The financial authorities have clarified the obligation for mega-investment banks (IBs) to supply venture capital and have specified the previously ineffective Investment Management Account (IMA) system.
On July 15, the Financial Services Commission announced that it would be releasing a draft amendment to the Enforcement Decree of the Capital Markets Act and its subordinate regulations for public comment. This amendment consists of three main parts: restructuring the operational regulations for comprehensive financial investment business entities (CFIBs) and systematizing designation requirements; strengthening internal control standards and improving securities industry systems; and introducing new professional personnel requirements for securities lending brokerage businesses. The public comment period will last until August 25. This measure follows the "Plan to Enhance Corporate Finance Competitiveness in the Securities Industry" announced in April of this year.
The financial authorities are pursuing a reform of operational regulations, aiming to promote active venture capital supply by CFIBs, while comprehensively considering risk management and investor protection related to promissory notes and IMAs.
First, CFIBs will be required to supply domestic venture capital equivalent to 25% of the funds raised through promissory notes and IMAs out of their total managed assets. The mandatory venture capital supply ratio will be raised in stages: starting at 10% in 2025, increasing to 20% in 2027, and reaching 25% in 2028.
Venture capital supply refers to funding provided to small and medium-sized enterprises (SMEs), venture capital (VC) firms, new technology finance companies, purchases of P-CBOs, debt securities rated A or below (excluding large conglomerate affiliates), mid-sized companies, win-win payment programs, KOSDAQ venture funds, high-yield funds, materials-parts-equipment funds, and parent funds.
Additionally, the investment limit for real estate-related assets in promissory note and IMA portfolios will be lowered. The limit will be reduced in stages: 15% in 2025 and 10% in 2027. However, since there are no existing IMA portfolios, the 10% limit will be applied immediately to IMAs.
Risk management for CFIBs related to promissory notes and IMAs will also be strengthened. The funding limit for IMAs will be set at a combined 300% of equity capital (with promissory notes limited to 200%). Both promissory notes and IMAs will be clearly defined as investment products under the Financial Consumer Protection Act. Suitability principles will be applied, and firms will be required to explain investment risks and risk grades to investors.
To ensure smooth corporate finance supply, the product characteristics of IMAs will be clarified. It will be stipulated by law that IMAs are principal-guaranteed products (however, early termination may result in investor losses depending on performance).
When making additional subscriptions or early redemptions, the basis for valuation will be either market value or fair value. In addition, considering that long-term funds are necessary for venture capital supply, at least 70% of IMAs must have maturities of one year or longer.
The comprehensive financial service functions of CFIBs will also be enhanced. Currently, only certain funds are eligible for exclusive brokerage by CFIBs. Going forward, exclusive brokerage will also be permitted for VC funds, REITs, and new technology investment associations, as these have similar investment structures, profit distribution methods, and characteristics.
The requirements for CFIB designation will be systematized. Currently, the equity capital requirement is only assessed at the time of application. In the future, it must be continuously met based on the financial statements of the most recent two fiscal years. In addition, business plans and social credit will be reviewed as part of the designation requirements.
CFIBs must operate at each stage (KRW 3 trillion and KRW 4 trillion) for at least two years before being eligible for designation at the next stage (KRW 4 trillion and KRW 8 trillion). For the KRW 8 trillion CFIB designation, new requirements for major shareholders at the level of a change-of-approval review will be introduced. To assess the validity of CFIB business plans, as with other licensing procedures, the Financial Supervisory Service Governor will be authorized to form and operate an external evaluation committee.
There will also be institutional improvements to support active corporate finance by securities companies. The obligation for securities firms to centrally deposit their proprietary foreign securities will be abolished, allowing them to use foreign securities as collateral or for securities lending transactions to raise funds.
Internal control standards for investment products such as equity-linked securities and bonds will be strengthened. Currently, there is only an obligation to segregate the funds raised through these products from the proprietary assets of securities firms. However, to ensure sound management and investor protection, it is deemed necessary to minimize the commingling of raised funds and proprietary assets. Therefore, the internal lending limit between funds raised through equity-linked securities and bonds and proprietary assets will be capped at 10%.
Additionally, securities lending brokers will be able to facilitate transactions in one-to-many or many-to-many formats, and the entire negotiation and transaction process will be automated. In consideration of this, personnel requirements for securities lending broker licensing reviews will be strengthened. Specifically, there will be new requirements for one trading specialist and four IT specialists.
A Financial Services Commission official stated, "We have established an institutional foundation to ensure that funds flow smoothly into productive sectors through the capital market," adding, "Through this public comment period, we will broadly gather feedback from relevant institutions and industry stakeholders, with the goal of implementing these measures within the year."
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