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Title:

Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets  CH

Amended Date: 2021.09.30 (Articles 36-2 amended,English version coming soon)
Current English version amended on 2019.03.15 

Title: Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets(2007.12.18)
Date:
   Chapter I General Principles
Article 1These Regulations are adopted pursuant to Article 14-1, paragraph 2 of the Securities and Exchange Act and Article 97-1, paragraph 2 of the Futures Trading Act.
Article 2A service enterprise establishing an internal control system shall do so in accordance with these Regulations and the internal control system requirements adopted hereunder; provided that where another act provides otherwise, the provisions of such act shall prevail.
Article 3The term "service enterprise" as used in these Regulations includes securities exchanges, over-the-counter securities markets, futures exchanges, central securities depositories, securities firms, futures enterprises, securities finance enterprises, credit rating agencies, and any other service enterprises in the securities or futures market designated by the competent authority.
Article 4The internal control system of a service enterprise is a management process designed by management, passed by the board of directors, and implemented by the board of directors, management, and other personnel, with the aim of promoting sound corporate operations and providing reasonable assurance regarding the achievement of the following objectives:
1. Effectiveness and efficiency of operations.
2. Reliability of financial reporting.
3. Compliance with applicable laws and regulations.
The objective of effectiveness and efficiency of operations referred to in subparagraph 1 of the preceding paragraph includes objectives such as profits, operating performance, and safeguarding of assets.
The objective of reliability of financial reporting referred to in subparagraph 2 of paragraph 1 includes objectives such as the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and transactions being made with proper approval.
Article 5A service enterprise shall document its internal control system, including internal audit implementation rules, and have them passed by the board of directors. If any director expresses a dissenting opinion, where stated in minutes or in a written statement, the service enterprise shall submit the dissenting opinion to each and all supervisors, together with the internal control system that has been passed by the board of directors. The same shall apply to any amendment thereto.
Where a service enterprise has established the position of independent director, when it submits its internal control system for discussion by the board of directors pursuant to the preceding paragraph, the board of directors shall take into full consideration each independent director's opinion; where an independent director has an objection or reservation, the objection or reservation shall be recorded in the minutes of the meeting of the board of directors.
Where a service enterprise has established an audit committee in accordance with the Securities and Exchange Act, any adoption of or amendment to its internal control system shall be subject to the consent of one-half or more of the entire membership of the audit committee and be submitted to the board of directors for a resolution.
Any matter under the preceding paragraph that has not been approved with the consent of one-half or more of the entire membership of the audit committee may be adopted with the consent of two-thirds or more of the entire board of directors, and the resolution of the audit committee shall be recorded in the board of directors meeting minutes.
The term "entire membership of the audit committee" as used in paragraph 3, and the term "entire board of directors" as used in the preceding paragraph, shall be calculated as the number of members actually in office.
   Chapter II Design and Implementation of Internal Control System
Article 6A service enterprise shall set out an explicit internal organizational framework in its internal control system and include therein, with respect to members of management, the establishment of positions, position titles, appointment and dismissal, as well as scope of duties and powers.
A service enterprise shall consider the overall operational activities of the enterprise and all subsidiaries in designing and scrupulously implementing an internal control system, and review the system from time to time to adapt to changes in its internal and external environment and to ensure sustained design and operating effectiveness of the system.
The term "subsidiaries" referred to in the preceding paragraph are those as determined in accordance with Statements of Financial Accounting Standards Nos. 5 and 7 issued by the Accounting Research and Development Foundation of the Republic of China.
Article 7A service enterprise's internal control system shall consist of the following components:
1. Control environment. The control environment is a composite factor that shapes organizational culture and affects employees' awareness of control. Factors affecting the control environment include the integrity, ethical values, and competence of employees; the management philosophy and operating style of the board of directors and management; how employees are recruited, developed, and organized, and how authority and responsibilities are assigned; and the attention and direction of the board of directors and supervisors. The control environment provides the foundation for the other components.
2. Risk assessment. Risk assessment is a process by which the service enterprise identifies internal and external factors that keep it from achieving its objectives and evaluates their impact and probability. The assessment results can assist the enterprise in designing, correcting, and implementing necessary control in a timely manner.
3. Control activities. Control activities are the policies and procedures that establish a complete and sound control framework and adopt control procedures at all levels to help the board of directors and management ensure that their directives are carried out. Control activities include policies and procedures for approvals, authorizations, verifications, reconciliations, reviews, periodic counting, check of records, segregation of duties, safeguarding of physical security of assets, comparison with plans, budgets, or operating performance in prior periods, and supervision and management over subsidiaries.
4. Information and communication. Information is the subject matter identified, measured, processed, and reported by information systems. It includes information, financial or non-financial, pertaining to the objectives in the areas of operations, financial reporting, and compliance with applicable laws and regulations. Communication is the provision of information to relevant personnel, either within or outside the company. The Internal control system must have mechanisms to generate information necessary for planning and monitoring and to provide information to those who need it in a timely manner.
5. Monitoring. Monitoring is a process to self-inspect the quality of internal control. It includes assessing the soundness of the control environment; whether risk assessment is timely and accurate; whether control activities are appropriate and accurate; and whether information and communication systems are functioning properly. Monitoring is accomplished either through ongoing monitoring activities or through separate evaluations. The former is routine monitoring in the course of operations, while the latter is the evaluation conducted by different personnel such as internal auditors, supervisors, or the board of directors.
A service enterprise designing and implementing, or carrying out self-inspection of, its internal control system, or a certified public accountant (CPA) engaged to conduct a special audit of the enterprise's internal control system, shall fully consider the components enumerated in the preceding paragraph, and, in addition to the criteria prescribed by the competent authority, may add additional items as dictated by actual needs.
Article 8In addition to setting out control activities for different transaction cycles based on the nature of its business, a service enterprise shall also consider its actual needs and include controls over the following activities in its internal control system:
1. Seal use management.
2. Management of the receipt and use of negotiable instruments.
3. Budget management.
4. Property management.
5. Management of endorsements/guarantees.
6. Management of liability commitments and contingencies.
7. Delegation of duties and implementation of deputy system.
8. Management of financial and non-financial information.
9. Management of related party transactions.
10. Management of preparation process of financial statements.
11. Supervision and management over subsidiaries.
12. Compliance system.
In addition to controls over the activities under the preceding paragraph, a service enterprise that is a public company shall also include in its internal control system the management of procedure for board of directors meetings.
Article 9A service enterprise that uses a computerized information processing system shall, in addition to clearly differentiating the functions and duties of information and user departments, at least include the following control procedures:
1. Clear demarcation of the functions and duties of the information-processing department.
2. Control of system development and program modification.
3. Control of preparation of system documentation.
4. Program and data access control.
5. Data input/output control.
6. Data processing control.
7. File and facility security control.
8. Control of purchase, usage, and maintenance of hardware and system software.
9. Control of system recovery plan and testing procedures.
10. Control of information and communications security inspection.
11. Control of relevant procedures, if required, for disclosing and reporting public information on a website designated by the competent authority.
   Chapter III Inspection of Internal Control System
      Section I Internal Audits
Article 10A service enterprise shall carry out internal audits to assist the board of directors and management in inspecting and reviewing deficiencies in the internal control system as well as measuring effectiveness and efficiency of operations, and shall make timely recommendations for improvements to ensure the sustained operating effectiveness of the system and to provide a basis for review and correction.
Article 11A service enterprise shall establish an internal audit unit in a direct reporting line to the board of directors and, except as otherwise provided by the competent authority, shall appoint qualified persons in an appropriate number as full-time internal auditors according to its business size, business condition, management needs, and the provisions of other applicable laws and regulations.
A service enterprise shall report any appointment or dismissal of the chief internal auditor for passage by the board of directors; where it has established the position of independent director, if an independent director has an objection or reservation, the objection or reservation shall be recorded in the minutes of the meeting of the board of directors.
Where a service enterprise has established an audit committee in accordance with the Securities and Exchange Act, any appointment or dismissal of the chief internal auditor shall be subject to the consent of one-half or more of the entire membership of the audit committee and be submitted to the board of directors for a resolution, in which case the provisions of paragraphs 4 and 5 of Article 5 shall apply mutatis mutandis.
Except as otherwise required by provisions governing securities or futures enterprises, a service enterprise shall report any appointment or dismissal of the chief internal auditor, specifying the reason for such a change of position and providing a copy of the minutes of the board of directors meeting, to the competent authority for recordation within five days from the date of passage by the board of directors.
The requirements for the qualified full-time internal auditors referred to in paragraph 1 shall be as prescribed separately by the competent authority.
Article 12A service enterprise shall include at least the following items in its implementation rules for internal audits:
1. Inspection of the system of internal controls to measure the effectiveness of, and compliance with, the established policies and procedures, and their effects on operational activities.
2. A detailed listing of audit items, times, procedures, and methods.
Article 13A service enterprise's internal audit unit shall, based on the results of the risk assessment, prepare an annual audit plan which, except as otherwise required by the competent authority, shall include matters to be audited monthly; the internal audit unit shall scrupulously implement the annual audit plan, so as to inspect its internal control system, and prepare audit reports annexed with working papers and relevant materials.
A service enterprise shall include as audit items in its annual audit plan for each year the control activities for major financial or business activities, such as for acquiring or disposing of assets, engaging in derivatives transactions, management over making endorsements/guarantees for others, and management over related party transactions, as well as supervision and management over subsidiaries and inspection of information and communications security.
In addition to the audit items under the preceding paragraph, a service enterprise that is a public company shall also include in its annual audit plan for each year the management of procedure for board of directors meetings.
A service enterprise shall have its annual audit plan, and any amendments thereto, passed by the board of directors.
Where a service enterprise has established the position of independent director, when it submits its annual audit plan for deliberation by the board of directors pursuant to the preceding paragraph, the board of directors shall take into full consideration each independent director's opinion; when an independent director has an objection or reservation, the objection or reservation shall be recorded in the minutes of the meeting of the board of directors.
The audit reports, working papers, and relevant materials under paragraph 1 shall be retained for no less than five years.
Article 14The internal auditors of a service enterprise shall factually disclose in audit reports any deficiencies and irregularities of the internal control system identified in inspection and, after having presented the reports, shall follow up on the matters and prepare follow-up reports on a regular basis to ensure that the relevant departments have taken appropriate corrective actions in a timely manner.
The service enterprise shall include any identified deficiencies and irregularities of the internal control system and the correction thereof, as referred to in the preceding paragraph, as major items of performance evaluation for each department.
The correction of deficiencies and irregularities of internal control system referred to in paragraph 1 shall include all deficiencies identified by the competent authority or a self-regulatory organization in the course of examination, those identified in the course of internal audit operations, those listed in the Statement on Internal Control, and those identified in the course of self-inspection or by CPAs in special audits.
Article 15After having presented the audit and follow-up reports, a service enterprise shall submit the same for review by each and all supervisors by the end of the month next following the completion of the audit items.
A service enterprise's internal auditors identifying any material violation or any likelihood of material loss to the enterprise shall promptly prepare and present a report and notify each and all supervisors.
Where a service enterprise has established the position of independent director, when an action is taken under the two preceding paragraphs, a copy of the submission or notice shall be provided simultaneously to the independent director(s).
Article 16The internal auditors of a service enterprise shall be detached, independent, objective, and impartial, in scrupulously performing their duties, and report their audit operations to each and all supervisors; in addition, the chief internal auditor shall attend a board of directors meeting to present a report.
The internal auditors shall perform their duties in good faith and shall not do any of the following:
1. Conceal or make false or inappropriate disclosures of any of the enterprise's business activities, financial reporting, or compliance with applicable laws and regulations that they know has caused direct damage to an interested party.
2. Cause damage to the right or interest of the enterprise or any interested party through improper intent or neglect of duty.
3. Fail to audit the matters instructed by competent authorities or provide relevant information.
4. Any other activity in violation of any law or regulation or otherwise prohibited by the competent authority.
Article 17The internal auditors of a service enterprise shall pursue continuing training as well as attend internal audit training held by institutions designated by the competent authority, so as to improve their auditing quality and competence.
The internal audit training referred to in the preceding paragraph shall include various professional courses, computerized auditing, and basic legal knowledge.
The number of hours required for the continuing training under paragraph 1 shall be as prescribed separately by the competent authority.
Article 18Except as otherwise required by provisions governing securities firms or futures enterprises, a service enterprise shall report to the competent authority for recordation the names, ages, educational background, work experience, years of service, and professional training of its internal auditors by the end of January each year in the format and manner required by the competent authority.
Article 19Securities firms and futures enterprises shall submit for recordation their annual audit plan, an account of the execution thereof, and a description of the correction of any irregularities identified, respectively to the securities exchange, over-the-counter securities market, central securities depository, futures exchange, securities dealers association, or futures industry association in the format and manner and at the time required respectively by each such institution.
Securities finance enterprises, credit rating agencies, and other service enterprises in the securities or futures market designated by the competent authority shall submit their next year's annual audit plan by the end of each fiscal year, and a report on the implementation of their previous year's annual audit plan within two months from the end of each fiscal year, to the competent authority for recordation in the format and manner required by the competent authority. They shall also submit to the competent authority for recordation their corrections of any irregularities identified in the previous year's internal auditing within five months from the end of each fiscal year.
Securities exchanges, over-the-counter securities markets, central securities depositories, and futures exchanges shall submit to the competent authority for recordation their next year's annual audit plan by the end of each fiscal year, and a report on the implementation of internal audits, any irregularities discovered, and the corrections made, during the previous quarter within two months from the end of each quarter.
 
      Section II Self-inspection and Statement on Internal Control
Article 20The purposes of self-inspection by a service enterprise of its internal control system is to implement a self-monitoring mechanism and adapt to changes in the environment in a timely manner, so as to adjust the design of the internal control system and enhance the internal audit department's inspection quality and efficiency. The inspection scope shall include the design and operation of all aspects of the enterprise's internal control system.
Before carrying out the inspection referred to in the preceding paragraph, a service enterprise shall set out in its internal control system the procedures and methods for self-inspection operations.
A service enterprise shall, based on the results of the risk assessment, determine the procedures and methods for self-inspection operations referred to in the preceding paragraph, which shall at least include the following:
1. Determining which controls should be tested.
2. Determining the business units to include in the self-inspection.
3. Evaluating the design effectiveness of controls.
4. Evaluating the operating effectiveness of controls.
Article 21When conducting self-inspections of its internal control system, a service enterprise shall, except as otherwise required by the competent authority, first arrange for self-inspections by all internal departments and subsidiaries on an at least annual basis, have its internal audit unit review each unit's self-inspection report, and submit the self-inspection reports, together with the reports on the correction of deficiencies and irregularities of the internal control system identified by the audit unit, as a primary basis for the board of directors and general manager to evaluate the overall effectiveness of the enterprise's internal control system and to produce a Statement on Internal Control.
The self-inspections under the preceding paragraph shall be recorded in working papers that shall be retained, together with the self-inspection reports and relevant materials, for no less than five years.
Article 22A service enterprise's findings in its self-inspection of the internal control system shall classify the system as either "effective internal control system" or "materially deficient internal control system" based on whether or not the system provides reasonable assurance regarding the following:
1. That the board of directors and the general manager know the degree to which the objective of effectiveness and efficiency of operations has been achieved.
2. That financial reporting is reliable.
3. That applicable laws and regulations have been complied with.
Article 23A service enterprise shall conduct annual self-inspection of the design and operating effectiveness of its internal control system, and prepare a Statement on Internal Control in the format required by the competent authority, and submit it the competent authority for recordation within four months from the end of each fiscal year.
Where a service enterprise has established an audit committee in accordance with the Securities and Exchange Act, the design and operating effectiveness of the internal control system as referred to in the preceding paragraph shall be subject to the consent of one-half or more of the entire membership of the audit committee, in which case the provisions of paragraphs 4 and 5 of Article 5 shall apply mutatis mutandis.
The Statement on Internal Control, and any amendment thereto, as referred to in paragraph 1 shall first be passed by the board of directors.
A service enterprise that is also a public company shall publicly announce and report the Statement on Internal Control referred to in paragraph 1 through a website designated by the competent authority, and need not further submit the written materials to the competent authority for recordation.
The Statement on Internal Control referred to in paragraph 1 shall, as required, be included in the enterprise's annual report and prospectus.
      Section III Special Audits
Article 24To strengthen the control of computer information systems, securities exchanges, over-the-counter securities markets, futures exchanges, and central securities depositories shall, on a regular basis, engage professionals with public credibility and audit capability to conduct special audits regarding the use of computer information systems in the handling of various operations, and submit the results of the audit to the competent authority for recordation.
Article 25Articles 25 through 36 of the Regulations Governing the Establishment of Internal Control Systems by Public Companies shall apply mutatis mutandis where a CPA is engaged by a service enterprise to conduct a special audit of its internal control system.
      Section IV Compliance System
Article 26The competent authority may, after having considered the size, business nature, and organizational characteristics of a securities firm, futures enterprise, securities finance enterprise, credit rating agency, or any other service enterprise in the securities or futures market designated by the competent authority, order such an enterprise to establish a unit in a direct reporting line to the board of directors or to the general manager, to be charged with the planning, management and execution of a compliance system.
The board of directors shall designate a member of senior management as the chief compliance officer, to be responsible for overseeing compliance matters and submit a report to the board of directors and to each and all supervisors at least semi-annually.
Except as otherwise required by provisions governing securities or futures enterprises, the information on the compliance officer described in the preceding paragraph shall be filed with the competent authority for recordation, specifying the reason for such a designation and annexed with the minutes of the board of directors meeting, within five days from the date of passage by the board of directors.
Article 27A unit responsible for legal and regulatory compliance shall carry out the following activities:
1. Establish clear and adequate systems of advocacy of laws and regulations, consultation, coordination, and communication.
2. Ensure that procedural and managerial bylaws are updated in a timely manner in response to applicable laws and regulations, so that operations are in compliance with all laws and regulations.
3. Formulate the content of and procedures for assessing compliance with laws and regulations and monitor the periodic self-assessment of the implementation thereof by each unit.
4. Administer adequate and proper legal training on laws and regulations to personnel of each unit.
5. Monitor the compliance by overseas branch units with the laws and regulations of the host country in which they are located.
6. Carry out such other activities as may be required by the competent authority.
Self-assessment of compliance with laws and regulations shall be performed no less frequently than annually, with the results delivered to the compliance unit for future reference. The head of a unit shall designate a person responsible for performing self-assessment within that unit.
Working papers and materials in connection with the self-assessment under the preceding paragraph shall be retained for no less than five years.
Article 28An internal audit unit shall incorporate the implementation status of the compliance system into its audit of the business and management units.
   Chapter IV Supplementary Provisions
Article 29Articles 38 through 41 of the Regulations Governing the Establishment of Internal Control Systems by Public Companies shall apply mutatis mutandis to a service enterprise' supervision and management over its subsidiaries.
Where a service enterprise's subsidiary is also a service enterprise as defined under Article 3 of these Regulations, its supervision and management over such subsidiary is exempted from the provision of the preceding paragraph.
Article 30A service enterprise shall specify in its internal control system the penalties for violation of these Regulations or its internal control system rules by members of management and relevant personnel.
A service enterprise shall from time to time check, with respect to its internal auditors, whether there is any violation of Article 11, paragraph 1 in relation to the "qualified" and "full-time" requirements or Article 16, paragraph 2, and upon discovery of any violation, shall adjust the position of the auditor within one month from the date of discovery, unless otherwise provided by law or regulation.
When reporting basic information on internal auditors pursuant to Article 18, a service enterprise shall check whether or not the internal auditors have met the requirements under Article 17, paragraph 1. If any auditor has not, the auditor shall take corrective measures within one month; otherwise, the service enterprise shall promptly adjust the auditor's position, unless otherwise provided by law or regulation.
Article 31Under any of the following circumstances, the competent authority may order a service enterprise to make improvements within a prescribed time limit, or where necessary, to engage a CPA to conduct a special audit of its internal control system and obtain an audit report and submit it to the competent authority for recordation:
1. Failure to document its internal control system.
2. Failure to appoint qualified personnel as full-time internal auditors or to appoint them in an appropriate number.
3. Failure to file a report within a prescribed time limit on, or fail to scrupulously execute, its annual audit plan.
4. Failure to file a report within a prescribed time limit on the actual execution of its annual audit plan.
5. Failure to file a report within the prescribed time limit on the correction of any deficiency or irregularity of the internal control system identified in an audit.
6. Failure to duly conduct self-inspection of its internal control system or to prepare a Statement on Internal Control.
7. Serious instance of failure to correct a deficiency of the internal control system pursuant to the internal control recommendations issued by a CPA.
8. Serious instance of false financial reporting or violating a law or regulation.
9. Any material fraud or suspicion of fraud.
10. Other condition where the competent authority deems a special audit to be necessary.
Article 32Where a service enterprise has established an audit committee in accordance with the Securities and Exchange Act, the provisions of Article 5, paragraph 1, Article 7, paragraph 1, subparagraphs 1 and 5, Article 15, paragraphs 1 and 2, Article 16, paragraph 1, and Article 26, paragraph 2 of these Regulations in relation to supervisors shall apply mutatis mutandis to the audit committee.
Article 33The competent authority shall separately prescribe the formats described in these Regulations.
Article 34In the case of a service enterprise being a foreign enterprise's branch unit within the territory of the Republic of China, the functions required by these Regulations to be performed by the board of directors or the supervisors may be performed by the responsible person of that branch unit within the territory of the Republic of China authorized by the board of directors of the foreign enterprise.
Article 35These Regulations shall be implemented from the date of issuance.