Financial Services Commission Holds Third Meeting on the Grand Transformation of Productive Finance
New Eligibility Requirements for Major Shareholders of GPs Introduced... "Enhancing Accountability and Soundness"
Entry of Specialized Electronic Registration Institutions for Unlisted Shares Approved... "Active Fundraising Expected for Ventures and Startups"
Regulatory reforms are being pursued to significantly strengthen the accountability of institutional private equity funds (PEFs). A "one-strike-out" system will be introduced, under which a PEF general partner (GP) can be expelled from the market after a single violation if they commit serious unfair trading practices, such as using undisclosed material information. The aim is to prevent side effects from short-term profit-seeking and to encourage PEFs to contribute to enhancing the long-term value of companies.
The Financial Services Commission announced on December 22 that it held the "Third Meeting on the Grand Transformation of Productive Finance" at the Seoul office of the Korea Exchange in Yeouido, Seoul. The meeting gathered representatives from the innovation and venture sectors, the financial industry, market infrastructure institutions, and experts who form the innovation ecosystem of the capital market. They discussed tasks to foster the capital market as a core platform supporting the innovative growth of Korea's economy. The agenda included measures to ensure that the capital market infrastructure operates efficiently and that the financial sector and innovative companies are organically connected, while also introducing the government's policy direction.
Introduction of 'One-Strike-Out System' for GPs... "Enhancing Accountability and Soundness"
First, the regulatory framework for PEFs will be aligned with global standards. Introduced in 2004 to foster domestic capital in the aftermath of the foreign exchange crisis, PEFs have grown rapidly over the past 20 years. The amount committed to PEFs increased from just 900 billion won in 2007 to 153.6 trillion won in 2024. However, concerns have been rising that PEFs, being overly focused on short-term profits, are undermining the long-term value of companies and increasing market volatility.
To address this, the Financial Services Commission aims to establish a regulatory system that enhances the accountability and soundness of PEFs without undermining their positive functions. In particular, regulations will be revised to meet global standards to prevent negative effects arising from regulatory arbitrage with overseas PEFs.
To secure GP accountability, oversight and supervision will be strengthened. Currently, grounds for GP deregistration are limited, such as "repeated similar violations." To improve this, a legal basis will be established to allow for the cancellation of a GP's registration after just one serious legal violation, such as unfair trading practices involving undisclosed material information (the one-strike-out system).
Additionally, unlike financial companies, there are no eligibility requirements for major shareholders of GPs, making it difficult to prevent the participation of unqualified individuals. Furthermore, the obligation to establish internal control standards has been limited to "conflict of interest management," which has been insufficient to ensure sound management. Going forward, eligibility requirements for major shareholders at the level of financial companies will be newly established as a registration requirement for GPs. In addition, GPs will be required to establish internal control standards equivalent to those of financial companies. For medium and large GPs, it will be mandatory to appoint a compliance officer responsible for overseeing internal control-related work.
Furthermore, to enhance the soundness of PEF operations, the supervisory authority's reporting system will be significantly improved, and the scope of information provided will be expanded so that investors can closely monitor the status of operations and hold GPs accountable. Chairman Lee emphasized, "We will strengthen oversight and supervision to ensure GP accountability and further expand the supervisory functions of both the authorities and the market over PEF operations."
The Financial Services Commission plans to submit a proposed amendment to the Capital Markets Act, reflecting these PEF system improvement measures, within this year (as a parliamentary bill), and will actively participate in discussions in the National Assembly with the goal of passing it in the first half of next year.
Allowing Entry of Specialized Electronic Registration Institutions for Unlisted Shares... "Expecting Improved Fundraising for Ventures and Startups"
From a market infrastructure perspective, the government will allow specialized electronic registration institutions for unlisted shares to ensure that the stocks of ventures and startups can be traded safely. Since the implementation of the Electronic Securities Act in September 2019, electronic registration businesses have operated under a licensing system. While electronic registration has become established in large-scale, standardized investment markets such as listed stocks and bonds, there have been criticisms that electronic registration for non-standardized and unlisted shares remains insufficient. In response, the government will permit electronic registration institutions specialized in unlisted shares. This will introduce competition into the securities electronic registration sector, which is currently monopolized by the Korea Securities Depository.
Starting this month, the Financial Services Commission, together with the Ministry of Justice and other relevant agencies, will prepare for the operation of new specialized electronic registration institutions for unlisted shares. In the first half of next year, detailed licensing review standards (manuals) will be developed in cooperation with relevant ministries and agencies, and the Electronic Securities Act will be supplemented to provide the legal basis for delegated licensing reviews. From the second half of the year, related licensing procedures, such as briefing sessions, will be carried out. The authorities expect that if tailored electronic registration for unlisted shares becomes active, the transparency and convenience of transactions and management will improve. They also anticipate that the potential for related disputes will decrease and that fundraising for small and venture businesses will be further expanded.
Chairman Lee Eogwon stated, "By allowing specialized electronic registration institutions for unlisted shares, we will introduce competition into securities electronic registration. Through customized electronic registration for non-standardized and unlisted shares, we will enhance the convenience of stock trading and management, making it easier for ventures and startups to raise funds."
Meanwhile, major securities firms such as Korea Investment & Securities, Mirae Asset Securities, Hana Securities, Shinhan Investment & Securities, and Kiwoom Securities, which attended the meeting, announced their intention to actively lead venture capital investment as key financial sector players in the capital market innovation ecosystem. To this end, based on the five firms, they plan to supply a total of 20.4 trillion won in venture capital by the end of 2028, by adding 15.2 trillion won over the next three years to the 5.1 trillion won in venture capital investments outstanding as of the end of September this year.
Chairman Lee Eogwon emphasized, "Productive finance should not be limited to changes in the work or investment targets of financial companies, but must deliver tangible results that the public can feel. Going forward, we will meticulously manage the policy delivery system to ultimately achieve 'finance that the public can feel and that benefits people's lives.'"
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