Securities Act of 1933 - Rule 902 (b)

December 14, 2004

Response of the Office of International Corporate Finance
Division of Corporation Finance

Mr. Show-Mao Chen
Davis Polk & Wardwell
The Hong Kong Club Building
3A Chater Road
Hong Kong

Dear Mr. Chen:

This letter will confirm the response of the Division of Corporation Finance to your request that the Division designate the Taiwan Stock Exchange Corporation as a "designated offshore securities markets" within the meaning of Rule 902(b) of Regulation S under the Securities Act of 1933. A copy of your letter is enclosed in order to avoid having to recite or summarize the facts set forth therein. On the basis of the facts presented, we hereby so designate the Taiwan Stock Exchange Corporation.

Incoming Letter:

December 8, 2004

Office of International Corporation Finance
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street N.W.
Washington, DC 25049

Ladies and Gentlemen:

We are writing to you on behalf of the Taiwan Stock Exchange Corporation (the "TSEC") to request that the Commission designate the TSEC, the principal securities market in Taiwan, the Republic of China (the "ROC"), as a "designated offshore securities market" within the meaning of Rule 902(b) of Regulation S ("Regulation S") under the Securities Act of 1933, as amended (the "Securities Act"). This designation is being sought in order to permit the resale of securities listed on the TSEC in transactions effected in, on or through the facilities of the TSEC in reliance on the safe harbor from the registration requirements of the Securities Act provided by Rule 904 of Regulation S. All information presented below are provided by the TSEC.

I. Background

Securities Markets in Taiwan

Since its founding in 1961, the TSEC has developed into an established securities market. The number of companies listed on the TSEC grew from 119 in 1983 to 672 as of June 30, 2004. The total market capitalization of companies listed on the TSEC was approximately New Taiwan dollar ("NT$") 12.6 trillion (translated into US$374.2 billion using the rate of NT$33.78 to US$1.00; all other convenience translations of New Taiwan dollar amounts in this letter have been made using the same rate) as of June 30, 2004.

Set forth below is certain information relating to the TSEC for or as of the end of the five most recent years.

The Securities and Futures Bureau (together with its predecessor, the "SFB") of the ROC Financial Supervisory Commission (the "FSC"), until recently the Securities and Futures Commission, a governmental agency established under the Ministry of Finance of the ROC government,¹ is responsible for implementing the ROC Securities and Exchange Law and governmental policies regarding Taiwan's securities markets. All securities offerings to the public are generally required to be approved by or registered with the SFB. The SFB has extensive regulatory authority over public companies: it requires, and establishes standards for, the periodic reporting of financial and operating information by all public companies. Additionally, the SFB has broad regulatory authority over firms conducting securities businesses in Taiwan. Securities firms must be licensed by the SFB and are subject to its continuing supervision.

Until 1961, securities transactions in Taiwan were regulated by the ROC Stock Exchange Law, which was promulgated in 1929. To address the growth of securities transactions in Taiwan, the ROC government promulgated the Rules Regulating Securities Traders in 1961 as a transitional measure and subsequently replaced it with the ROC Securities and Exchange Law in 1968. The ROC Securities and Exchange Law, as amended from time to time, currently governs securities transactions in Taiwan.

In 1961, the TSEC, an ROC company limited by shares, was established pursuant to the ROC Securities and Exchange Law and the ROC Company Law for the purpose of promoting investment by enterprises, enhancing economic development, and assisting industrial and commercial enterprises in raising capital in Taiwan. Under the ROC Securities and Exchange Law, the SFB is responsible for overseeing the operations of the TSEC.

The TSEC commenced operations in 1962 and grew slowly through the 1960s. In the 1970s and the early 1980s, the ROC government implemented a number of measures designed to enhance the quality and importance of the ROC securities markets, such as revising the ROC Securities and Exchange Law in order to encourage companies in Taiwan to seek listings on the TSEC. In the mid-1980s and the 1990s, the ROC government instituted additional reforms to improve the operation and governance of the ROC securities markets to international standards. Securities listed on the TSEC have historically been limited to common shares and bonds issued by Taiwan companies. Legislative reforms and the continuing policy of the SFB favoring the liberalization of the securities markets have, however, encouraged innovations. Since the late 1980s, the TSEC has also listed exchangeable bonds, convertible bonds, convertible preferred shares, warrants, mutual funds (including closed end funds and exchange traded funds), bonds issued by international financial institutions and Taiwan depositary receipts, or TDRs, which represent interests in shares of foreign companies. The TSEC derives its operating revenues primarily from handling fees collected on securities trades, market data fees and listing fees, which accounted for 74%, 12% and 7%, respectively, of the total operating revenues of the TSEC for 2003.

The TSEC is the only statutory stock exchange in Taiwan that executes all of its trading transactions on a centralized computer matching system. All trading orders are placed through TSEC-licensed securities firms that have exclusive electronic access to this system. In addition to the TSEC, there are two other organized securities and futures markets in Taiwan, namely the ROC Gre-Tai Securities Market (the "GTSM") and the Taiwan Futures Exchange (the "TAIFEX"). GTSM-listed securities are traded over the counter through direct negotiations among broker-dealers or, under certain circumstances, through a centralized computer matching system operated by the GTSM. The standards for listing on the GTSM are generally more permissive than on the TSEC. The TAIFEX was established following the promulgation of the Futures Trading Law in 1997 for the trading of a range of index-based futures and options, stock options and interest rate-based products. As with government supervision of the TSEC, the SFB is responsible for overseeing the operations of the GTSM and the TAIFEX. The regulatory regimes that govern the operations of the TSEC, the GTSM and the TAIFEX are substantially similar.

Listing and Reporting Requirements

Both domestic and foreign companies are permitted to list their securities on the TSEC. The SFB has promulgated regulations that would permit foreign issuers to list their equity securities on the TSEC, in the form of shares or TDRs. To date, five foreign issuers have listed their securities on the TSEC, all in the form of TDRs.

The TSEC has established specific requirements for listing based on criteria such as the following:

• Corporate existence. The company has been established for at least five fiscal years.
   
• Paid-in capital. The company has paid-in capital of at least NT$600 million.
   
• Shareholders. The company has no fewer than 1,000 registered shareholders, at least 500 of which hold between 1,000 and 50,000 shares each. These 500 or more shareholders must together hold no less than the lesser of (i) 20% of the outstanding shares of the company and (ii) 10 million shares of the company.
   
• Profitability. The company did not have an accumulated deficit as of the end of its most recent fiscal year, and each of its operating income and before-tax net income, as a percentage of its paid-in capital, (a) (i) exceeded 6% for each of the company's two most recent fiscal years, or (ii) on average exceeded 6% for its two most recent fiscal years and the company's income for the most recent fiscal year exceeded that for the immediately preceding fiscal year, or (b) exceeded 3% for each of the company's five most recent fiscal years.
   

In addition, the TSEC applies special listing criteria to technology-based companies, which make allowances for shorter corporate history and lower paid-in capital and profitability, and take into consideration the net worth of the company and new products or technology developed by the company. Set forth below are special listing criteria for technology-based companies:

• Paid-in Capital. The company has paid-in capital of at least NT$300 million.
   
• New Products/Technology. The company has successfully developed a product or a technology with market potential, and the company has obtained an appraisal opinion from the central government agency in charge of the industry concerned.
   
• Net Worth. The company's net worth is not less than two-thirds of its paid-in capital for the fiscal year of the listing application and the immediate preceding fiscal year according to the company's (projected) financial report for such year.
   

The TSEC also applies special listing criteria to "important enterprises involved in national economic reconstruction projects." Set forth below are special listing criteria for such enterprises:

• Paid-in Capital. The company has paid-in capital of at least NT$1 billion.
   
• Government Ownership. The company is formed under the encouragement of the government and not less than fifty percent of the issued and outstanding shares of the company are held by the ROC government at the central or local levels.
   

In addition, the TSEC may deny the application of a company that otherwise meets its criteria for listing, if such company has suffered certain recent material adverse changes or lapses in corporate governance or internal control.

Listed companies are required to file their annual, semi-annual and quarterly financial statements with the SFB with a copy to the TSEC and promptly report to the SFB and the TSEC and make public any information that may significantly affect shareholders' interests or securities prices. SFB regulations require that annual and semi-annual financial statements of listed companies be audited by accounting firms accredited by the SFB. The ROC Securities and Exchange Law provides for civil liability for material misrepresentations or omissions made by issuers in such filings and reports.

Trading

The TSEC operates a consolidated limit order book trading system under which only limit orders are accepted. Regular trading hours are 9:00 a.m. to 1:30 p.m., Monday through Friday. Shares of listed companies are sold in round lots of 1,000 shares. Orders of fewer than 1,000 shares are considered odd-lots and orders of more than 500,000 shares are considered block trades. Odd-lot trades must be executed in accordance with the TSEC Regulations Governing Odd-lot Securities Trades, pursuant to which odd-lot trades may only be executed in off-hour trading and only at prices that are 0.5% below the closing prices of the regular trading session. In addition, odd-lot trades are suspended on ex-dividend or ex-right dates, for three trading days immediately preceding such dates, and on the last trading day of any calendar year or lunar calendar year. Block trades must be registered and executed in accordance with the TSEC Regulations Governing Block Securities Trades, pursuant to which block trades may only be executed in off-hour trading and only at the closing prices of the regular trading session. In addition, block trades are suspended on ex-dividend or ex-right dates, the trading day immediately preceding such dates, and on the last trading day of any calendar year or lunar calendar year. For more information relating to regular and off-hour trading on the TSEC, please see "Attribute 6: A System for Exchange of Price Quotation through Common Communications Media - Collection of Market Data" below.

The TSEC sets limits on the range of daily price movements. Fluctuations in the price of stocks traded on the TSEC are currently subject to a limit of 7% above and below the closing price for the preceding trading day (or a reference price set by the TSEC if no such closing price is available, due, for example, to a lack of trading activity). The TSEC's centralized computer matching system automatically rejects any orders exceeding such trading limits. On rare occasions, the FSC (and formerly the ROC Ministry of Finance) may modify such trading limits under extreme market conditions, pursuant to specific authority granted by the ROC Executive Yuan, the executive branch of the ROC government. The most recent such event occurred during a severe earthquake in Taiwan on September 21, 1999, on which date the ROC Ministry of Finance announced a temporary reduction of the lower limit from 7% to 3.5% in order to forestall panic selling.

The TSEC, working with and subject to approval by the SFB, also sets limits on broker commission rates. Currently, a broker may charge commission not exceeding 0.1425% of the transaction amount. Brokers are also required to report their actual commission rates to the TSEC.

A securities transaction tax, currently levied at 0.3% of the transaction price for stocks and 0.1% for bonds, TDRs and other securities, is payable by the seller of securities. Such securities transaction taxes are withheld from the sales proceeds at the time of the transaction giving rise to the tax. The securities transaction tax is collected by the central government and amounts withheld are not retained by the TSEC. The TSEC charges a handling fee collected from both parties to a securities trade in the amount of 0.0065% of trading value payable by each party.

The TSEC Indices

In order to enable investors to monitor overall market performance and the performance of different industrial sectors, the TSEC maintains 28 stock price indices.

The TSEC Capitalization Weighted Stock Index, or TAIEX, is the most widely quoted of all the TSEC indices. The TAIEX covers all listed stocks other than preferred stocks, full-delivery stocks and newly listed stocks. Full-delivery stocks are stocks of certain distressed companies, the trading of which requires the buyer to prepay the purchase price and the seller to pre-deliver the stocks when an order is placed with the securities broker. Newly listed stocks are stocks that have been listed for less than one calendar month. As of June 30, 2004, there were 646 stocks in the TAIEX.

The TSEC Taiwan 50 Index, the first tradable index for the Taiwan market, was created in October 2002 through the collaboration of the TSEC and FTSE International Limited. The TSEC Taiwan 50 Index covers the top 50 listed companies by market capitalization.

The TSEC also has the following industrial group stock indices: Cement, Foods, Plastics, Textiles, Electric Machinery, Electrical Appliance & Cable, Chemicals, Glass & Ceramics, Paper & Pulp, Steel & Iron, Rubber, Automobile, Electronics, Construction, Transportation, Tourism, Finance, Wholesale & Retail and Others.

All TSEC indices are computed and broadcast every minute during trading hours, except that the TSEC Taiwan 50 Index is computed and broadcast every 15 seconds. Index information, along with other market data, is disseminated through securities firms and data vendors and made available to the public through the Market Information System, which is a website maintained by the TSEC. For more information on the Market Information System, see "Attribute 6: A System for Exchange of Price Quotation through Common Communications Media - Collection of Market Data" below. Periodic summaries of the performance of the TSEC indices are also available on the TSEC website.

II. Attributes Identified in Rule 902(b)(2)

Rule 902(b)(2) identifies seven attributes that will be considered by the Commission in determining whether to designate a non-U.S. securities market as a "designated offshore securities market." When adopting Regulation S, the Commission stated that the attributes set forth in Rule 902(b)(2) were not the exclusive factors considered by the Commission in designating foreign markets. The Commission further stated that no single attribute is required and that designations were to be made through the interpretive letter process, based upon consideration of all the facts pertaining to a particular market. See SEC Release No. 33-6863 (April 24, 1990).

As indicated below, we are of the view that the TSEC has each of the attributes listed in Rule 902(b)(2).

Attribute 1: Organization Under Foreign Law

The TSEC was established pursuant to and its operations are principally governed by the ROC Securities and Exchange Law and the ROC Company Law. The ROC Securities and Exchange Law, promulgated in 1968, provides the legal framework for the regulation of the securities markets and the securities industry in Taiwan. The ROC Company Law, promulgated in 1929, provides the legal framework for corporate governance, including such matters as dividend distribution, changes in share capital, and the preemptive, voting and appraisal rights of shareholders.

The TSEC is organized as a company limited by shares and the operations of the TSEC are managed by a board of directors, which appoints the corporate officers:

• Shareholders. The TSEC is organized as a company limited by shares under ROC law. Historically, there were no specific restrictions or requirements in respect of the share ownership of the TSEC in the ROC Securities and Exchange Law, other than that the TSEC was prohibited from issuing bearer shares. However, the ROC Securities and Exchange Law was amended in 2000 to require that, effective January 2001, transferees of shares of the TSEC be limited to securities firms licensed by the SFB, in order to encourage active participation by the securities firms in the operations of the TSEC. In March 2001, pursuant to the authority granted by such amendment, the SFB limited the maximum shareholding of each securities firm in the TSEC to 5%. As of June 21, 2004, TSEC-listed companies (excluding TSEC-listed securities firms and TSEC-listed banks and companies that are owned by the ROC government), government-owned banks and companies, securities firms, other corporate entities, and individual shareholders held approximately 47%, 22%, 11%, 17% and 2%, respectively, of the outstanding shares of TSEC.
   
• Directors and supervisors. As a company limited by shares, the TSEC is managed by a board of directors consisting of fifteen directors and three supervisors, of which six directors and one supervisor are appointed by the ROC government. The government seeks to appoint persons with broad knowledge and extensive experience in the securities industry, in order to represent effectively the public interest. Among the government-appointed directors and supervisor, there are four university professors, one attorney of law and one industry leader in information technology. In addition, Mr. Ming-Tai Chen, who is both a director and the president of the TSEC, is also appointed by the government. The remaining directors and supervisors are representatives of the shareholders of the TSEC and are elected by and from among the shareholders. The term of office for directors and supervisors is three years, and they may be re-appointed or re-elected. The directors elect from among themselves the chairman of the board of directors, who presides over meetings of the shareholders and the board of directors. The supervisors elect from among themselves a resident supervisor, who presides over meetings of the supervisors. Supervisors do not participate in meetings of the board of directors, but oversee the management of the TSEC by the board of directors through statutory powers to inspect the books of the TSEC and approve its financial statements.
   
• Corporate officers. The day-to-day operations of the TSEC are conducted by various committees and departments, each of which is headed by one or more principal corporate officers, who are appointed by the board of directors.
   

Attribute 2: Association with a Generally Recognized Community of Brokers, Dealers, Banks, or Other Professional Intermediaries with an Established Operating History

Securities transactions in the ROC are conducted by securities firms licensed by the SFB pursuant to the ROC Securities and Exchange Law. As of June 30, 2004, there were 150 securities firms licensed by the SFB in the ROC. To participate in the TSEC, an SFB-licensed securities firm is required to enter into a contract with the TSEC for the use of the centralized securities exchange market. All securities firms participating in the TSEC are subject to regulation by the SFB and the TSEC. As of June 30, 2004, there were 122 licensed securities firms operating on the TSEC. Under the ROC Securities and Exchange Law, securities firms are categorized according to their businesses as underwriters, dealers, brokers or a combination of any or all of the foregoing. Securities underwriters distribute securities for issuers. Securities dealers trade securities for their own account. Securities brokers trade securities for the account of their customers. As of June 30, 2004, of the 122 licensed securities firms operating on the TSEC, 62 were exclusively brokers, 41 were combined underwriters, dealers and brokers and the remaining 19 were either exclusively dealers or engaged in a combination of any two of the three regulated businesses. In addition, of the 122 licensed securities firms, 38 were qualified to offer margin loans to their customers.

In order to obtain the requisite license from the SFB, a securities firm must satisfy the following requirements:

• Paid-in capital. The firm must have the minimum paid-in capital required to conduct each of its businesses. The amount of paid-in capital required is NT$400 million, NT$400 million and NT$200 million for underwriting, dealing and brokerage businesses, respectively, and an additional NT$30 million is required for every branch office maintained by the firm.
   
• Deposits. The firm must maintain a specified amount of "business guarantee funds" in a bank designated by the SFB and a specified amount of "settlement and clearing funds" with the TSEC. Underwriters, dealers and brokers are required to deposit a minimum of NT$40 million, NT$10 million, and NT$50 million, respectively, in business guarantee funds. Dealers and brokers are required to deposit a minimum of NT$10 million and NT$15 million, respectively, in settlement and clearing funds prior to the commencement of their businesses. In subsequent years the SFB may adjust the amount of settlement and clearing funds from time to time based on the securities firm's transaction volume in the previous year.
   
• Reserves. Brokers are required to deposit 0.0028% of their monthly turnover into a default loss reserve each month, unless the cumulative amount in such reserve is not less than NT$200 million. Such reserve may only be used to compensate for losses suffered as a result of customer default. Similarly, dealers are required to deposit 10% of their monthly net income from trading activities into a trading loss reserve, unless the cumulative amount in such reserve is not less than NT$200 million. Such reserves may only be used to compensate for trading losses.
   

In addition to the foregoing, securities firms must also comply with the following procedures:

• Registration of directors and executive officers. The firm must register its directors and executive officers with the TSEC. These directors and executive officers must be approved by the TSEC and meet minimum requirements prescribed by the SFB, including requirements relating to academic qualifications and industry experience.
   
• Contract. The firm must enter into a contract with the TSEC in connection with the usage of the centralized securities exchange system maintained by the TSEC.
   

• Registered office. The firm must register its business premises, and may not share its business premises with other securities firms.
   
• Record keeping. The firm must maintain complete accounts and make accurate book entries. Its accounting and financial reports must be prepared in accordance with the ROC Standards for Preparation of Financial Reports of Securities Firms.
   
• Financial reporting. The firm must produce financial reports that are audited and certified by a certified public accountant, approved by the board of directors of the firm, recognized by the board of supervisors of the firm, and published in a newspaper.
   
• Use of its own funds by brokers. A broker must deposit its funds in a banking institution. Without the approval of the SFB, a broker may not invest its own funds in non-listed securities. Where a broker's own funds are invested in listed securities, the amount of such investment shall not exceed the maximum amount set by the SFB. A broker may not use its own funds or securities, or funds or securities borrowed from others, to settle securities trades for the account of its customers.
   
• Inspection of trading record. The firm may not refuse any requests of the TSEC to examine and review its trading certificates, vouchers, books, statements, and contracts.
   
• Assessment of investment ability. The firm must evaluate its customers' ability to make investment decisions before recommending securities transactions.
   
• No commingling of funds. The firm must establish a separate bank account used exclusively for settlement purposes.
   
• Corporate governance best-practice principles for securities firms. The firm must adhere to the following corporate governance best-practice principles jointly adopted specifically for securities firms by the TSEC, GTSM and Chinese Securities Association, in addition to complying with relevant laws and regulations governing corporate entities generally in the ROC:
   
• protect shareholders' rights and interests;
   
• strengthen the powers of the board of directors;
   
• fulfill the functions of the board of supervisors;
   
• respect stakeholders' rights and interests; and
   
• enhance information transparency.
   
• Guidelines for settlement of collateral by securities firms. Where the securities provided by the securities firm representing the seller are not eligible and cannot be used for settlement, such firm must borrow securities on a daily basis pursuant to the Measures Governing the Borrowing of Securities as stipulated by the TSEC.
   
• TSEC procedures for handling default on settlement obligations by securities firms. When a securities firm defaults on its settlement obligations, it will be suspended by the TSEC and the clients and settlement operations of such suspended firm will be transferred to another securities firm appointed by the TSEC pursuant to the TSEC Procedures for Handling Default on Settlement Obligations by Securities Firms.
   

Attribute 3: Oversight By a Governmental or Self-Regulatory Body

The operation of the TSEC is overseen by the SFB, which has the exclusive authority to inspect the securities market operations and processes of the TSEC. The ROC Securities and Exchange Commission, which was renamed the ROC Securities and Futures Commission in 1997 and the ROC Securities and Futures Bureau recently, was established in 1960 by the ROC government to supervise and regulate all aspects of the domestic securities markets. The following is a summary of the regulatory powers of the SFB:

• Regulatory authority. The SFB is a government agency under the jurisdiction of the FSC. It is designated as the "competent authority" under the ROC Securities and Exchange Law and has extensive regulatory authority over the offering, issuance, trading, clearing and settlement of securities, including the authority to promulgate and amend certain rules and regulations necessary to carry out its duties pursuant to the ROC Securities and Exchange Law. While the SFB has broad rule-making powers under the ROC Securities and Exchange Law, this law requires that certain rules and regulations that are of vital importance to the financial markets of ROC or that may involve multi-disciplinary actions be promulgated by the FSC. For example, the ROC Securities and Exchange Law requires that the regulations governing margin purchases and short sales be drafted by the FSC and approved by the ROC Executive Yuan. In addition, this law also requires that the regulation governing the administration of securities investment trust funds be promulgated by the FSC.
   
• Scope of authority. The SFB is empowered to curb abuses and violations of laws and regulations through administrative measures, including the issuance of warnings, suspension of activities, imposition of administrative fines and revocation of licenses. It does not have criminal or civil enforcement powers under the ROC Securities and Exchange Law. Criminal actions may be brought by government prosecutors. Upon findings of suspected criminal violations, the SFB may refer such cases directly to the government prosecutors when in possession of concrete evidence. Otherwise, the SFB may refer the case and any relevant information and documents to the Bureau of Investigation of the FSC for further investigation and evidence collection. Civil actions may be brought by plaintiffs who assert that they have suffered damages. While the SFB may act as witnesses in criminal investigations and prosecutions by providing documentary evidence, it does not play a similar role in civil actions. The Securities and Futures Investors Protection Center, an organization established and funded by securities exchanges, securities firms and other enterprises, may instigate class actions on behalf of investors as a group.
   
• Regulatory authority over stock exchanges. The ROC Securities and Exchange Law gives the SFB the authority to oversee the operation of securities exchanges, such as the TSEC, the GTSM and the TAIFEX, and the operation of securities dealers associations, such as the Chinese Securities Association. Under this law, the standards for the establishment of securities exchanges in Taiwan are drafted by the SFB and approved by the FSC. The SFB have promulgated several regulations applicable to the operation of securities exchanges in Taiwan, including the Rules Governing Stock Exchanges, the Rules Governing Securities Dealers Associations and the Rules Governing Futures Exchanges. Pursuant to the ROC Securities and Exchange Law, the SFB has the power to revoke the license of a stock exchange and sanction its supervisors, directors and officers for violation of applicable laws or regulations.
   

The TSEC is also a self-regulated organization that oversees the securities transactions and trading activities that take place on and the participants that conduct businesses on the TSEC. In order to carry out its duties, the TSEC may propose new rules or amendments to existing rules governing its own operations which become effective upon the approval of the SFB. The TSEC oversees the implementation and enforcement of certain standards established by the ROC Securities and Exchange Law, including: