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Title:

Regulations Governing Securities Firms  CH

Amended Date: 2020.10.29 (Articles 14-6, 21, 32-1, 35-2, 68-1 amended,English version coming soon)
Current English version amended on 2020.02.03 

Title: Regulations Governing Securities Firms(2007.01.03)
Date:
   CHAPTER I GENERAL PROVISIONS
Article 1These Regulations are prescribed in accordance with Paragraph 4 of Article 44 of the Securities and Exchange Act (hereinafter referred to as "the Act").
Article 2A securities firm shall, according to the Criteria Governing Internal Control Systems of Services Enterprises in the Securities and Futures Market set by the Financial Supervisory Commission, Executive Yuan (the “Commission”), and other securities firm internal control regulations set by the Taiwan Stock Exchange Corporation (hereinafter referred to as "the Stock Exchange"), and other securities-related institutions, establish its own internal control system.
The operation of securities firm shall be in accordance with laws and regulations, articles of incorporation, and the internal control system referred to in the preceding Paragraph.
Any amendments to be made to the internal control system referred to in Paragraph 1 per the notice of the Commission or a securities-related institution shall be made within the specified time limit.
Article 3In case of any of the following events, a securities firm shall report to the Commission for approval in advance:
1. Change of name of the firm;
2. Change of capital amount, working capital, or the fund for operating business;
3. Change of the business premises of the firm or its branch office;
4. Acquisition of the entire or major part of the business or assets of another person, or transfer of the entire or major part of the business or assets of the firm to another person;
5. Merger or dissolution;
6. Investment in foreign securities firms;
7. Any other matters which under the regulation of the Commission shall be reported to and approved by the Commission in advance.
Where a securities firm has entered into a contract for using the centralized securities market with the Stock Exchange, matters to be reported and approved as referred to in the preceding Paragraph shall be submitted to the Stock Exchange for transmittal to the Commission. Where a securities firm only entered into a contract for trading securities on the over-the-counter market with the GreTai Securities Market("the GreTai"), the said submission shall be made to the Commission through the GreTai. Where no contract has been entered into, the submission shall be made to the Commission through a securities dealers' association.
Article 4In case any of the following events occurs, a securities firm shall report to the Commission:
1. Where the business operation is commenced, suspended, resumed or terminated;
2. Where litigation arises due to operation of or engagement in securities business by a securities firm or its director, supervisor, or employee;
3. Where any director, supervisor, or manager has any of the conditions referred to in Article 53 of the Act;
4. Where any director, supervisor, or employee has violated the order promulgated by the Commission in accordance with the Act;
5. Where there is any change in the shareholding of any director, supervisor, manager or shareholder holding more than 10% of the shares of the company; or
6. Where there is any matter required to be reported by the Commission.
For the matters in Subparagraph 1 in the preceding Paragraph, the company shall report in advance; for the matters in Subparagraphs 2 through 4, the company shall report within five (5) days from the date on which it becomes aware thereof or on which the matters occur; for matters in Subparagraph 5, the company shall report by the 15th day of the following month.
Where a securities firm has entered into a contract for using the centralized securities market with the Stock Exchange, matters to be reported and approved as referred to in Paragraph 1 above shall be submitted to the Stock Exchange for transmittal to the Commission. Where a securities firm only entered into a contract for trading securities on over-the-counter market with the GreTai, the said submission shall be made to the Commission through the GreTai. Where no contract has been entered into, the submission shall be made to the Commission through a securities dealers' association.
Article 5The advertisements produced and broadcasted by a securities firm shall not be exaggerated or biased.
The regulation for the production and broadcasting of advertisements by securities firms referred to in the preceding Paragraph shall be prescribed by the securities dealers' association and submitted to the Commission for recordation.
Article 6A securities firm shall install internal auditors to regularly or from time to time examine the company's finance and business and prepare audit reports and keep them available for audit.
The audit reports referred to in the preceding Paragraph shall include comments on the compliance of the company's finance and business with relevant laws and regulations and the internal control system of the company.
Article 7A securities firm which engages in more than two types of securities businesses shall independently operate the business based on the types thereof.
Article 8In operating securities business, a securities firm shall have its duly registered qualified associated persons business in accordance with the Regulations Governing the Responsible Persons and Associated Persons of Securities Firms.
   CHAPTER II FINANCE
Article 9After completion of corporate registration, a securities firm shall lodge an operation bond with a bank designated by the Commission as follows:
1. securities underwriter: NT$40 million.
2. securities dealer: NT$10 million.
3. securities broker: NT$50 million.
4. Operators of two (2) or more types of securities business: aggregate of the amounts as referred to in the preceding three subparagraphs according to the types of business being engaged in.
5. Branch office: additional NT$10 million for each branch.
The operation bond referred to in the preceding Paragraph shall be paid in cash, government bond, or financial bond.
Article 10A securities firm operating the business of accepting orders to trade securities on the centralized securities exchange market shall deposit a settlement/ clearing fund with the Stock Exchange in the following manners:
1. Before commencement of business operation, the securities firm shall pay a basic amount of NT$15 million; after commencement of business operation, it shall lodge the deposit based on a specified percentage of the value of the executed trades of securities for which it has accepted trading orders within 10 days after the close of each quarter until the end of the then-current year. The said percentage shall be separately determined by the Commission.
2. From the year following the commencement of business operation, the original basic amount shall be reduced to NT$7 million and combined into the amount equal to the above-mentioned percentage of the value of the executed trades of securities for which it accepted trading orders for the previous year on a yearly basis. At the end of January of each year, the insufficient or excessive amount of the fund shall be deposited or withdrawn from the Stock Exchange.
Before the commencement of business operation, a securities firm trading securities for its own account on the centralized securities exchange shall deposit a settlement/clearing fund of NT$10 million in a lump sum with the Stock Exchange.
A securities firm trading securities for customers' accounts and its own account on centralized securities exchange shall deposit an aggregate of the amounts referred to in the preceding two Paragraphs.
Before commencement of business operation of each domestic branch office, a securities firm shall pay a settlement/clearing fund of NT$3 million in a lump sum to the Stock Exchange; provided that from the year following the business operation, the original amount shall be reduced to NT$2 million.
A joint liability system shall be adopted for the settlement/ clearing fund deposited by securities firms, and a special management committee of the fund shall be set up. The management rules shall be drafted by the Stock Exchange with input from the securities dealers' association and reported to the Commission for approval. This provision shall apply to the amendment of the said rules.
The special management committee of the fund may, depending on the degree of operational risk of securities firms, notify the securities firms to pay additional settlement/clearing fund and report such to the Commission for recordation. The detailed rules for the above fund shall be drafted by the special management committee of the fund and reported to the Commission for approval. This provision shall apply to the amendment of the said rules.
Article 11For a securities firm trading securities for its own account, if the profit for trading securities for its own account exceeds the amount of loss, it shall allocate 10% of the portion in excess on a monthly basis as the trading loss reserve.
The trading loss reserve shall not be used except for the purpose of covering the amount of loss in excess of the amount of profit.
When the accumulated amount of the trading loss reserve referred to in Paragraph 1 above reaches NT$200 million, allocation may be suspended.
Article 12A securities firm trading securities for customers' accounts shall allocate 0.0028% of the transaction price of the traded securities on a monthly basis as reserve for breach of contract losses.
The reserve for breach of contract losses referred to in the preceding Paragraph shall not be used except for the purpose of covering the losses caused by breach of contract for trading on customers' accounts or for purposes approved by the Commission.
When the accumulated reserve for breach of contract losses reaches NT$200 million allocation will be suspended.
In calculating the income of a profit-seeking enterprise, the reserve for breach of contract loss shall be handled in accordance with the relevant provisions of the tax laws.
Article 13Unless a securities firm is concurrently operated by a financial institution and subject to other relevant acts or regulations, its total debts to other parties shall not be more than 4 times its capital net worth. The total amount of its current liabilities shall not exceed the total amount of its current assets; provided that, unless otherwise provided by the Commission, the total amount of debts to other parties of a securities firm trading securities for customers' accounts or for its own account shall not exceed its capital net worth.
In calculating the total amount of liabilities referred to in the preceding Paragraph, the reserve for trading losses, reserve for breach of contract losses referred to in the preceding two Articles and liabilities arising from trading of government bonds may be deducted.
Article 14A securities firm, unless concurrently operated by a financial institution and subject to other relevant acts or regulations, shall set aside a 20% special reserve from the annual after-tax profit. The special reserve of a securities firm concurrently engaging in securities-related futures business shall be increased to 30%. However, if the accumulated amount reaches the paid-in capital amount, no further fund needs to be set aside.
The special reserve referred to in the preceding Paragraph shall not be used for purposes other than covering the losses of the company or, when the special reserve reaches 50% of the amount of paid-in capital, half of it may be used for capitalization.
Article 14-1Where any of the following circumstances applies to a securities firm, the Commission may reject or disapprove its application to carry out capital increase for cash or issue corporate bonds; provided, this restriction shall not apply where the application arises from a merger of securities firms:
1. It has been sanctioned by the Commission under Article 66, Subparagraph 1 of the Act within the past three months.
2. It has been sanctioned by the Commission under Article 66, Subparagraph 2 of the Act within the past half year.
3. It has been sanctioned by the Commission under Article 66, Subparagraph 3 of the Act within the past one year.
4. It has been sanctioned by the Commission under Article 66, Subparagraph 4 of the Act within the past two years.
5. It has had its trading rights terminated or restricted by the Stock Exchange, GreTai, or Futures Exchange pursuant to bylaws thereof within the past year.
Calculation of the periods in the subparagraphs of the preceding paragraph shall commence from the date of issuance of the disposition letter by the Commission, Stock Exchange, GreTai, or Futures Exchange.
Article 14-2Within the same fiscal year in which it receives a letter of approval or effectiveness from the Commission for a capital increase for cash or a corporate bond issue, a Listed or OTC securities firm may not file another filing (application) for a capital increase for cash or corporate bond issue.
A listed or OTC securities firm may be exempt from the restriction in the preceding paragraph where it has an actual need for a capital increase to achieve statutory capitalization or net worth or conform to regulations governing the regulatory capital adequacy ratio as required for merger or to take assignment of the business or assets of another person in whole or in part, establish a branch institution, increase its business or categories or items, or concurrently engage in futures business.
Article 14-3Where the securities firm substitutes a report from a credit rating institution for the evaluation report issued by the lead underwriter pursuant to the Criteria Governing the Offering and Issuance of Securities by Securities Issuers, it shall obtain a credit rating of a specific grade or higher from a credit rating agency approved or recognized by the Commission.
Article 14-4(deleted)
Article 14-5A securities firm offering and issuing securities shall comply with the provisions of the Criteria Governing the Offering and Issuance of Securities by Securities Issuers or the Criteria Governing the Offering and Issuance of Overseas Securities by Issuers in addition to the provisions of these Regulations.
The Commission shall separately prescribe the required application forms and rules applicable to issuance of securities by securities firms that have not publicly issued stock.
Article 15A securities firm, unless concurrently operated by a financial institution and subject to other relevant acts or regulations, shall not act as a guarantor of any nature, make endorsement for transfer of negotiable instruments, or provide its property as security for other persons without the approval of the Commission.
Article 16The sum of the total amount of fixed assets used for operating purposes and the total amount of real property used for non-operating purposes of a securities firm, unless it is concurrently operated by a financial institution and subject to other relevant acts or regulations, shall not be more than 60% of the total amount of its assets.
Article 17A securities firm, unless concurrently operated by a financial institution, shall not borrow funds from a non-financial or non-insurance institution; provided that this rule shall not apply to the following:
1. Issuance of commercial paper;
2. Issuance of corporate bonds;
3. Meeting urgent capital needs of the company.
When borrowing funds to meet urgent capital needs referred to in Subparagraph 3 of the preceding Paragraph, a securities firm shall report to the Commission within 2 days from the date of occurrence of the event.
Article 18Unless a securities firm is concurrently operated by a financial institution and subject to other relevant acts or regulations, its funds not required for business operation shall not be loaned to other persons or used for other purposes; the funds shall be used for the following purposes only:
1. Bank deposits;
2. Purchase of government bonds or financial bonds;
3. Purchase of treasury bills, transferable certificates of deposit, or commercial papers;
4. Purchase of Commission-approved securities of a specific ratio, or transfer of investment in an Commission-approved securities, futures, banking, finance or other related institution of a specific ratio; and
5. Other purposes approved by the Commission.
The total combined amount of funds utilized under Subparagraph 4 and Subparagraph 5 of the preceding paragraph shall not exceed 40 percent of the firm's capital net worth, and the total amount of equity investments of such funds shall not exceed 40 percent of the firm's paid-in capital, unless approved by the Commission.
Article 19A securities firm trading securities for its own account, unless it is concurrently operated by a financial institution and subject to other relevant acts or regulations, shall not hold more than 10% of the total issued shares of any company. The total amount of the cost of the securities issued by any company held by such securities firm shall not be more than 20% of its capital net worth, and the total amount of the cost of the OTC Second Board stocks held by such securities firm shall not be more than 10% of its capital net worth. However, this provision shall not apply if the Commission provides otherwise.
If the aggregate of the securities acquired by a securities firm through underwriting and those traded for its own account by such firm exceeds the limit referred to in the preceding Paragraph, the portion in excess shall be sold within 1 year after its acquisition in accordance with Article 75 of the Act.
Article 19-1The Commission shall prescribe the total amount limits, and methods for calculation thereof, on the positions held in foreign securities and the expenditures on derivative financial product hedging transactions of a securities firm trading foreign securities for its own account.
A securities firm shall not hold more than 5 percent of the total issued shares of any foreign company. The total amount of the cost of the securities issued by any foreign company that a securities firm holds shall not exceed one-half of the total amount limit under the preceding paragraph.
Article 19-2Exchange settlement matters for securities firms trading foreign securities for their own accounts and engaging in derivative financial product hedging transactions shall be handled in accordance with the Regulations Governing the Reporting of Foreign Exchange Receipts and Disbursements or Transactions.
A securities firm may carry out hedging transactions only in the status of a customer with a designated bank or foreign financial institution permitted by the Central Bank of China to handle derivative foreign exchange products.
A securities firm trading foreign securities for its own account shall open a segregated foreign exchange account in the selected foreign currency at a designated foreign exchange bank, from which it shall conduct all deposits and remittances in connection with payment and receipt of settlement money and offshore fees.
Article 19-3A securities firm may operate derivative financial product trading business at its business premises, and shall do so in accordance with the provisions of the GreTai.
"Derivative financial product trading" in the preceding paragraph includes convertible bond asset swaps, structured notes, equity derivatives, credit derivatives, interest rate derivatives, and bond derivatives transactions.
Article 19-4Securities firms operating derivative financial product trading business that involves foreign exchange operations shall obtain approval from the Central Bank of China.
Securities firms operating business referred to in the preceding paragraph and engaging in related hedge trades shall handle exchange settlement matters in accordance with the Regulations Governing the Reporting of Foreign Exchange Receipts and Disbursements or Transactions and related provisions.
For a securities firm operating business referred to in paragraph 1, matters relating to settlement of funds, payment and receipt of fees, and payment of funds upon early rescission or expiration of contracts shall be carried out according to the following:
1. When denominated in New Taiwan Dollars, all settlement of funds and payment and receipt of fees with a customer shall be carried out in New Taiwan Dollars.
2. When denominated in a foreign currency, all settlement of funds and payment and receipt of fees with a customer shall be carried out in foreign currency. The customer's payment of funds may be carried out by transfer from its own foreign exchange deposit account. Where foreign exchange settlement is required, it shall be carried out by the customer at a designated foreign exchange bank in accordance with the Regulations Governing the Reporting of Foreign Exchange Receipts and Disbursements or Transactions.
3. Upon early rescission by the customer or expiration of the contract, the securities firm shall deposit the funds receivable by the customer in its New Taiwan Dollar or foreign exchange deposit account on the settlement date based on the currency stipulated in the contract.
A securities firm operating business referred to in paragraph 1 shall submit a monthly operations statement and statement of payables remitted into customers’ designated accounts to the foreign exchange authority and the GreTai by the fifth day of the following month.
Article 19-5A securities firm operating derivative financial product trading business at its place of business may not make any use derivatives trading to carry out mergers or acquisitions or unlawful trades on its own behalf or in cooperation with its clients.
Article 20A securities firm, other than re-investment in Commission-approved businesses, shall obtain corporate stocks for the greatest benefit of the company and may not directly or indirectly participate in the operation of the issuer company or other inappropriate actions.
Except where otherwise provided by law or regulation, a securities firm exercising voting rights of stock it holds in a public company shall dispatch a personnel member to attend and do so as its representative.
Article 21Within 4 months after the close of each fiscal year, a securities firm shall publicly announce and report to the Commission the annual financial reports audited/certified by certified public accounts, approved by the board of directors, and recognized by the supervisors; within 2 months after close of each half fiscal year, it shall publish and report to the Commission the financial reports audited/certified by certified public accountants, approved by the board of directors, and recognized by the supervisors. Where the stocks of such securities firm have been listed on the Stock Exchange or traded on over-the-counter markets, the provisions of Subparagraphs 2 and 3 of Paragraph 1, and Paragraphs 2 and 3 of Article 36 of the Act shall be complied with.
A securities firm shall submit to the Commission its monthly accounting summary for the preceding month by the 10th day of each month.
Where a securities firm has entered into a contract for using the centralized securities market with the Stock Exchange, submission of matters referred to in the preceding two Paragraphs shall be made to the Commission through the Stock Exchange. Where a securities firm only entered into a contract for trading securities on the over-the-counter markets with the GreTai, the said submission shall be made to the Commission through the GreTai. Where no has been entered into, the submission shall be made to the Commission through a securities dealers' association.
   CHAPTER III BUSINESS OPERATION
Article 22Where a securities firm underwrites securities on a firm commitment basis, the total underwriting amount shall not be more than 15 times the balance of its current assets less current liabilities. Within such amount, the total amount of firm commitment securities underwriting by overseas branch offices of the securities firm shall not be more than 5 times the balance of its current assets less current liabilities.
Where the regulatory capital adequacy ratio of a securities firm is less than 120 percent, the multiple for total firm commitment securities underwriting under the preceding paragraph may be adjusted to 10, and the multiple for total firm commitment underwriting by overseas branch offices thereof may be adjusted to 3. Where it is less than 100 percent, the total firm commitment underwriting multiple may be adjusted to 5, and overseas branch offices thereof shall not underwrite securities on a firm commitment basis.
Article 23A securities firm that underwrites securities on a firm commitment basis by subscribing securities before putting them for re- sale or specifying in the underwriting contract that a portion of the securities covered in the contract shall be subscribed by such firm for its own account in accordance with Paragraph 2 of Article 71 of the Act shall meet the following conditions:
1. The financial status shall meet the relevant laws and regulations;
2. The securities firm has not been subject to the punishment of suspension of business imposed by the competent authority in accordance with Article 66 of the Act during the last half year.
Article 24A securities firm that underwrites securities shall make a public announcement of the underwriting and shall publish such announcement in local daily newspapers. Matters to be published shall include the method for deciding the offering price and a description of the basis of pricing, conclusions of the assessment report of the securities firm, the place where the prospectus is available and the method to obtain such prospectus.
If the offering price referred to in the preceding Paragraph is decided through negotiations between the securities underwriter and the issuer or holder of the securities, in addition to the matters referred to in the preceding Paragraph, the public announcement shall include financial information based on which the offering price is decided and the audited opinion of the certified public accountants on the financial information. In calculation of the profitability of each share, the financial information based on which the offering price is decided shall fully reflect the dilution effect caused by the increase of issued shares. The calculation basis of information obtained from different sources of different time periods shall be consistent.
Article 25When a securities underwriter is mandated to handle matters relating to the offering, issuing, listing, or trading on the over-the-counter market of securities, the assessment report and relevant information provided by it shall not have any of the following conditions:
1. Containing false statement or concealment which would mislead others;
2. Containing material omission or obvious errors which would affect investment judgment;
3. Failing to prepare work sheets or failing to keep work sheets according to regulation; adopted so that objective and reasonable evidence is not obtained;
4. The issuer violates Articles 7 and 8 of the Guidelines for Handling Offering and Issuance of Securities by Issuers and its application shall be rejected or returned; however, if the underwriter can prove that he has exercised as much care as possible, this is not applicable;
5. The underwriter fails to conduct necessary assistance and assessment on major items that require assessment, thus causing major difference between assessment conclusions and facts;
6. After the assessment report is submitted, and before the prospectus is printed and published, if the company has a condition that will materially affect shareholders' interests or the price of securities under Subparagraph 2 of Paragraph 2 of Article 36 of the Securities and Exchange Act and the underwriter does not immediately add the supplementary information to the assessment and change the report; or
7. Violating other securities laws and regulations and other relevant laws and regulations.
Article 26If any of the following events exists between a securities underwriter and an issuer, such underwriter shall not act as the lead underwriter of the said issuance:
1. Where either party and the subsidiary company in which such party holds more than 50% of the shares aggregately hold 10% or more of the total shares of the other party.
2. Where either party and the subsidiary company in which such party holds more than 50% of the shares appoint more than half of the directors of the other party.
3. Where the board chairman or president of either party is the spouse or a relative within the second degree or closer of the board chairman or president of the other party.
4. Where 20% or more of the total number of shares of either party is held by the same shareholder.
5. Where half or more of the directors or supervisors of either party are the same as the directors or supervisors of the other party; the spouses, children, and relatives within the second degree or closer of the said persons count as "the same".
6. Where either party and related parties hold a total of 50% or more of the total issued shares of the other party. However, where the securities underwriter is a subsidiary securities firm of a financial institution or a financial holding company, this restriction shall not apply if the total shares of the issuing company held by such subsidiary itself, the subsidiary's parent company, and all subsidiaries of the parent company do not exceed 10 percent of the total issued shares of the issuing company, and neither the director nor supervisor seats of the issuing company held by such companies exceed one-third of the director or supervisor seats, respectively.
7. Where the two parties, according to the relevant laws or regulations, must apply for combination, or has approval from the Fair Trade Commission of the Executive Yuan for combination.
8. Where, under the regulations of other laws or in actuality, either party directly or indirectly controls the personnel, financial, or business affairs of the other party.
The related parties referred to in Subparagraph 6 of the preceding Paragraph is defined as in Number 6 of the Statements of Financial Accounting Standards on the rules for Disclosure of Related Party Transactions.
Article 27The securities subscribed to by a securities firm under the first part of Paragraph 2 of Article 81 of the Act shall be re-sold within the underwriting period as prescribed in the underwriting agreement.
The provisions of Article 24 shall apply mutatis mutandis to the public announcement for the re-sale by the securities firm referred to in the preceding Paragraph.
If the securities for re-sale under Paragraph 1 above is not fully sold, the unsold portion shall be sold in accordance with Article 75 of the Act.
Article 28A securities firm shall underwrite or re-sell securities in accordance with the handling rules prescribed by the securities dealers' association.
The securities dealers' association shall submit the handling rules referred to in the preceding Paragraph to the Commission for approval.
When a securities firm underwrites or re-sells listed securities, it may conduct stabilized operation transactions when necessary. Regulations governing the administration thereof shall be prescribed by the Stock Exchange and submitted to the Commission for approval.
Article 29When a securities firm underwrites securities, it shall mandate a bank to establish a separate account to collect prices on its behalf unless the securities are delivered on the spot.
The prices collected under the preceding Paragraph shall not be used unless and until a certificate evidencing payment or the securities sold are delivered to the subscriber.
Article 29-1A securities firm underwriting securities shall create and keep a file recording the sales results for the securities and the quantity of its own subscription, following the format and content set out in the handling rules prescribed by the securities dealers' association under Article 28 hereof. The Commission may require the securities firm to provide relevant materials at any time.
A securities firm shall preserve relevant materials in underwriting cases referred to in the preceding paragraph for at least five years after the conclusion of the underwriting period.
Article 30In trading securities for its own account or selling the securities acquired by underwriting, a securities firm shall efficiently adjust the demand and supply in the market depending on the market situation, and ensure that the formation of fair price and its sound operation are not harmed.
Article 30-1A securities firm operating derivative financial product business may not damage fair market price formation or investor rights and interests when conducting hedging operations or when calculating product gains or carrying out settlement upon cancellation or expiration.
Article 31A securities firm trading securities for its own account on the centralized securities exchange shall, in accordance with the coordination efforts of the Stock Exchange, be responsible for buying or selling at least one listed stock whose trading has not reached one trading unit.
A securities firm trading securities for its own account on the over-the-counter market shall, in accordance with the coordination efforts of the GreTai, be responsible for buying or selling one kind of stock.
A securities firm trading securities for its own account on the over-the-counter market shall, during the period while it is holding the securities, provide a quotation for selling such securities held by it.
A securities firm trading securities for its own account shall adopt a trading policy and related procedures. Except as otherwise provided by this Commission, it shall form trading decisions on the basis of analysis reports before executing trades, and shall keep records, and regularly produce review reports. It also shall establish control mechanisms, and adopt procedures for regulating changes in trading decisions.
The written materials referred to in the preceding paragraph shall be recorded in chronological order and kept in files. They shall be preserved for a period of not less than five years.
Article 31-1For a securities firm trading foreign securities for its own account or engaging in foreign derivative financial product hedging transactions, the scope of the foreign securities, types of foreign derivative financial products, foreign trading markets, and sovereign ratings of the places of transactions shall be determined by the Commission.
Article 31-2A securities firm trading foreign securities for its own account or engaging in foreign derivative financial product hedging transactions shall establish a dedicated unit and adopt handling procedures, which shall be implemented after approval by the board of directors, as shall any amendments thereto.
The handling procedures under the preceding paragraph shall include all the following items:
1. Trading principles and policies: shall include types of underlyings traded, trading or hedging strategies, setting of position limits.
2. Trading procedures: shall include hierarchy of responsibility, trading process, division of powers and duties of relevant departments, procedures for preservation of trading records.
3. Risk management measures: shall include risk management scope, risk management procedures, methods and frequency of position evaluation, production and review of position evaluation reports, irregularity reports and procedures for follow-up surveillance.
4. Audit procedures: shall include internal audit and self-inspection, frequency and scope of audits, audit reports and procedures for correction and follow-up of deficiencies.
Article 31-3A securities firm trading foreign securities for its own account or engaging in foreign derivative financial product hedging transactions shall not be involved in any of the following:
1. Engaging in margin transactions.
2. Engaging in trading or transactions with any overseas affiliated enterprise; provided, this restriction shall not apply where it mandates the affiliated enterprise to trade or transact on its behalf.
"Affiliated enterprise" in the preceding paragraph shall be as defined in the Affiliated Enterprises chapter of the Company Act.
Article 31-4A securities firm trading foreign securities for its own account or engaging in foreign derivative financial product hedging transactions, and whose regulatory capital adequacy ratio is lower than 200 percent for three consecutive months, may only sell or close out its existing positions, and may not engage in any further trading or transactions, unless its regulatory capital adequacy ratio has already been corrected.
Article 32Unless otherwise provided by law or regulation, a securities firm trading securities for its own account on the centralized securities exchange shall not give a quote for the sale of securities not held by it.
A securities firm concurrently operated by a financial institution that uses its own fund and the trust fund to conduct cross-trades for its own account of the same kind of securities on the same day shall be subject to the provisions of Article 108 of the Banking Act and report such transactions to the Commission for recordation.
Article 32-1As needed for hedging in the issuance of put warrants, a securities firm may borrow the underlying securities from holders thereof and sell them, or sell the underlying securities short in an exchange market.
A securities firm selling securities by borrowing them as referred to in the preceding paragraph shall enter into a loan contract with the lender of the securities. The following particulars shall be specified in the loan contract:
1. Name, volume, period, and rate of the loaned securities.
2. Means of exercise of shareholders' rights of the loaned underlying securities.
3. The means of reimbursement by the securities firm of the rights/dividend value to the lender for ex-rights/ex-dividend dates of the loaned securities (including the means of calculation, whether reimbursement is to be made in cash or securities, and the reimbursement date).
4. Means stipulated between the parties for return of the securities upon expiry of the contract (including whether or not the securities may be refunded as cash).
5. Means stipulated between the parties for handling of breach and related matters of damages.
Article 33When a securities firm enters into a brokerage agreement with its customer, it shall appoint its personnel to explain the contents of the contract and the relevant procedures for trading securities.
Article 34A securities firm accepting orders to trade securities shall establish the following information on its customers:
1. Name, domicile, and mailing address;
2. Occupation and age;
3. Assets condition;
4. Investment experience;
5. Reason of opening account; and
6. Other necessary information.
A securities firm shall keep confidential the information referred to in the preceding Paragraph unless being inquired according to law.
Article 35A securities firm accepting orders to trade securities shall evaluate a customer's investment ability based on the information referred to in the preceding Article and transaction conditions. If the evaluation of a customer's credit status shows that the customer's order is beyond his/her investment ability, unless proper security is furnished, the securities firm may refuse the order for trading.
Article 36When a securities broker recommends that a customer trade in a securities, it shall first evaluate the customer's investment ability and that the customer possesses reasonable information and shall not guarantee the value of the recommended securities.
When a securities broker recommends that a customer trade in a securities, if such securities are to be traded on the centralized securities exchange, it shall follow the rules prescribed by the Stock Exchange; if the securities are to be traded on the over-the-counter market, it shall follow the rules prescribed by the GreTai. The above-mentioned rules shall be reported to the Commission for approval.
Article 36-1Where a department of a securities firm that concurrently operates securities investment consulting services or futures advisory services (hereinafter, collectively, "consulting services department") produces research reports, or a department of a securities firm that concurrently operates a securities investment consulting enterprise handling discretionary investment services ("discretionary investment department") produces analysis reports or investment strategies for customers, personnel other than of those departments shall not participate in composing or reviewing the reports.
Within two hours from the time market trading hours begin after a research report provided by a consulting services department of a securities firm is publicly disclosed, other departments and personnel apart from that department may not engage in any trading of any security recommended in the research report, unless otherwise provided by this Commission.
"Market" in the preceding paragraph refers to the domestic Stock Exchange, GreTai Securities Market, and Futures Exchange.
The compensation or bonuses paid to personnel of a consulting services department or discretionary investment department of a securities firm shall not be directly linked to the performance of any other department.
Article 36-2When an underwriting department of a securities firm underwrites securities, during the period from the time the securities firm enters into an advisory contract with a public issuer until the termination of the advisory relationship, or from the time the securities firm enters into an underwriting contract with a listed or OTC-listed company until the deadline for payment, its consulting services department shall not recommend any trading of that security or any derivative financial product thereof; a discretionary investment department may not purchase securities for a customer without first explicitly informing the customer of any related conflicts of interest and control measures and then obtaining the customer's written consent on an instance-by-instance basis, and specifically stating the quantity of the securities that may be purchased.
When an underwriting department of a securities firm obtains securities through a firm commitment underwriting, the provisions of the preceding paragraph shall apply mutatis mutandis to the handling of those securities by the consulting services department and discretionary investment department of the securities firm until such time as all the procedures of the firm commitment underwriting have been completed in accordance with regulations.
Article 37Unless otherwise provided by the laws and regulations, a securities firm operating securities business shall not:
1. Provide opinion on the rise or drop of the price of securities to induce customers to trade;
2. Agree to or provide specified interest or to share losses to induce customers to trade;
3. Provide account for customers to subscribe to and/or trade securities;
4. Commit false, fraudulent, or other misleading act in providing information of securities to customers;
5. Accept general authorization from customers in connection with the type, quantity, price, and purchase or sale of securities;
6. Accept settlement of customers who use the same account for offsetting purchase against sale or offsetting sale against purchase of the same type of securities;
7. Accept settlement of customers who use different accounts for offsetting purchase against sale or offsetting sale against purchase of the same type of securities;
8. Directly or indirectly set up fixed places outside the business premises of the head office or branch office to accept orders for securities trading;
9. Directly or indirectly set up fixed places outside the business premises of the head office or branch office to sign brokerage agreements with customers or settle securities transactions; however, this restriction shall not apply where the Commission has provided otherwise;
10. Accept securities transactions of a customer who has not signed a brokerage contract;
11. Accept the company's director, supervisor, or employee as an agent for others for the account opening, subscription, trade, or settlement of securities;
12. Accept from any person other than the customer himself/herself the customer's instructions for account opening; however, this is not applicable for those in accordance with other regulations set by the Commission;
13. Accept from any person other than the customer himself/herself or an agent without a power of attorney issued by the customer's instructions for subscription, trade, or settlement.;
14. Knowingly accept a trading order from a customer who intends to use an issuer's non-public information which may materially affect the price of its stocks or who intends to manipulate the prices of the market;
15. Use the name or account of a customer to subscribe to and/or trade securities;
16. Disclose, not in response to inquiries given in accordance with laws and regulations, the contents of orders placed by a customer or other secrets obtained in the course of operation of business;
17. Misappropriate the securities or funds owned by a customer or temporarily kept under the custody of the securities firm in the course of business;
18. Safekeep the securities, funds, seal, or passbook under its custody for its customers;
19. Directly or indirectly provide funds or securities to customers in connection with margin purchases or short sales to effect settlement without the Commission's approval;
20. Violate settlement obligation to the securities exchange market; or
21. Conduct other acts in violation of laws and regulations governing securities or orders of the Commission on mandatory or unpermitted acts.
Article 38A securities firm accepting orders to trade securities shall establish a separate demand deposit account with a bank for paying and receiving settlement funds of the customer. The funds in the said account shall not be used for other purposes.
Article 39A securities firm accepting orders to trade securities shall clear and settle transactions in the manner provided in the operating rules of the Stock Exchange or GreTai's business rules for trading securities on over-the-counter markets.
Article 40A securities firm accepting orders to trade securities shall not place the securities deposited by the customers under its custody. It shall deliver such securities to the centralized securities depository on the same day; provided that the securities firms which are located in areas other than Taipei City and Taipei County may deliver the securities for centralized custody on the following business day.
The provisions in the preceding Paragraph shall also apply to any of the following conditions:
1. Where a customer that indicates when placing a buy order that he/she will withdraw the securities for his/her own custody fails to do so on the day on which the securities firm is to deliver the securities;
2. Where a customer places a sell order but no transaction is consummated, and the securities have been previously delivered to the securities firm but not been claimed;
3. Where a customer engages the securities firm to deliver the securities to the centralized depository for custody; or
4. Where a customer engages the securities firm to withdraw securities deposited in the centralized depository but fails to take delivery as scheduled.
Article 41A securities firm accepting orders to trade securities shall collect or deliver the funds or securities within the time limit for settlement. When receiving or delivering stocks to a customer, it shall fill in the securities delivery statement, enter the stock certificate number, and have the customer sign the said statement.
If the securities delivery statement referred to in the preceding Paragraph is for securities to be traded on the centralized stock exchange, an additional copy shall be delivered to the Stock Exchange for recordation; if the said statement is for the securities to be traded on the over-the-counter market, an additional copy shall be delivered to the GreTai for recordation.
Article 42A securities firm accepting orders to trade securities shall prepare a trade report for signing/sealing by the customer after the customer executes a trade; provided that the trade report may be waived if the securities firm is concurrently operated by a financial institution, and the delivery of funds for trading the securities may be verified through the separate saving account of the customer.
If the trade report referred to in the preceding Paragraph is confirmed by an agent engaged by the customer to trade securitieson its behalf, a power of attorney issued by the customer shall be provided.
If the funds and securities of the customers of a securities firm accepting orders to trade securities are settled through book-entry transfer, or trade confirmation has been carried out and records have been kept, the signing/sealing referred to in Paragraph 1 above may be waived, and Paragraph 1 of Article 28 of the Rules Governing Book-entry Operations of securities in Centralized Custody regarding recordation on passbook shall not apply.
Article 43A securities firm trading securities on centralized stock exchange for its own account and customers' accounts shall establish separate accounts for placing orders and settlement. After placing orders, no inter-change between the accounts shall be allowed.
Article 44When a securities firm accepts orders to trade securities, it shall not use information obtained from a trading order to take the opposite side of the customer's order for trading in its own account; provided that this provision shall not apply if the securities firm engages in securities trading on the over-the-counter markets and based on the quotation it should sell the securities and concurrently places an order for purchase.
Article 45While operating its securities business, when a securities firm obtains information which may materially affect the price of the stocks listed on the stock exchange or traded on the over-the-counter market, it shall not trade on such stocks or provide the said information to its customers or other persons before the information becomes public.
   CHAPTER IV MERGER
Article 46Securities firms applying for merger shall meet the following conditions:
1. Exchange-listed or OTC-listed securities firms applying for merger shall comply respectively with Article 51 of the Operating Rules of the Taiwan Stock Exchange Corporation or Article 16 of the GreTai Securities Market Regulations Governing Securities Trading on Over-the-Counter Markets.
2. The regulatory capital adequacy ratio has reached 200% or more 6 months before the merger.
3. The pro forma consolidated regulatory capital adequacy ratio shall reach 200% one month before the application.
4. Have not been subject to a disposition under Subparagraphs 2 to 4 of Article 66 of the Act or under Subparagraphs 2 to 4 of Paragraph 1 of Article 100 of the Futures Trading Act or under Supbaragraphs 2 to 5 of Article 103 of the Securities Investment Trust and consulting Act within the last six months.
5. In the most recent year, the Stock Exchange and GreTai have found, according to their inspection of the condition of internal control operations of the applicant's head office and branches to be satisfactory and meeting the standards set by the Commission.
In the case that the securities firm applying for merger does not meet the criteria in the preceding paragraph, the Commission may approve the application as a special case based on the goals of facilitating the healthy expansion of the securities market and increasing the competitiveness of securities firms.
Article 47Securities firms applying for merger shall provide the following documents to the Commission:
1. The application.
2. Merger plan: shall specify the content of the merger plan (including particulars such as the merger method, evaluation of economic efficiency, post-merger business regions, business items, business development plan, and financial forecasts for the next three years) and analyze the forecasted timetable, feasibility, necessity, rationality, and legality and assessment of the factors for consideration under Article 6 of the Financial Institutions Merger Act.
3. Merger contract: in addition to the particulars required under Article 8, Paragraph 2 of the Financial Institutions Merger Act, shall also include material particulars such as treatment of employee equity.
4. Minutes of the general shareholders meetings of the institutions to survive and to be extinguished.
5. Content of the merger resolutions (board of directors meeting minutes) and documentation of publication (notification) of relevant required contract content.
6. Information on prospective shareholders seeking to purchase shares.
7. Certified public accountant's opinion on the reasonableness of the share conversion ratio for the merger and valuation method.
8. An itemized report on the pro forma consolidated regulatory capital adequacy ratio at the end of the month before the merger.
9. Balance sheets, profit and loss statements, inventories of assets, statements of changes in shareholder equity, and cash flow statements audited and certified by the certified public accountant for the record date of the merger share swap.
10. Legal opinion of an attorney at law.
11. Other documents required by the Commission.
For a securities firm to be newly created by a merger, in addition to complying with requirements of the preceding paragraph, the promoters of the securities firm to be newly created shall apply to the Commission for approval of establishment, annexing the following documents:
1. Roster of promoters.
2. Minutes of the promoters' meeting.
3. Certification of qualifications of presidents, vice presidents, and assistant vice presidents.
4. Articles of incorporation of the securities firm to be newly created.
5. Other documents required by the Commission to be submitted.
The formats of the documents required under the preceding two paragraphs shall be prescribed by the Commission.
Article 48Where the securities firm surviving after the merger is an exchange-listed or OTC-listed securities firm, the securities firm shall have the certified public accountant make a special auditing of its internal control system within six months after the merger, and after sending the report to the Stock Exchange or the GreTai, respectively, for inspection, shall file it with the Commission for recordation.
   CHAPTER V INVESTMENT IN FOREIGN AND MAINLAND CHINESE SECURITIES ENTERPRISES
Article 49Investment by securities firms in foreign enterprises shall be limited to investments set forth in the following subparagraphs:
1. Securities enterprises, including securities, futures, and financial business they are allowed to operate under the local laws and regulations of the country of the investment.
2. Other related enterprises in which the Commission has approved investment.
Article 49-1Securities firms investing in securities companies in the Mainland China area shall comply with the provisions of the Regulations Governing Approval of Securities and Futures Transactions Between the Taiwan Area and the Mainland China Area.
Securities firms that have received approval to invest in securities companies in the Mainland China area are prohibited from doing any of the following:
1. Accepting any order to trade in Mainland China area securities.
2. Recommending that any investor in the Taiwan area invest in any securities traded on any Mainland China securities market or in any securities issued by a Mainland China area company.
A Mainland China securities company in which a securities firm has invested may not provide services to Taiwan area individuals or enterprises.
Article 50Securities firms investing in foreign enterprises, unless regulated by other laws, regulations and orders shall meet the following provisions:
1. Have not received any disciplinary warning from the Commission in the most recent 3 months
2. Have not been ordered by the Commission to relieve or replace the duties of its director, supervisor, or manager in the most recent six months.
3. Have not had business suspended as punishment from the Commission within the last year.
4. Have not had the license of branch offices or of a portion of the business invalidated by the Commission as punishment within the last 2 years.
5. Have not had trading terminated or restricted by the Stock Exchange, the GreTai, or the Futures Exchange as punishment under each of their regulations or rules.
6. The regulatory capital adequacy ratio has not been below 200% within the most recent 3 months, and the financial structure is sound and in accordance with the rules of these Regulations.
7. Have complied with Article 7 of the Regulations for Approval and Consideration of Foreign Investment or Technical Cooperation promulgated by the Ministry of Economic Affairs.
8. The total amount invested in foreign enterprises plus the funds that a securities firm establishing an overseas branch office(s) appropriates there for local operations has not exceeded 20% of the securities' firm's net worth. However, when there is special need and approval as a special case has been received, this provision does not apply.
Article 51Securities firms applying for investment in a newly formed foreign enterprise shall provide the following documents to the Commission in their application:
1. The company's articles of incorporation/by laws or a document equivalent to the company's constitution/regulations.
2. The plan for investment, the contents of which shall include the following items:
(1) The plan for investment including: the purpose of investment, the estimated effect, the origin of capital, the implementation plan, the operation plan, the recapitalization plan, etc. If the type of investment is company, then its reinvestment plan shall be included as well.
(2) Guidelines for business operations including: the establishment location, amount of capital, the business to be operated, the scope/items of business, business operation strategies, etc. of the company.
(3) Structure and functions of the organization including: a chart of the organization of the company or a group organizational chart for a holding company, functions and allocation of duties of departments, etc.
(4) Personnel plan including: personnel allocation/structuring, personnel training, and regulations of personnel management, etc.
(5) Condition of the site and facilities including: site layout, the summary of important equipment/facilities, etc.
(6) Financial projection for the next 3 years including: opening costs, financial estimates and notes for financial statement for the next 3 years, etc.
3. The minutes of the board of directors' or board of governors' meeting or minutes of the shareholders' meeting resolution.
4. The most recent financial report, audited and certified or approved by the certified public accountant.
5. Management/administration rules shall be set up for those invested or re-invested foreign enterprises where the investment shareholding percentage is 50% or above. The contents of such management/administration rules shall include the following items:
(1) the scope of management
(2) the direction and principles of management
(3) the management of financial, business, and accounting affairs.
(4) the management of assets
(5) the financial statements to be regularly prepared
(6) the method of regular auditing of internal financial and business affairs
(7) others, such as: management of personnel operations, internal control auditing of the invested enterprises, etc.
6. A list detailing the domestic and foreign invested enterprises as of the date of application.
7. Other documents required by the Commission.
Article 52Securities firms applying for investment in foreign enterprises shall provide the following documents to the Commission with the application for an approval:
1. The company's articles of incorporation/bylaws or a document equivalent to the company's constitution/regulations.
2. The plan for investment including: the purpose of investment, the estimated effect, the origin of capital, the recapitalization plan, the estimated income/expenses/profits of the invested foreign enterprise of each year for the next 3 years, etc.
3. The minutes of the board of directors' or board of governors' meeting or minutes of the shareholders' meeting resolution.
4. The most recent financial report, audited and certified or approved by the certified public accountant.
5. Management/administration rules shall be set up for those invested or re-invested foreign enterprises where the investment shareholding percentage has exceeded 50%. The contents of such management/administration rules shall include the following items:
(1) the scope of management
(2) the direction and principles of management
(3) the management of financial, business, and accounting affairs.
(4) the management of assets
(5) the financial statements to be regularly prepared
(6) the method of regular auditing of internal financial and business affairs
(7) others, such as: management of personnel operations, internal control auditing of the invested enterprises, etc.
6. A list detailing the domestic and foreign invested enterprises as of the date of application.
7. General description of the invested foreign enterprise including: a synopsis of the company, the company organization, capital and shares, scope of business, and the condition of financial status for the most recent three fiscal years, etc.
8. The investment (or joint venture) agreement.
9. Other documents required by the Commission.
Article 53If there is any change in any of the investment-related items approved by the Commission, the securities firm shall, within 10 days after the change, report the change to the Commission for recordation.
Article 54Where the overseas subsidiary company invested by the securities firm re-invests in other institutions or where the institution invested by the overseas subsidiary company reinvests in other institutions, if such investment has constituted the substantial controlling and subordinating relationship as regulated under the Chapter governing related enterprises of the Company Act, a prior report shall be made to the Commission for approval.
For the investment of the preceding paragraph that has been approved by the Commission, within 10 days after the actual investment, the related documents shall be provided to the Commission for recordation.
Securities firms investing in overseas enterprises according to Paragraph 1 above, may submit the management rules for the foreign invested enterprises required under Subparagraph 5 of Article 51 and Subparagraph 5 of Article 52 along with the documents referred to in the preceding paragraph to the Commission for recordation within 10 days after the actual investment.
Article 55When securities firms directly or indirectly investing in foreign enterprises holding 50% or more of their shares, those foreign securities being thus invested may not further reinvest in securities-related enterprises in the ROC.
Article 56Securities firms investing in foreign enterprises are limited to the following types for putting up capital:
1. Outward remittance.
2. Net profit or other benefits obtained from outward investment.
3. Remuneration or other benefits obtained from outward technical cooperation.
Article 57(deleted)
Article 58After the securities firm has been approved and invested in foreign enterprises, within 5 days after receiving documents concerning outward remittance of capital, or the registration or any change in the registration of the invested foreign securities enterprises, these documents shall be reported to the Commission for recordation.
   CHAPTER V-1 ADMINISTRATION OF OVERSEAS BRANCH OFFICES
Article 58-1If the business that an overseas branch office of a securities firm would handle under the local securities acts and regulations and customary business practices of the place surpass the business items of the head office, an application for approval, accompanied by the following documents, shall be filed with the Commission in advance:
1. Business item particulars: including the products to be handled, types of transactions, and trading counterparts and markets.
2. Local acts and regulations that must be complied with when engaging in such business.
3. Minutes of the board of directors' (board of governors') meeting.
4. Internal control and risk management plans.
5. Legal opinion by a lawyer.
6. Other documents that the Commission requires to be submitted.
If there is any change in the Commission-approved business items of an overseas branch office of a securities firm, the change shall be reported to the Commission for recordation within 10 days from the day of the change.
The overseas branch offices of a securities firm shall abide by the local securities acts and regulations of the place where they are conducting business.
Article 58-2A securities firm shall implement internal audit procedures in its overseas branch offices in accordance with the securities firm's internal control system.
A securities firm shall dispatch personnel to conduct on-site audits of its overseas branch offices at least once per year. Audit reports shall be submitted to the Stock Exchange and forwarded by it to the Commission for recordation within one month from completion of the audit.
A securities firm whose overseas branch office receives an audit report from a local competent authority or auditing agency shall file the report or any deficiencies discovered in the audit with the Commission for recordation within 10 days from the day next following the receipt of the audit.
Where any material emergency or incident of malpractice, or disposition by a local competent authority, occurs with respect to an overseas branch office, a report shall be filed with the Commission within two days from the day next following the occurrence of the incident or receipt of the disposition notice from the local competent authority.
Article 58-3A securities firm establishing an overseas branch office, after obtaining approval from the Commission, shall apply to the Investment Commission, Ministry of Economic Affairs, for approval (or recordation) in accordance with Article 57. Reporting of any matters relating to outward remittance of capital, registration, or amendment registration shall be handled in accordance with Article 58.
   CHAPTER VII SUPPLEMENTAL PROVISIONS
Article 59A securities firm, unless concurrently operated by a financial institution and subject to other acts or regulations, shall maintain an appropriate ratio between its regulatory capital and its operational risk equivalent, except as approved by the Commission.
The appropriate ratio referred to in the preceding paragraph is called the regulatory capital adequacy ratio and its calculation method is the net amount of the eligible regulatory capital divided by the operational risk equivalent.
For those foreign securities firms having Taiwan branches, if their home-country head office have already calculated their regulatory capital adequacy ratio under their local laws with the operation risk of their Taiwan branch office already entered into the calculation, and have met the standard, they may send those documents and information relating to the said regulatory capital adequacy ratio which have met the standard to the Commission to apply for a waiver of application of the provisions in this Chapter. However, unless specifically approved by the Commission, a monthly report on the head offices' regulatory capital adequacy ratio shall still be reported according to Paragraph 3 of Article 21.
Article 60The net amount of eligible regulatory capital referred to in Paragraph 2 of the preceding Article is the balance of the sum total of the Tier 1 capital and Tier 2 capital items as set out below minus the following items on the balance sheet: financial assets reported at fair value with changes in fair value included in "profit or loss - noncurrent, available-for-sale financial assets - current and noncurrent, held-to-maturity financial assets - current and noncurrent, bond portfolios that include no active market bonds - current and noncurrent, prepayments, special funds, long-term equity investments under equity method, long-term equity investments held for disposal, fixed assets, intangible assets, operating bonds, clearing and settlement funds, refundable deposits, deferred debits, assets leased to others, idle assets, deferred income tax assets - noncurrent, restricted assets - noncurrent:
1. Tier 1 capital: the total of capital stock (common stock, perpetual non-cumulative preferred stock), capital reserve, retained earnings or accumulated losses, unrealized losses on financial products, accumulated translation adjustment, treasury stock, net loss not recognized as pension cost, and the profit/loss of the current year up to the current month.
2. Tier 2 capital: the total of capital stock (perpetual cumulative preferred stock), reserve for trading losses, reserve for losses from breach of contract, unrealized gains on financial products.
Deduction amounts for deductible assets under the preceding paragraph shall be prescribed by the Commission.
Where the amount of Tier 2 capital exceeds that of Tier 1 capital, calculation shall be based on the amount of Tier I capital.
Article 61The operational risk equivalent referred to in Paragraph 2 of Article 59 is the operational risk equivalent for each category as calculated by securities firms according to the following calculation methods:
1. Market risk: refers to risks of those positions both in and outside of the balance sheet arising from pricing changes; which means the equivalent price fluctuation risk amount derived from multiplying the fair value of the above described positions by a certain risk coefficient.
2. Counterparty risk: refers to risks arising from counterparties to transactions; this is calculated by referring to those transactions within the business scope of the securities firm for which there is a possibility that counterparties will not perform their obligations, and based upon each different type of counterparty and transaction method. After calculating those factors separately, the total added sum is the risk equivalent.
3. Basic / fundamental risk: refers to risks arising from carrying out business operations; this is calculated by using the fiscal year to which the date of calculation belongs as the referenced point and according to 25% of the operation cost for the fiscal year preceding the reference points, in order to calculate the equivalent risk amount.
Article 62The risk coefficients of those positions within or outside of the balance sheet and the relevant risk coefficients of the transaction counter party and their calculation methods referred to in the preceding Article shall be handled according to the risk coefficient table used by securities firms for calculating their regulatory capital adequacy ratio.
The particulars and method of calculation of the risk coefficient table used by securities firms to calculate their regulatory capital adequacy under the preceding paragraph shall be prescribed by the Commission.
Article 63Securities firms, other than those concurrently operating financial institutions and foreign securities firms who have Commission approval for waiver of this Chapter's regulations, shall fill out the Itemized Statement of the Regulatory Capital Adequacy of the Securities Firm monthly and by the 10th of the next month, report it according to the method prescribed in Paragraph 3 of Article 21. When necessary, the Commission shall require securities firms to file reports at any time.
The format of the Itemized Statement of the Regulatory Capital Adequacy of the Securities Firm referred to in the preceding paragraph shall be prescribed by the Commission.
Securities firms shall disclose the most recent regulatory capital adequacy ratio information in the annual report.
Article 64When the regulatory capital adequacy ratio of a securities firm is at least 120% but is less than 150%, the Commission may take the following actions:
1. Postpone any additions by the securities firm to its types of operations or lines of business and any establishment of additional branch offices.
2. Require the securities firm to strengthen the internal control and increase the frequency of internal auditing, and within one week of filing the report, send a concrete, detailed explanation and plan of improvement to the relevant authorities according to Paragraph 3 of Article 21.
3. If there has been no improvement made on the capital adequacy ratio at the end of the month that preceded the board of directors making proposal for distribution of profits, in addition that it shall be required to deduct from its undistributed profits those items to be set aside according to regulations, it shall further set aside 20% for special reserve according to Paragraph 1 of Article 41 of the Act.
Article 65When the regulatory capital adequacy ratio of a securities firm is at least 100% but is less than 120%, the Commission, in addition to handling the matter according to Subparagraphs 1 and 2 of the preceding Article, may also handle the matter in the following ways:
1. Reduce its scope of business operations.
2. Require the securities firm to fill out and report weekly a securities firm capital adequacy reporting form.
3. If there has been no improvement made on the capital adequacy ratio at the end of the month that preceded the board of directors making proposal for distribution of profits, in addition that it shall be required to deduct from its undistributed profits those items to be set aside according to regulations, it shall further set aside 40% for special reserve according to Paragraph 1 of Article 41 of the Act.
Article 66When the regulatory capital adequacy ratio of a securities firm falls below 100%, the Commission, in addition to handling the matter according to Subparagraphs 1 and 2 of Article 64 and Subparagraphs 1 and 2 of the preceding Article, may also handle the matter in the following ways:
1. Disapprove any of its applications for increasing the number of branch offices.
2. If there has been no improvement made on the capital adequacy ratio at the end of the month that preceded the board of directors making proposal for distribution of profits, in addition that it shall be required to deduct from its undistributed profits those items to be set aside according to regulations, it shall further set aside the total amount as special reserve according to Paragraph 1 of Article 41 of the Act.
Article 67Securities firms that have already provided special reserve various special according to Articles 64 to 66 for the previous year, when providing various special reserves as required for this year pursuant to relevant regulations, shall include it as part of the undistributed profits, and then recalculate the required special reserve to be set aside according to the actual condition of the regulatory capital adequacy ratio.
   CHAPTER VII SUPPLEMENTAL PROVISIONS
Article 68A securities firm operating securities business in violation of these Regulations shall be subject to the punishment under the Act.
Article 69These Regulations shall become effective as of the date of promulgation.