The Committee greatly appreciates the effort of the Financial Supervisory Commission (FSC) in shaping a more flexible yet resilient investment market in Taiwan. We believe that the close collaboration between AmCham Taipei and the FSC helps reflect the market’s need for further development of Taiwan’s asset management industry while maintaining the regulator’s expectation and responsibility to protect the general public.
The Committee thanks the FSC for its response to our suggestions in 2019, in particular its willingness to consider relaxing the restriction on opposite transactions when the investment decision of the relevant onshore fund is delegated to a third party. This change would grant investment managers of onshore funds more flexibility in portfolio management and better align Taiwan’s market practice with the global market.
To continue to develop the investment environment in Taiwan, the Committee has collected proposals from its members that would increase the variety of investment products and services provided to investors in Taiwan. Suggestions 1 and 2 below are aimed precisely at accomplishing that vision. As described in more detail below, the Committee requests that the FSC consider relaxing the restriction on onshore bond funds investments in contingent convertible bonds and loosening existing laws and regulations governing certain asset management-related businesses.
The Committee also recognizes the various innovative approaches that the FSC and the relevant authorities have adopted, such as the existing “Happy Retirement Experimental Project for Voluntary Investments,” to allow more investment options for those preparing for retirement. In addition to the existing approaches, the Committee recommends granting tax incentives to Taiwan nationals to promote active engagement by each individual in his or her own retirement investments as prescribed in Suggestion 3.
Lastly, as elaborated in Suggestion 4, the Committee requests that the FSC consider allowing a certain level of leeway for investment managers when setting up internal control systems with respect to marketing materials.
All in all, the Committee looks forward to continuing to collaborate with the FSC to create a resilient and vibrant investment market in Taiwan, bringing greater benefits to domestic and international investors.
Suggestion 1: Relax the restriction on onshore bond fund investments in contingent convertible bonds (CoCo) so as to be aligned with offshore funds’ investment practice.
CoCos are an increasingly used type of bank capital with characteristics of both equity and debt. With the tightening of capital requirements under Basel III, the market for this type of security has developed rapidly. Due to CoCos’ fixed-income nature and higher dividend yield, the investment opportunities and value generated cannot be overlooked in managing a fixed-income fund in global investment practice. CoCos have become a common type of investment object for offshore funds.
Unlike investors in general fixed-income securities, investors in CoCos assume certain equity risks as well as additional risks related to the characteristics, structure, and various maturities of CoCos. However, assessment of a CoCo’s risk profile and investment opportunities are already covered in the existing structure of analyzing the issuing bank’s credit risks and bond risks, which means that CoCos do not create an entirely new type or scope of risk. In other words, most professional investment institutions have sufficient capability and tools to analyze the risk profile of CoCos.
In this regard, we suggest that the FSC relax the prohibition on onshore bond fund investment in this growing type of bank capital security so as to be aligned with global investment practices for offshore funds and to enable the investment strategy and universe of an onshore fixed-income portfolio to be more flexible and diversified.
Suggestion 2: Loosen existing laws and regulations governing asset management-related businesses, including privately placed funds and investment instruments.
The changes set out in this suggestion are in line with the Taiwanese government’s objective of promoting diversified policies to revitalize Taiwan’s financial markets as indicated in the government’s “New Wealth Management Plans Comparable to Singapore and Hong Kong.”
2.1 Allow portfolio managers of publicly offered securities investment trust enterprise (SITE) funds to concurrently act as portfolio managers of privately placed SITE funds, as long as measures are adopted to prevent conflicts of interest. Portfolio managers of discretionary investment management funds are currently permitted to act concurrently as the portfolio managers of privately placed funds. However, pursuant to an FSC ruling, concurrently holding the roles of portfolio manager of a publicly offered fund and a privately placed fund has been prohibited for more than 10 years due to concerns over market manipulation and conflict of interest. However, as internal controls have expanded over the years, it is well established that such risks can be addressed without limiting concurrent management of publicly offered and privately placed funds. Relaxing the restriction would benefit SITEs by enabling them to make the most efficient use of portfolio managers having expertise in the same types of funds. It would also provide SITEs with more flexibility in developing diversified business to improve operating results and performance.
2.2 Permit privately placed SITE funds to issue “multi-currency funds including classes denominated in NTD and other foreign currencies.” The offering of multi-currency (including NTD) publicly offered funds has been permitted since 2012. Generally speaking, the laws and regulations applicable to privately placed funds should be less (not more) stringent than those for publicly offered funds. We therefore recommend that SITEs also be permitted to issue privately placed “multi-currency funds including classes denominated in NTD and other foreign currencies.”
2.3 Relax the investment restrictions on domestic SITE funds using offshore non-deliverable forwards (NDFs) as an exchange rate hedging instrument. SITE funds currently are only allowed to use foreign exchange swaps to hedge relevant risks associated with investments in foreign securities. Such hedging transactions require that there be sufficient NTD or USD cash positions to adjust the hedge ratio. However, making such adjustments is more costly and less flexible in terms of timeliness than would be the case if SITE funds were permitted to use offshore NDFs. If SITE funds, like life insurance companies, are permitted to use a certain amount of offshore NDF transactions, SITEs could more effectively use the fund assets to conduct exchange rate hedging for NTD and USD. This would enable SITEs to better control investment fluctuations in a timely fashion and pursue the best interests of the underlying investors.
Suggestion 3: Encourage Taiwanese citizens to prepare for their retirement as early as possible through long-term investments.
The Committee proposes that the government grant each fund investor an income tax deduction of not more than NT$24,000 per year as a tax incentive to make investments for retirement, along the same lines as the tax deduction for life insurance premiums. As Taiwan’s saving rate is relatively high, this tax incentive will not only help the general public voluntarily prepare for retirement by encouraging them to start savings planning at an early stage, but also make up for the underfunding of relevant government pension payments, thereby benefiting the entire society. The tax incentive would also help promote the government’s “Happy Retirement–Experimental Project for Voluntary Investments by Nationals for Retirement.”
Suggestion 4: Allow marketing materials to be reviewed by an independent dedicated department.
According to Article 20 of the “Securities Investment Trust and Consulting Association Guidelines for Advertisements and Business Activities Performed by Members and Their Sales Agents,” if a company has established a Compliance Department, that is then the only department allowed to review marketing materials prior to public use. However, review of marketing materials prior to public use is also a part of the activity necessarily performed in substance within the business function. Since the regulation allows marketing materials to be reviewed by the head of a responsible department if no compliance department has been established, it would be reasonable for the Guidelines to be revised to give companies the option to either use the compliance department or establish an independent dedicated department to perform appropriate reviews of marketing materials.
With such a proposed change, depending on a firm’s organizational structure, responsibility for reviewing marketing materials could rest with a newly established independent, dedicated department or remain with the compliance department.
This alternative would allow flexibility for each firm to accommodate its practical needs in consideration of the differing size and scale of asset management firms in Taiwan. The wording of Article 20 could be revised as follows:
“The information prepared by members of SITCA and their sales agents for advertisements, public seminars, or other business activities shall be incorporated under the company’s internal control system and shall be appropriately reviewed before public use by the Compliance Department or an independent dedicated department, or by the head of a responsible department if no Compliance Department or independent dedicated department is established, to ensure that the content is appropriate with no fraud and violation against relevant laws and rules…”