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New Amendments to Capital Markets Act’s Enforcement Decree Heighten Standards for Replacement of Asset Management Company and Trustee/Custodian

2020.07.03

The amendments (the “Amendments”) to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “Enforcement Decree”), which require specific terms and conditions concerning replacement of asset management company (“AMC”) and trustee/custodian (collectively “Trustee”) to be included in trust agreements or articles of incorporation of collective investment vehicles (“Funds”), took effect as of April 1, 2020.

The Enforcement Decree in effect prior to the Amendments also required the terms and conditions regarding replacement of AMC and Trustee to be included in trust agreement (for trust-type Funds) or articles of incorporation (for company-type Funds) (the “Governing Documents”); however, it did not specifically enumerate what specific terms and requirements had to be included in the Governing Documents.  As a result, the Governing Documents of a considerable number of Funds merely provide that the replacement of AMC or Trustee requires a resolution adopted at the general meeting of beneficiaries/equity holders or unanimous consent of the beneficiaries/equity holders, without setting forth the detailed replacement conditions or procedures.  In light of the foregoing, the Amendments introduced requirements to explicitly set forth in the Governing Documents the specific terms and conditions regarding replacement of AMC and Trustee such as terminable/replacement grounds, procedures for termination/replacement as well as losses and damages to be collected by AMC and Trustee in case of such replacement.

With the introduction of the Amendments, a replacement of AMC or Trustee based on the grounds not specifically enumerated in the Governing Documents may not be enforceable, and it would therefore be important to review in advance the replacement conditions and procedures included in the Governing Documents.   

The Amendments will apply immediately to (i) trust agreements newly executed or amended on or after April 1, 2020 or (ii) articles of incorporation newly adopted or amended on or after April 1, 2020.

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