[Asia Economy Reporter Park Jihwan] Model guidelines that securities firms must follow when conducting 'alternative investments,' which refer to investments other than stocks and bonds such as real estate, social overhead capital (SOC), and aircraft, will be established.
The Financial Supervisory Service and the Korea Financial Investment Association announced on the 21st that they have prepared model guidelines specifying risk management standards and procedures that securities firms must adhere to when making alternative investments domestically and internationally, including real estate, and plan to implement them starting March 1.
According to the model guidelines, securities firms must operate the alternative investment sales department separately from the review department and risk management to prevent conflicts of interest. It is also mandatory to establish internal regulations regarding organizational operation and investment standards for alternative investments.
Additionally, to prevent concentration risk in specific assets or regions, investment limits must be set and managed by asset, region, and counterparty, and compliance must be ensured.
The review department must mandate prior review and approval by decision-making bodies regardless of the investment purpose. During the review process, essential inspection items necessary for evaluating alternative investment risks and business feasibility have been added, including △counterparty △transaction structure △risk and business analysis △investment recovery plan △results of on-site due diligence.
For overseas alternative investments, it is additionally required to obtain appraisal and legal advice on the investment assets from external experts.
Furthermore, for investments made for the purpose of resale to investors, known as 'sell-down,' a 'sell-down analysis report' must be prepared and utilized during internal review to ensure sufficient risk assessment prior to the sell-down investment. For unsold assets, a post-management report reviewing the 'sell-down status,' 'reasons for delay,' and 'response plans' is required.
Offshore funds serving as underlying assets for derivative-linked securities (DLS) are limited to funds registered under the Capital Markets Act.
Even for transactions of the same type, risks vary by region and counterparty, so a performance fee system must be established to sufficiently reflect the risk attributes and levels of each transaction. When calculating performance fees using the net capital ratio (NCR) risk value, the risk values should be subdivided and applied to ensure sufficient differentiation of risk levels by transaction.
The Financial Supervisory Service emphasized, "By systematically presenting risk management standards and procedures to be followed at each stage of the alternative investment process, we expect to secure the soundness of securities firms and protect investors," adding, "In particular, for sell-down purpose investments, additional compliance requirements have been established to protect investors."
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