The Financial Supervisory Service (FSS) is strengthening its inspections of private equity funds (PEFs). The agency plans to expand the number of annual inspections to five levels by differentiating the scope and intensity of inspections based on a comprehensive assessment of investment size, degree of regulatory compliance, and fulfillment of social responsibilities.
Ham Yongil, Deputy Governor for Capital Markets and Accounting at the FSS, made this announcement during a briefing titled "Achievements and Future Plans for Capital Market Changes and Innovation," held at the FSS headquarters in Yeouido, Seoul, on May 28.
Since October 2021, the FSS has introduced inspection authority over general partners (GPs), or private equity fund managers, conducting three to four inspections per year. To date, a total of 18 GPs have been inspected. Ham explained, "PEFs have been in a supervisory blind spot, so we plan to allocate more resources."
He also mentioned the need for legal revisions. He stated, "The data we can currently obtain under the law is limited," and added, "The scope of information disclosure, such as public announcements, needs to be discussed in the National Assembly."
The FSS also plans to announce the results of accounting reviews related to Korea Zinc and Young Poong in the second half of the year. Ham emphasized, "There are some accounting issues," and added, "The matter will be addressed soon in accordance with the review procedures."
Regarding the "focused review system" introduced in February this year to reestablish the balance between controlling shareholders and general shareholders, the FSS will continue to conduct reviews consistently. After operating the system for a certain period, the agency plans to assess its effectiveness and make improvements as necessary.
Ham stressed, "Although there are some concerns about abuse of authority, the FSS serves as the last line of defense regarding fundraising activities by marginal companies," and added, "We will strive to support smooth fundraising for listed companies and protect investors by ensuring that shareholder interests are not undermined, thereby maintaining balance between both sides."
According to the FSS, since the introduction of the system until last month, 14 out of a total of 16 rights offerings subject to focused review involved marginal companies with poor financial indicators, accounting for 12 cases.
The FSS stated, "In most focused review cases, corrections were required," and evaluated, "The background for capital increases, the deliberation process, and the effects of the increases have not been disclosed transparently and specifically, and efforts to communicate with shareholders have also been insufficient."
Additionally, the FSS will respond strictly to the continued occurrence of unsound business practices and actions undermining market trust by securities firms. The agency also plans to continue sending "CEO letters" to chief executive officers (CEOs).
Since February, the FSS has sent CEO letters on major capital market issues, including risks in overseas alternative investments, problems at real estate trust companies, and responsibility structures. The next letter will address the recent series of IT system failures.
Ham explained, "The CEO letter outlines the causes of the issues that have occurred, introduces improvement measures, and shares best practices," adding, "In the future, we plan to archive these letters on our website, similar to the U.S. Securities and Exchange Commission (SEC)."
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