Fund Exchange Traded Fund Index Fund Total (Data Source: SITCA) US$: local currency exchange rate on June 30, 2016: 32.28 US$: local currency exchange rate on December 31, 2015: 32.83 3.2 Shares of Mutual Fund Market by Category 2015.12.31 2 (Data Source: SITCA) 2016.6.30 (Data Source: SITCA) 3.3 Trends Concerning International Investment Funds (a) Key investment area of onshore international investment funds: 3 (Data Source: SITCA) (b) Trends in overseas investment of onshore funds: (Data Source: SITCA) (c) From December 2014 to June 2016, the AUM of domestic funds investing overseas decreased slightly from USD24.89 billion to USD24.22 billion. During the same period, the AUM of offshore decreased from USD104.94 billion to USD94.13 billion, whereas the AUM of onshore funds increased from USD62.39 billion to USD68.83 billion. 4 Product development 4.1 The total market value reached NTD2.22 trillion as of 30 June 2016, up 13% from NTD1.97 trillion by the end of 2014, boosted primarily by substantial net cash flow into ETFs and domestic money market funds. 4 4.2 Investors have been choosing passively managed products (including ETFs and index funds) for a while. This trend continued over the period of 2015 to June 2016. The total market value reached NTD286 billion as of 30 June 2016, up 65% from NTD173 billion by the end of 2014. Among them, the leveraged ETFs by far top the list and gained a total of around NTD110 billion in assets during this period. 4.3 Due to the widened movement of the market and banks’ refusals to large deposits, large capital inflow from Institutional Investors into domestic money market funds gained a total of NTD198 billion in assets during this period. 4.4 High-yield bond funds were one of the worst investments in 2015. The total market value saw a decrease of 24%, from NTD194 billion by the end of 2014 to NTD148 billion as of 30 June 2016. However, investors began returning to high-yield bond funds during the second quarter in 2016. AUM hit the low point in March 2016, but enjoyed a moderate return from that point forward through the end of the second quarter. 5 Regulatory and self-regulatory developments (including tax) 5.1 Amendments of Some Articles of Standards Governing the Establishment of Securities Investment Consulting Enterprises and Regulations Governing Securities Investment Consulting Enterprises In order to facilitate healthy development of securities investment consulting enterprises and supervision work, the FSC introduced amendments of Standards Governing the Establishment of Securities Investment Consulting Enterprises and Regulations Governing Securities Investment Consulting Enterprises on May 19, 2016. The key points of the amendments include: (1) If a securities broker operating only equity crowdfunding applies for concurrent operation of securities investment consulting business, the scope of such concurrent consulting business will be confined to the stock of companies that conduct equity crowdfunding on the broker’s crowdfunding platform. (2) The amendment also adds that a securities investment consultation enterprise that is of a certain scale, and that possesses equipment for real-time access to foreign securities investment research information, and sufficient and competent personnel, is qualified to apply operating foreign securities investment consulting business. 5.2 Amendments of Directions Regarding Securities Investment Trust Enterprise Exercising the Voting Rights Associated with Shares It Holds in a Securities Investment Trust Fund Electronic voting has gradually become a common practice in shareholders' meetings of public companies. In order to increase participation of investment trust enterprises in corporate governance, the FSC issued an order on May 18, 2016 to amend directions regarding a securities investment trust enterprise exercising the voting rights associated with shares it holds in a securities investment trust fund based on authorization in Article 23 of Regulations Governing Securities Investment Trust Enterprises. According to the new direction, funds have to meet two conditions in order to waive the requirement of sending designated person to attend the shareholders’ meeting of a public company using electronic voting. The first and also an existing condition is that the number of shares held by an individual fund has to be less than 300,000 and 5 the total number of shares held by all funds collectively has to be less than 1 million. Second and also a new condition is that the number of shares held by an individual fund has to be less than 1/10000 of shares issued by the invested company and the total number of shares held by all funds collectively has to be less than 3/10000. 5.3 Deregulation allowing centralized securities depository enterprises to pay and collect money for domestic funds On April 26, 2016, the FSC introduced a deregulation measure that allows securities brokers to subscribe domestic funds for investors in their own name and the payments can be made and collected with the accounts designated by centralized securities depository enterprises for such transactions. At the same time, centralized securities depository enterprises are allowed to pay and collect money for domestic funds, with the aim of promoting consistency of operating procedures between overseas and domestic funds and making payment and collection simpler and more convenient for investors and sub-distributors. 5.4 Deregulation measure regarding the reporting requirements for business plan about public offering and follow-on offering of securities investment trust funds submitted by securities investment trust enterprises to their board of directors and lifting restrictions for applications submitted by new securities investment trust enterprise for the public offering of its first fund product In order to help securities investment trust enterprises to promptly satisfy market needs by offering or follow-on offering of securities investment trust funds and in order to lift restrictions for applications submitted by a new securities investment trust enterprises for public offering of its first fund product, the FSC issued the amendment to Regulations Governing the Public Offering of Securities Investment Trust Funds by Securities Investment Trust Enterprises on January 4 2016, the key points including changing operating requirements fort fund raising plans submitted by securities investment trust enterprises to their board of directors, waiving of the requirement of approval from board of directors of securities investment trust enterprises for follow-up offering of funds, lowering the minimum amount for establishment of the first open-ended fund by a new securities investment trust enterprise, shortening the period in which the beneficiary can redeem the fund and extending the deadline for offering commencement after approval by the FSC. 5.5 Broadening the scope of re-investments by Securities investment Trust Enterprises and Securities Investment Consulting Enterprises On December 9, 2015, the FSC broadened the scope of reinvestments made by Securities Investment Trust Enterprises (SITEs) and Securities Investment Consulting Enterprises (SICEs). Such liberalization measures aim to help SITEs and SICEs to (1) work with financial technology industry for business development and operating efficiency enhancement and (2) exploit available sales human resources and research experience and professional analysis ability regarding securities and financial market to expand the business scope. The FSC allows SITEs to invest in financial technology companies, Fund Online Sales Platform established by Taiwan Depository and Clearing Corporation and the Taipei Exchange, local insurance agents and insurance brokers, 6 local venture capital investment enterprises and venture capital investment consulting companies and foreign asset management institutions. SICEs are also allowed to invest in local insurance brokers, insurance agents and financial technology companies and SICEs acting as master agents of offshore funds are allowed to invest in the Fund Online Sales Platform. The SITEs and SICEs shall obtain the FSC’s approval for the abovementioned reinvestments and the total about of such reinvestments shall not exceed 40% of net worth of the SITE or SICE. In addition, the SITEs and SICEs shall establish a management and risk assessment mechanism for investee enterprises and introduce related preventive measures in the internal control system to avoid conflict of interest. 5.6 Regulations Governing Overseas Bonds and High Yield Bonds Relaxed for Securities Investment Trust Funds In order to boost competitiveness of domestic investment trust business and flexibility of investment trust operations, on November 10, 2015. FSC allowing the long-term debt rating of the issuer to apply to priority bonds without credit rating; allowing long-term bonds with a credit rating of BBB to be classed as investment grade bonds; removing limitations for investments in Rule 144A bonds; allowing real estate securitized funds to invest in high yield bonds. 5.7 Partial amendments of Regulations Governing Offshore Funds In order to facilitate balanced development of onshore and offshore funds business and better protect interests of domestic investors regarding offshore funds, the FSC amended the above Regulations on October 13, 2015. The amendments are highlighted as follows: A. To strengthen supervision over offshore funds and increase the contribution of offshore fund institutions to domestic asset management business, offshore institutional fund managers or their group affiliates are allowed to offer and sell offshore funds and are granted one-year “grace period” only when such entities have made specific contribution to domestic asset management business and such contribution has met specific criteria set by the FSC. B. To increase flexibility in supervision, the FSC may set the total amount of domestic offering and sale by offshore funds depending on market conditions. C. The monthly reports of offshore funds now may be submitted in a two-stage manner; monthly report information shall be submitted by the tenth business day of the following month, while information regarding investment ratios may be provided by the end of the following month. D. To protect interests of domestic investors and meet business practices, some amendments have been made. Including modification of the procedure and type of events a master agent shall publicly announce, deletion of the paragraph that offshore funds meeting specific criteria may apply to the Regulations Governing Public Offering of Securities Investment Trust Funds by Securities Investment Trust Enterprises, revision of conditions that the FSC may suspend the offering and sale of offshore funds or void or revoke its approval or effective registration, and amendment of the type of events that a master agent who has filed the application to the FSC for approval of the offering and sale of offshore funds shall report before the approval is granted. 7 5.8 Eased regulations on holding of concurrent positions by associated persons of SITEs and SICEs working for overseas institutions relaxed To assist foreign financial institutions to execute their Plan of Stronger Business Ties in Taiwan, encourage foreign SITEs and SICEs to cultivate domestic asset management professionals, and bring Taiwan into line with international norms, on September 16, 2015 the FSC eased regulations, allowing associated persons of SITEs and SICEs to hold concurrent positions at foreign institutions that have an investment relationship with the SITE or SICE, or that are members of the same business conglomerate and under the control of the same parent company as the SITE or SICE. 5.9 A FOFs managers now allowed to manage other FOFs Quite a few fund of funds (FOFs) issued by SITEs are based on the mixed asset allocation concept and there exists difficulty differentiating equity-based funds and credit-based funds, and, at present, a balanced fund manager can manage other balanced funds simultaneously. With the above considerations, the FSC relaxed previous restrictions on September 23, 2015, and now allows a fund of funds managers to manage other FOFs at the same time. 5.10 FSC relaxed Directions for Offshore Banking Branches Conducting Trust Businesses September 1st, 2015, the FSC relaxed Directions for Offshore Banking Branches Conducting Trust Businesses. Regarding offshore Funds of the investment targets of the business, the FSC eased the ratio of each target’s investment in Taiwan securities markets to its net asset value shall not exceed from 30% to 50%. However, the investment in foreign currency denominated international bonds (including RMB denominated Formosa bond) may be excluded from the calculation of investment in Taiwan securities markets. 5.11 SFB Launched the Advanced Excellence Program for SITEs guiding securities investment trust enterprises (SITEs) to upgrade their management skills and enter into international market The FSC has launched incentive measures for SITEs to raise the level of asset management talent and skills, increase asset management scale and develop in the direction of internationalization, announcing the Advanced Excellence Program for SITEs on June 1st 2015. With regards to SITEs that meet the basic necessary requirements, they have committed no major regulations breaches, have sound finances and no major shortcomings with respect to internal controls, if such a SITE performs well with respect to two of the three aspects on investment research capability or international presence and talent training, the FSC will provide incentive measures for related business. The main measures include: (1) Relaxing the limit on the number of new securities investment trust funds per application or shortening the effective registration period; (2) Simplifying the application process for special types of securities investment trust fund; (3) Easing restriction on some investment ratios; (4) Simplifying the operating procedure regulations for investment transactions. SITEs can now apply for the aforementioned program. This program is intended to encourage and is not restrictive or mandatory; therefore, SITEs can still, according to the current regulations, apply for or filing for public/private funds and engage in 8 discretionary and other asset management business. 5.12 Restrictions eased on the acquisition and post-acquisition selling of stocks for securities investment trust and consulting professionals On May 25th, 2015, the FSC loosened the restrictions on employee and their spouses involved in securities investment trust companies or discretionary investment business in securities investment trust and investment consulting companies, allowing them to acquire and sell the stocks acquired from new share issuance, participation in employee benefit savings trust or employee stock ownership trust within their managed mutual funds or discretionary investment assets. These persons should then report their stock transaction to their company in compliance with their companies’ internal control regulations. 6 Major development in corporate government The Organization for Economic Cooperation and Development (OECD) published revised Principles of Corporate Governance in September 2015, to conform to international development trends and enhance corporate governance of the Taiwan Stock Exchange Corporation (TWSE)/GreTai Securities Market (GTSM) Listed Companies, the Financial Supervisory Commission (FSC) amended relevant corporate best practice principles for TWSE/GTSM Listed Companies, requiring those companies to put more emphasis on communicating with institutional investors, protecting the shareholders’ right and strengthening the powers of the board of directors. In addition, FSC amended Corporate Social Responsibility Best Practice Principles for TWSE/GTSM Listed Companies in order to give full consideration to the interests of stakeholders (e.g. customers or consumers). 7 Fund governance 7.1 Taiwan Stock Exchange Corporation (TWSE) issued Stewardship Principle on June 30th, 2016. Institutional investors (SITEs and SICEs with Discretionary investment business) can voluntarily sign this Stewardship Principle. In compliance with the Principle, Signatories are encouraged to pay attention on operating condition of investment object, attend the shareholders meeting, exercise the right to vote, and communicate with management of investment object in order to strengthen corporate governance n of investment object. 7.2 Amendments of Directions Regarding Securities Investment Trust Enterprise Exercising the Voting Rights Associated with Shares It Holds in a Securities Investment Trust Fund Electronic voting has gradually become a common practice in shareholders' meetings of public companies. In order to increase participation of investment trust enterprises in corporate governance, the FSC issued an order on May 18, 2016 to amend directions regarding securities investment trust enterprise exercising the voting rights associated with shares it holds in a securities investment trust fund based on authorization in Article 23 of Regulations Governing Securities Investment Trust Enterprises. According to the new direction, funds have to meet two conditions in order to waive the requirement of sending designated person to attend the shareholders’ meeting of a public company using electronic voting. The first and also an existing condition is that the number of shares held by an individual fund has to be less than 300,000 and 9 the total number of shares held by all funds collectively has to be less than 1 million. Second and also a new condition is that the number of shares held by an individual fund has to be less than 1/10000 of shares issued by the invested company and the total number of shares held by all funds collectively has to be less than 3/10000. 8 Other major issues and developments 8.1 Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises On December 9, 2015, the FSC broadened the scope of reinvestments made by Securities Investment Trust Enterprises (SITEs) and Securities Investment Consulting Enterprises (SICEs). Such liberalization measures aim to help SITEs and SICEs to (1) work with financial technology industry for business development and operating efficiency enhancement and (2) exploit available sales human resources and research experience and professional analysis ability regarding securities and financial market to expand the business scope. The FSC allows SITEs to invest in financial technology companies, Fund Online Sales Platform established by Taiwan Depository and Clearing Corporation and the Taipei Exchange, local insurance agents and insurance brokers, local venture capital investment enterprises and venture capital investment consulting companies and foreign asset management institutions. SICEs are also allowed to invest in local insurance brokers, insurance agents and financial technology companies and SICEs acting as master agents of offshore funds are allowed to invest in the Fund Online Sales Platform. The SITEs and SICEs shall obtain the FSC’s approval for the abovementioned reinvestments and the total about of such reinvestments shall not exceed 40% of net worth of the SITE or SICE. In addition, the SITEs and SICEs shall establish a management and risk assessment mechanism for investee enterprises and introduce related preventive measures in the internal control system to avoid conflict of interest. 8.2 FSC requires Securities firm , Securities investment trust enterprise , and Futures Commission Merchant to set aside a special reserve to pay for transformation of employees affected by financial technology To spur Securities firm , Securities investment trust enterprise , and Futures Commission Merchant to attach importance to the interests of their employees in the digitization process, on Aug 5, 2016 the FSC issued an order requiring that Securities firm , Securities investment trust enterprise , and Futures Commission Merchant set aside a special reserve of 0.5% to 1% of after-tax earnings when allocating earnings for 2016 to 2018 to cover the cost of transformation of employees affected by Fintech. 10