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Newsletter | February 2014, Issue 1
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CORPORATE |
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The FSC Announces Plan for Reform of Private Equity Fund Regulations |
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The Financial Services Commission (“FSC”) announced its plan to reform the policies related to private funds (“Plan”) on December 4, 2013 in order to boost dynamics in the capital market. The Plan is intended to (i) minimize the negative effects of private funds and (ii) reform the overall PEF system to enhance the original functions of private funds. Some of the key features of the Plan are provided below. |
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Re-Establishment of Regulatory Scheme for PEFs: Private funds will be categorized into the two following broad categories: “specialized investment private funds” (i.e., hedge funds) and “management participation private funds” (i.e., PEFs), and they will be regulated separately from publicly offered funds. |
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Reasonable Restrictions on Investors in PEFs: By requiring a minimum investment of KRW 500 million, the Plan will allow only “qualified investors” with the capacity to take financial risks to invest directly in private funds. Publicly offered funds of the newly permitted fund under the Plan will be able to invest in private funds and provide a means for individuals to invest in private funds (i.e., individuals can now invest in private funds only through publicly offered funds under the Plan). |
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Relaxation of Regulations on Entry, Establishment, Management and Sale of Private Funds |
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| Category |
Current Regulation |
FSC’s Plan |
| Entry |
Only those who have licenses for collective investment business can manage hedge funds (registration is required for establishment of PEFs). |
By simply registering a private collective investment business, one can manage private funds. |
| Establishment |
All private funds are required to be registered prior to establishment thereof. |
All private funds will be required to file a report to the FSC within 14 days following their establishment and penalties are to be imposed for a failure to timely file such report. |
| Management |
Restrictions on (i) investing in securities, derivatives and real estate and (ii) providing debt guarantee and collateral. |
PEFs and hedge funds will be permitted, up to 50% and 400% of their net assets, respectively, to invest in securities, derivatives and real estate and to provide debt guarantee and collateral. |
| Sale |
Suitability/appropriateness principles and the duty to explain to investors; blanket prohibition on advertising private funds. |
In offering investments in private funds, the offeror will only be obligated to confirm whether the investor is a qualified investor, and certain advertisements and direct sales of products will be permitted. |
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Strengthened Supervision of Private Fund Managers and Borrowings by Private Funds: All private funds will be obligated to entrust the custody and management of assets to a trust company. The restrictions on borrowing and asset management will be uniformly based on “net assets.” |
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Improved Regulation on PEFs of Business Group: The uniform restriction on the exercise of voting right by private funds or special purpose companies, those which are members of the business group, subject to limitations on cross capital investment will be relaxed and an exception will be available for private funds that are a member of the business groups focusing on financial business. |
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Strengthened Mechanism to Prevent Assistance to Affiliates via Private Funds: PEFs will be prohibited from transacting with their affiliates in principle while the restrictions on hedge funds’ investment in their affiliates will be strengthened. |
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The FSC has collected opinions and comments on the Plan by holding a public hearing on December 18, 2013 and plans to push for the amendment of the Financial Investment Services and Capital Market Act as promptly as possible. |
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