Newsletter
PRIVATELY PLACED TRUST FUNDS MAY INVEST IN NON-APPROVED OFFSHORE FUNDS
According to Article 54 of the Regulations Governing Securities Investment Trust Funds, a privately-placed trust fund managed by a securi-ties investment trust enterprise (SITE) must comply with the relevant provisions in the fund''s securities investment trust agreement, and with the requirements set forth by the Financial Su-pervisory Commission. Privately-placed trust funds may invest in offshore funds not approved by or registered with the FSC. On 17 February 2006, the FSC issued an order requiring that such offshore fund meet the following conditions:
It may not invest in gold or commodities.
The percentage of the offshore fund invested in Mainland China securities and red-chip shares may not exceed the percentage set by the FSC pursuant to Article 23 Paragraph 1 Item 3 of the Regulations Governing Offshore Funds.
The fund management institution must exist for at least one year, be registered with its lo-cal regulatory authority, and have no record on file of being penalized by its regulatory au-thority within the past two years.
Assessment of the offshore fund''s fair value, sufficient to serve as a basis for valuation, must be made on a regular basis.
The following requirements must also be com-plied with:
The trust agreement of the privately-placed fund must expressly provide that "the fund may invest in offshore funds (including hedge funds) not approved by or registered with the Financial Supervisory Commission of the Executive Yuan."
The investment memorandum must include the disclosure that "criteria for the selection of offshore funds that have not been approved by or registered with the Financial Supervisory Commission of the Executive Yuan include fund type, investment strategy, level of risk, past fund performance, valuation method, and the level of experience of the fund manage-ment institution and fund managers."
Relevant risk information must be disclosed on the cover of the investment memorandum, such as "sub-funds invested in by this fund include offshore funds (including hedge funds) not approved by or registered with the Finan-cial Supervisory Commission of the Executive Yuan. Since such funds are subject to lower level of supervision and regulation, and they use alternative investment strategies, risk ex-posure is generally different than that of tra-ditional funds."
In addition, when a SITE invests in offshore funds not approved by or registered with the FSC, it must incorporate criteria for the selection of such offshore funds, as well as risk monitoring and control measures, into its internal control systems. These criteria and measures should be approved by the SITE''s board of directors.