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2021.10.25

Amendment of the Capital Market Act Presidential Decree Passes the National Assembly (on 10.19.2021)

The Financial Services Commission (“FSC”) announced that the Amendment of the Capital Market Act and its Presidential Decree (the “Amendment”) passed the National Assembly on October 19, 2021. Cases of financial fraud scandals such as those of Lime Asset Management and Optimus Asset Management had called for amendments to be made on private fund regulations. This amendment, which will come into effect starting on October 21, 2021, with grace period of 3 months up to a year, seeks to protect the general investors while enhancing the flexibility and efficiency of the private fund market.

 

According to the existing Capital Market Act, there are two types of private funds, categorized by their operational purpose, or the management right, which are Hedge Fund and PEF(Private Equity Fund). The purpose of the Hedge Fund was to minimize the risk of the asset and ensure an absolute rate of return regardless of economic conditions. Because of this purpose, Hedge Funds do not allow investment banks to interfere with company operations. PEFs, however, strive to earn profit by participating in corporate management and improving corporate values. Because funds were only categorized by their operational purposes, the general investors, accredited investors, and institutional investors were not held back with their choice of funds—they could buy whichever fund they wished.

However, with the cases of Lime Asset Management financial fraud in 2019 and that of Optimus Asset Management in 2020, this Act has been criticized for being unable to protect the general investors and categorizing private funds artificially. Consequently, Amendments have been made to i) protect the general investors, ii) enhance the flexibility of the private fund market iii) facilitate the financing of private fund investment banks by categorizing funds according to participating investors and unifying regulations on fund management.

 

The Amendment includes a new provision requiring investment banks to write Key Product Specifications (“specifications”) when selling/ recommending private funds to general investors. Information such as 1) basic specifications such as the name and type of the fund 2) collective investment scheme 3) the fund’s degree of risk and 4) information on fund resale. After such information is specified, the seller must review the specifications from general investors’ perspectives under manuals provided by FSC. (Act 249-4(2), Decree 271-5) Then, based on the ‘asset management report’ provided by investment banks, the seller and consignee are mandated to monitor if any unreasonable managing is taking place. (Act 249-4(5), Decree 271-5 (7))

To enhance private fund market flexibility, the Amendment also includes new provisions to unify private fund management regulations. Under the new Amendments, both PEFs and Hedge Funds will no longer have limitations on their management rights, given that this purpose is specified. (Act 249-7(5), Decree 271-10 (16)~(17) The FSC also unified the leverage limitations, allowing both funds to borrow up to 400 % of their net assets. (Act 249-7(1), Decree 271의10 (1)~(3)) Hedge Funds will no longer have its limitation on voting rights. (Act 249-7(6))   

 

 

Before

                     After

 

Hedge Fund

PEF

No Distinction between Hedge Fund and PEF, consolidated as Private Equity Fund

PEF for General Investors

PEF for institutional Investors

Operation Purpose

Minimize Risk &

Ensure absolute return rate

  • Management Participation X

Management Participation

 

Unlimited

Leverage

Up to 400% of net asset

Up to 10% of net asset

Up to 400% of net asset

Voting Right

Voting right limited for stockholding over 10%

N/A