Mandatory Provision of Product Descriptions When Selling Private Equity Funds...Sales Companies Also Subject to Operational Monitoring Obligations

[Asia Economy Reporter Park Jihwan] Starting from the 21st, it will be mandatory to provide a Key Product Description Document when selling private equity funds to general investors. Institutional measures to protect private equity fund investors, such as imposing operational monitoring obligations on sellers and trustees, will also be implemented.

The Financial Services Commission announced on the 19th that the amendment to the Capital Markets Act and subordinate regulations containing these provisions was approved at the Cabinet meeting. The amendment will take effect from the 21st.

The Financial Services Commission revised the Capital Markets Act in April as a follow-up measure to the Lime and Optimus private equity fund incidents. This subordinate regulation amendment was prepared to specify delegated matters under the law.

According to the amendment, when soliciting or selling private equity funds to general investors (those investing 300 million KRW or more), it is mandatory to provide a Key Product Description Document. Essential items have been set to ensure that all necessary information for investors' investment decisions is reflected in the document. The document must mandatorily include △ fund and management company names △ investment objectives and strategies △ target assets for investment △ operational risks △ redemption-related matters, among others.

Sellers and trustees must monitor whether there are any unreasonable operational acts when selling private equity funds to general investors. Sellers are obligated to verify, based on the asset management reports from the management company, whether the private equity fund is being operated in accordance with the Key Product Description Document. Trustees must monitor compliance of operational instructions with laws, regulations, and the description document, and conduct asset reconciliation quarterly for the fund assets they hold and manage.

Regulations on private equity fund operations will also be improved. Private equity funds will be prohibited from providing personal loans and loans to gambling-related industries. To prevent perpetual corporate control by private equity funds, a mandatory disposal of shares within 15 years for investments aimed at management participation will be introduced.

Investment criteria that effectively allow exercising control have also been specified. These include investments that enable exercising authority over major management matters such as appointment and dismissal of executives, organizational changes, or investments that make the investor the largest shareholder of the investee company. For institutional private equity funds, a new requirement for registering executive officers specialized in investment management has been introduced, and the qualification criteria for these specialists have been specified as those with at least three years of experience in managing institutional private equity funds.

Institutional private equity funds will be required to follow the operational methods of general private equity funds. This is a measure to unify private equity fund regulations. The scope of investors is limited to institutional investors with expertise and risk management capabilities.

The Financial Services Commission stated, "Through the implementation of this amendment, we will ensure that the private equity fund market gains trust and supports economic growth as a sound venture capital market."