New Rules Take Effect in South Korea to Better Supervise Private Equity Funds Market

The Financial Services Commission (the FSC) announced on Thursday (Oct. 21) that South Korea’s new rules for PEFs (private equity funds) have taken effect.

According to the watchdog, the government approved the revision bill on the Enforcement Decree of the Financial Investment Services and Capital Markets Act and its subordinate rules at a cabinet meeting held on October 19. With the revised FSCMA scheduled to go into effect on October 21, the changes in its subordinate statute and regulations will help improve investor trust in the private equity fund market and provide better protections for retail investors.

The rules introduce a new classification system that distinguishes between “general PEFs” and “institution-only PEFs”, under which qualified retail investors (those investing KRW 300 million or more) can invest in “general PEFs” only, with stronger investor protections provided. Institution-only PEFs are limited to professional institutional investors with risk management capabilities.

The maximum number of investors allowed in a PEF is increased from 49 to 100, though the total number of retail investors will remain at 49.

Fund sellers are required to issue a summary prospectus to investors when selling a PEF. The revised rules specify the methods for verifying summary prospectus from an investor’s standpoint and indicate a list of required information that needs to be contained in a summary prospectus.

The revised rules require fund sellers to monitor whether PEFs sold to qualified retail investors are being managed by fund management firms according to their prospectus requirements. Fund trust agencies are required to monitor the consistency of the funds’ asset statements with those of management firms.

Additionally, PEFs are prohibited from issuing personal loans to private lenders and P2P lending firms. “Only PEFs with institutional investors that have risk management capabilities can offer loans, with fund management firms required to have internal control measures,” the regulator said.

To better supervise the PEF market, the FSC will set up an integrated monitoring and analysis system at the FSS (Financial Supervisory Service)  for general PEFs. Under the system, the FSC will be able to promptly respond when abnormal activity is detected by carrying out an inspection on fund management firms.

The FSC will also strengthen monitoring of institution-only PEFs and supervision of GPs (general partners). GPs are now required to have professional investment management experience of at least three years, can be subject to inspections, and can have their registration cancelled more quickly for violations.

Last month, the FSC announced its plan to improve the current fractional trading system​.