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On 7 January 1991 the Securities and Futures Commission (SFC) promulgated its Rules Gov-erning Securities Firms Engaged in Consigned Trading of Foreign Securities, under the powers granted to it by Article 44, Paragraph 4 of the Securities and Exchange Law. Since then the rules have already been amended four times in 1995, 1996, 2000 and 2001 and in view of major changes in the international financial services environment and related legislation, the rules were amended once again to take account of such changes and to meet the business needs.
The main points of the amendments are as fol-lows:
Under a new provision, the term "overseas securities market" is defined as an organized securities trading market that is regulated by the securities regulatory authority of the country where it is located. Such markets in-clude both stock exchanges and over-the-counter markets. It also provides that securities firms engaged in consigned trading of overseas securities must in principle do so on a securities market, except insofar as pro-hibited by SFC regulations. At present the SFC excludes Taiwanese securities firms from being engaged in consigned trading of over-seas securities on PRC securities markets and from trading on Hong Kong markets in secu-rities issued by PRC entities.
In principle the SFC permits Taiwanese secu-rities firms to engage themselves in consigned trading of all securities that are traded on for-eign securities markets. These include: (1) shares, stock warrants, beneficiary certificates, depositary receipts, and other negotiable se-curities traded on overseas securities markets; (2) bonds rated at or above an appropriate credit rating by a credit rating agency ap-proved by the SFC; and (3) other negotiable securities approved by the SFC. However, in accordance with the opinion of the Foreign Exchange Department of the Central Bank of China, corporate bonds issued overseas by Taiwanese companies, and structured notes that are linked to (1) Taiwanese domestic se-curities, (2) securities issued overseas by Taiwanese TSE and OTC listed companies, and (3) beneficiary certificates issued overseas by Taiwanese securities investment trust en-terprises, are excluded from the permitted scope of consigned trading.
Qualified institutional investors have special-ist investment knowledge and experience; accordingly, in order to expand the scope of consigned trading in overseas securities that securities firms can undertake, if the consignor is a qualified institutional investor that has received approval to invest in overseas secu-rities from the regulatory authority for its in-dustry, consigned trading conducted on its behalf is not subject to the above restrictions on the types of securities that may be traded. Thus the securities firm may accept the quali-fied institutional investor's instructions to trade in any type of overseas securities, except for corporate bonds issued overseas by Tai-wanese companies, and structured notes linked to domestic securities, as described in the previous paragraph.
To accommodate to investors' practice in trading in overseas securities and to increase clients' flexibility in placing trading instruc-tions, securities firms are now permitted to accept from consignors instructions that spec-ify a price range and a period of validity, and the consignment order may be made in written or electronic form. The securities firm must retain a record of the client's instructions, in accordance with the relevant provisions. Also, in line with the provisions of Article 75-1 of the Operating Rules of the Taiwan Stock Ex-change Corporation, an individual consignor whose maximum daily trading amount does not exceed NT$1 million may apply to open a trading account via the Internet, by letter or by other means.
For the greater convenience of investors, the amended rules allow a securities firm to make a prior agreement in writing with a consignor to open a cash investment management ac-count, so that after the consignor disposes of a particular securities investment, the securities institution that executes the order overseas may reinvest the proceeds of the sale in a money market fund or bond fund, as agreed by the consignor in advance, that conforms to the market regulations in the country concerned. The amended rules also allow a consignor to settle trades in NT dollars, in which case matters pertaining to foreign exchange set-tlement should be conducted in accordance with the Regulations Governing the Reporting of Foreign Exchange Receipts and Disburse-ments or Transactions, with the securities firm undertaking forex settlement with a desig-nated bank, using the consignor's annual forex remittance allowance. But securities pur-chased with settlement in NT dollars that are subsequently resold with settlement also in NT dollars, need not be counted toward the annual remittance allowance. Inward remit-tances of proceeds from the sale of foreign securities that were originally purchased by the consignor with currency remitted outward using the consignor's annual remittance al-lowance, also need not be counted toward the allowance.
Sometimes the issuance of securities firms' research reports is handled by different com-panies within the same group, or reports are issued with the authorization of multiple con-signee securities firms, or reports prepared by other institutions are used by securities firms with permission. Therefore, to conform to securities firms' operational practice, the amended rules relax the previous provision that required research reports be authorized and issued by the securities company con-cerned, to also allow reports to be used with permission. However, if the content of a re-port is false, conceals material information, is fraudulent, or is otherwise misleading, a se-curities firm may not absolve itself from li-ability by asserting that the report was not approved and issued by the securities firm it-self.
To meet investors' need and to avoid the situations in which securities firms introduce investors to overseas securities firms to open accounts for trading in overseas securities, and recommendations are passively or actively made for trades for which instructions are accepted, such that responsibility cannot be clearly ascribed when disputes arise over such trading, the amended rules broaden the per-mitted range of overseas securities in which Taiwanese securities firms may conduct con-signed trading, allow the opening of cash in-vestment management accounts, and explic-itly prohibit securities firms, their responsible officers, and their employees from introducing investors to foreign securities firms to open overseas securities trading accounts.
