Financial Supervisory Commission’s interpretation regarding short-swing trading under the Securities and Exchange Act (Taiwan)

Aaron Chen and Tina Lee

I. Article 157, Paragraph 1 of the Securities and Exchange Act prohibits short-swing trading, which stipulates that “In the event that any director, supervisor, managerial officer, or shareholder holding more than ten percent of the shares, of a stock issuing company sells listed stock of the company within six months after acquiring it, or repurchases listed stock of the company within six months after selling it, the company shall claim for the disgorgement of any profit realized thereby.”

II. The Financial Supervisory Commission issued Circular Jin-Guan-Zheng- Jiao-Zi No. 1100362924 on July 30, 2021, integrating previous interpretations of short-swing trading. The main points are as follows:

1. Stocks acquired by company insiders before listing/OTC(Over The Counter)/ESB(Emerging Stock Board), and those distributed from capitalization of cash, capital reserve, retained earnings(including employee dividends), treasury stock transfer, or convertible bonds are out of the scope of “acquisition” in the above-mentioned trading regulation, and thus are not included in the disgorgement calculation.

2. However, the right of disgorgement still applies to insiders who purchased and sold (or sold and purchased) company stocks within a six-month period. Furthermore, exemptions do not apply even if the stocks sold are obtained through aforementioned methods. In other words, if 10 stocks were purchased on August 1 and 10 more stocks are obtained from retained earnings in September 1, selling 10 stocks on November 1 would still be considered short-swing trading. The 10 stocks obtained from retained earnings is not a basis for defense.

3. The six-month period of short-swing trading shall be calculated respectively between corporate director, supervisor and its designated natural person representative, due to their independent ownership on company stocks.