Rhyme Fund Sales Company Inspection Intensifies... Securities Industry on Edge
Mirae Asset Followed by NH Investment's 'Preferential Redemption' Inspection
Asset Management Firms Join Banks and Securities Firms in Money Laundering Investigations
The Financial Supervisory Service (FSS) is expanding its investigation into preferential redemptions in private equity funds and will also begin inspections of asset management companies following securities firms and banks in relation to anti-money laundering (AML). As a result, the financial sector is on high alert due to the FSS's comprehensive expansion of inspections.
According to the financial investment industry on the 31st, there are a total of four funds suspected of preferential redemptions, including 'Lime Martini No.4,' in which Democratic Party lawmaker Kim Sang-hee invested. These funds are suspected of covering losses by pulling funds from other funds or using proprietary funds. Besides Mirae Asset Securities, the distributor of these funds, other securities firms were also found to have sold these funds. One of these firms is NH Investment & Securities. It was revealed that NH Investment & Securities redeemed 20 billion KRW for NongHyup Central Association.
NongHyup Central Association redeemed Lime funds worth 20 billion KRW in September 2019, just before the Lime incident occurred. The 'Lime incident,' where investors suffered losses amounting to 1.6 trillion KRW due to the suspension of Lime fund redemptions, broke out a month later in October 2019. The FSS did not disclose NongHyup Central Association's name, but the association acknowledged the redemption while denying any preferential treatment. NongHyup Central Association explained that it invested 20 billion KRW in the Lime fund in 2018, and as losses exceeded 20% in September 2019, it redeemed the fund according to internal regulations. The redemption amount was 15.7 billion KRW, resulting in a loss of 4.3 billion KRW.
The FSS stated that although it cannot disclose the specific company name (NH Investment & Securities), it will conduct additional inspections of distributors related to preferential redemptions. A senior FSS official said, "We will conduct re-inspections on matters that require verification."
The FSS reviewed 63 open-ended funds managed by Lime Asset Management and confirmed that 223 people redeemed a total of 306.9 billion KRW from 31 of these funds. All these redemptions occurred in September 2019, one month before Lime Asset Management suspended redemptions. Among the 31 funds, 27 were redeemed using their own funds, but four funds, including Lime Martini No.4, paid investors using funds from other funds or proprietary funds. The FSS viewed this as a problem of shifting losses from the relevant funds to other funds and providing preferential treatment to specific parties when redemptions were impossible.
Initially, the FSS did not plan to investigate the sales process. Only the asset management companies that created the funds were to be examined, and securities firms that received funds from the asset managers and sold them to customers were not subject to inspection. However, after the FSS's 'Major Investor Damage Asset Management Company Inspection Task Force (TF),' established earlier this year, conducted additional inspections on three asset management companies?Lime, Optimus, and Discovery?and announced the results, it was highlighted that a multi-term lawmaker received preferential redemptions. Subsequently, lawmaker Kim Sang-hee was identified, who strongly denied receiving preferential treatment from Lime Asset Management, stating that the redemption was requested following the recommendation of the distributor, Mirae Asset Securities. During this process, it was revealed that Mirae Asset Securities encouraged all subscribers of Lime Martini No.4 to redeem, prompting the FSS to recently begin investigating the sales team.
The FSS plans to inspect whether ▲ Mirae Asset Securities sold other open-ended Lime funds and ▲ if so, whether it encouraged full redemption for those funds as well. In the additional inspection of NH Investment & Securities, the focus will be on whether ▲ Lime Asset Management had prior knowledge that redemption responses would be difficult and proceeded with redemptions, and ▲ whether they were aware that redemption payments were a form of fund recycling from other funds. Furthermore, despite the principle that 'customer information' should not be shared between distributors and asset managers, the FSS intends to verify ▲ whether NH Investment & Securities directly assisted NongHyup Central Association's redemption.
Meanwhile, regarding anti-money laundering (AML) matters, the FSS will conduct inspections of domestic asset management companies for the first time ever. The first inspection target is Mirae Asset Global Investments. The FSS AML Office plans to begin an on-site inspection of Mirae Asset Global Investments in September. Although the FSS AML Office has previously conducted inspections targeting banks and securities firms, this is the first time it will inspect an asset management company. Mirae Asset Global Investments was selected as the initial inspection target considering the scale of assets under custody. This is part of verifying the AML exposure management status mainly among large asset managers. The inspection is expected to check customer identity verification procedures related to transaction counterparties, whether they are related parties, and internal employee management practices. Earlier, the Financial Intelligence Unit (FIU) prepared institutional improvement plans in July, redefining the roles and responsibilities of key AML officers and clarifying the supervisory scope and content of the board of directors. An FSS official said, "We will check how well it is being managed." After completing the inspection of Mirae Asset Global Investments and assessing the situation, the FSS plans to gradually expand inspections mainly to other large asset managers.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
