Korea to Amend Law to Protect Private Equity Fund Investors

The revisions will enhance oversight and risk assessment of private equity funds, and prevent illiquid funds from being marketed to retail investors.

South Korea is working on legislative amendments to better protect private equity fund investors – a response to a series of recent frauds that have highlighted systemic misconduct and mis-selling in Korea’s private fund market, which has resulted in large losses for retail investors.

The two major cases involve Lime Asset Management, which last year suspended redemptions worth an estimated KRW 1.6 trillion after it was accused of covering up losses and embezzling fund assets, and Optimus Asset Management, which in July was found to have deceived investors and brokers and fabricated documents to hide illegal transactions.

According to local media outlet Maeil Business Newspaper, lawmaker Kim Byeong-wook is expected to submit a revised capital market law to Parliament for approval.

Under the proposed revisions, fund sellers would be required to increase oversight of suspicious private equity funds and provide investors with a quarterly management report.

Securities firms offering prime brokerage services would also be obligated to assess the credit risk of private equity funds and file reports on their bad assets upon three days of their discovery.

Fund sellers would also be prohibited from marketing as an open-ended fund any private equity fund with illiquid assets making up more than 50 percent of the total.

Exceptions may be allowed if only professional investors are invested in the private equity fund, as they are more capable of monitoring securities firms.

All privately placed funds that have to date been categorised as either business involvement or strategic investment funds will also be regrouped based on their suitability for institutional and retail investors.

In addition, regulations on institutional-only funds will be eased to meet global standards.