[Asia Economy Reporter Eunmo Koo] The Financial Services Commission (FSC) plans to strengthen regulations on the sales and management stages of high-risk financial products to prevent the recurrence of private equity fund redemption suspensions, which have occurred consecutively from Lime Asset Management last year to Optimus Asset Management recently.
On the 29th, through a business report submitted to the National Assembly's Political Affairs Committee, the FSC announced that it will enhance regulations on the sales and management stages of high-risk financial products, as stated in the derivative-linked fund (DLF) measures announced in December last year and April this year, as well as the private equity fund measures.
First, through the DLF measures announced in December last year, the FSC decided to strengthen investor protection at the sales stage by restricting bank sales of complex and high-risk products. As a result, when securities firms and other sales channels sell complex and high-risk private equity funds, enhanced investor protection measures such as recording the sales process for general investors, providing a cooling-off period, and delivering key investment explanation documents will be applied.
Furthermore, if funds with the same or similar underlying assets and profit-loss structures are sold to more than 50 people within six months, they will, in principle, be regarded as public funds, effectively blocking the sale of public funds in the form of private equity funds.
Additionally, the criteria for general investors eligible to invest in private equity funds will be strengthened from 100 million KRW to 300 million KRW, and acts inducing incomplete sales, such as manipulating investor profile classification or lowering product risk levels contrary to reality, will be strictly sanctioned as unfair business practices.
Through the private equity fund measures announced in April, selective regulations to resolve side effects at the management stage will also be introduced. The FSC plans to establish a system where related institutions such as sales companies, custodians, and prime brokerage service (PBS) securities firms monitor and check illegal activities by asset managers during fund management.
Moreover, management of complex multi-layered and circular investment structure funds will be strengthened, and liquidity risk management systems will be established by resolving maturity mismatches, thereby enhancing investor protection and liquidity management systems. The FSC also plans to shorten the submission cycle of business reports from semiannual to quarterly, strengthen continuous supervision and inspections by financial authorities, and activate the self-regulatory functions of associations.
The FSC also aims to enhance trust in the financial market through a comprehensive inspection of all private equity funds. As of May, the FSC will conduct a full-scale self-inspection of 10,304 private equity funds through sales companies, asset managers, custodians, and administrative management companies from this month until September. Additionally, a dedicated inspection organization will be established within the Financial Supervisory Service to conduct on-site inspections of all private equity asset managers over three years until 2023.
Meanwhile, investor protection for high-risk financial investment products containing derivatives will be strengthened. The FSC noted that investment demand for high-risk, high-return financial investment products such as crude oil leverage exchange-traded notes (ETNs), preferred stocks, and high-interest equity-linked securities (ELS) has recently increased, expressing its intention to foster a sound asset management market by curbing excessive speculative demand in the ETN market and alleviating concentration on specific products.
To this end, individual investors will be required to deposit a basic margin of 10 million KRW when investing in leveraged ETFs and ETNs, and education will be strengthened to block indiscriminate speculative demand entry. Additionally, to disperse investment demand concentrated in specific sectors such as commodities, the FSC will create an environment where various products can be launched, including allowing market representative index products, permitting the issuance of ETNs tracking domestic market representative indices such as KOSPI 200 and KOSDAQ 150, and relaxing composition requirements for products tracking overseas blue-chip stock returns.
Furthermore, the FSC plans to induce an increase in the number of circulating shares to minimize sharp price fluctuations of preferred stocks and mandate prior warnings to investors in abnormally soaring preferred stocks.
The FSC will implement investor protection measures related to ETNs and preferred stocks, such as the introduction of basic margin requirements for leveraged ETNs and strengthened market management of preferred stocks, through amendments to exchange regulations starting from September.
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