Restrictions on an investment trust enterprise’s investment funds are relaxed so that its own capital may serve as a seed capital(Taiwan)

Grace Chiang

The Financial Supervisory Commission (hereinafter, the “FSC”) rendered the Jin-Guan-Zheng-Tou-1060021744 Directive of June 30, 2017 (hereinafter, the “Directive”) to relax the restrictions on an investment trust enterprise’s investment funds to allow its own capital to be used as a “seed capital”.

The FSC mentioned in the Directive that since foreign mutual fund groups have had mechanisms for seed money or seed capital for funds, which means that their own capital may be injected into the group’s new funds for purposes of fund marketing or experiments on new investment strategies to help the inception and initial operation of the funds until they have been operated to reach a certain scale, duration, or track records created in manners favorable to open market distribution, and then the own capital can be exited properly; therefore, Paragraph 3 of the Directive was revised to allow investment trust enterprises in Taiwan to also adopt the “seed capital” mechanism.
According to the Directive, if a trust enterprise seeks to invest its own capital in its funds as a “seed capital,” it may apply to the FSC for approval and invest its own capital in a publically offered investment fund managed by such enterprise or in a publicly offered offshore fund whose management is entrusted to the enterprise, and the trust enterprise may be exempted from the restriction that its own capital invested in a single fund shall not exceed five percent of the enterprise’s net worth and five percent of the net asset value of the invested fund as of the previous day. However, if an investment trust enterprise invests its own capital to purchase domestic government bonds or financial debentures, domestic treasury bills, or negotiable certificates of deposit or commercial papers issued by banks, the total amount of such investment still shall not exceed 40% of the enterprise’s net worth.

In addition, this Directive further requires that an investment trust enterprise seeking to adopt a “seed capital” mechanism is required to have sound finance and a comprehensive internal control system, and the enterprise is obliged to establish and regularly review the investment guidelines for the “seed capital,” which shall be included in its internal control system at the same time for thorough implementation to ensure that the timing and manner of the seed capital’s exit from the fund will not impair the fund’s performance or the rights and interests of other investors of the fund. Meanwhile, after the FSC’s approval is obtained, an investment trust enterprise is also required to disclose the holdings of the “seed capital” in various funds by amount and ratio to facilitate the FSC’s understanding of the actual operation status of the seed capital.