Cathay Financial's Scope of Inspection Expanded; Peng Jin-long: Clarifying Related Party Notification Mechanism

(CNA, Taipei, July 8) The controversy surrounding Cathay Securities Investment Trust (Cathay SITC) continues, with legislators questioning the Financial Supervisory Commission (FSC) about the reasons for expanding the scope of its inspection and whether the timing of the major information announcement was too late. FSC Chairman Peng Jin-long stated that the expanded inspection is to understand whether the group has established an internal notification mechanism and how subsidiaries operate with each other, in order to clarify the Cathay SITC case. He emphasized that "everything that needs to be investigated will be investigated" and promised a review report on major information disclosure regulations within one month.

The Legislative Yuan's Finance Committee reviewed entities under the FSC's purview today, including the Central Deposit Insurance Corporation, the Financial Supervision and Management Fund, and the Insurance Business Development Fund, and invited FSC Chairman Peng Jin-long to attend and respond to questions. Due to Cathay SITC's violation of the red line for related party investments, the FSC's Inspection Bureau dispatched personnel to inspect Cathay SITC starting on June 22, with the inspection expected to conclude on July 8. The FSC confirmed on July 2 that it was expanding the scope of its inspection, sending personnel to Cathay Financial Holding, its banking, life insurance, property insurance, and securities subsidiaries for on-site understanding.

DPP legislator Lee Kun-cheng pointed out that it is unclear whether the inspection of Cathay SITC, scheduled to end on July 8, will be extended, and also inquired about the reasons for expanding the inspection scope. Cathay SITC announced compensation of NT$948 million. Although the investment trust has compensated all entrusted clients and investors, the question remains as to who will bear the final losses.

Lai Hsin-kuo, Director-General of the FSC's Inspection Bureau, stated that the inspection of Cathay SITC will conclude this afternoon.

Peng Jin-long also explained the reasons for expanding the inspection scope for the first time. He stated that the primary concern is whether the group has established a mutual notification mechanism internally, which is why they also visited subsidiaries other than the investment trust to understand their operational status. The FSC hopes to determine whether the issue is isolated to a single company or if there are systemic issues within the group or differences in regulations among subsidiaries. On-site understanding will assist in clarifying the Cathay SITC case.

Regarding whether only Cathay Financial has internal reporting issues or if similar situations exist across all financial institutions, Peng Jin-long indicated that financial institutions may have relevant internal control regulations, but their implementation might be lacking or vary. Further clarification is needed. Additionally, consideration will be given to whether the financial industry should establish multiple notification mechanisms, not solely relying on individual reporting, but also incorporating group-wide reporting obligations to prevent omissions, while complying with personal data protection laws.

Cathay SITC stated that after recalculating the eight funds, the total compensation to investors amounts to approximately NT$494 million for about 50,500 beneficiaries. Combined with the previous NT$454 million compensation for entrusted accounts, the total compensation reaches NT$948 million. Lee Kun-cheng expressed concern about who will ultimately bear these compensation costs. Peng Jin-long replied that these losses affect reduced revenue, and responsibility can only be confirmed after clarifying the liabilities.

DPP legislator Kuo Kuo-wen questioned why Cathay SITC compensated entrusted accounts first and individual investors several months later. He also inquired why the NT$454 million compensation for entrusted accounts was not separately announced as a major event. The Taiwan Stock Exchange stated that the amount did not exceed 10% of equity, but questioned whether such losses do not constitute a significant impact on financial performance and investors, urging a review of major information disclosure regulations.

Lin Hsiu-ming, Chairman of the Taiwan Stock Exchange, pointed out that Cathay SITC's second compensation to investors amounted to NT$494 million. When added to the previous amount, the total exceeds the 10% threshold, prompting the exchange to send a letter to Cathay Financial requesting the disclosure of major information.

Peng Jin-long further explained that there are over 50 types of major information items. The exchange is continuously evolving and will review how listed companies fully disclose information. He agreed to present a review report on major information disclosure regulations within one month.

DPP legislator Lin Dai-hwa questioned the dereliction of duty by both the FSC and Cathay Financial's independent directors, demanding the inspection results be released within two weeks. Lai Hsin-kuo stated that the inspection results will be processed as quickly as possible.

Peng Jin-long added that regulations regarding concurrent positions will also be reviewed, with a focus on preventing conflicts of interest. Financial inspection reports will not be publicly disclosed, but the inspection situation can be explained externally. Any final disciplinary actions will clearly state the nature of the violations.

The Cathay SITC incident originated from former Cathay United Bank Chairman Kuo Ming-chien's concurrent role as an independent director at Alchip Technologies Ltd. starting May 29 of the previous year, while he was also a director at Cathay SITC. Due to internal oversight lapses at Cathay SITC, funds and entrusted accounts managed by the investment trust invested in Alchip Technologies Ltd. stock, thus crossing the related party red line. Kuo Ming-chien recently resigned from his position as a director at Cathay SITC and subsequently resigned from his directorships at Cathay Financial Holding, Cathay United Bank, and Cathay Private Equity. Cathay Financial Holding President Lee Chang-ken led the management teams of its subsidiaries in an apology on July 1. Cathay Financial Holding announced on July 7 that Chang Yung-chuan resigned as General Manager of Cathay SITC. (Editor: Yang Kai-hsiang) 1150708

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