S. Korea Amends Bill to Protect Private Equity Fund Investors

The revision bill addresses issues with feeder funds, cross investing between PEFs managed by the same entity, and inappropriate sales activities involving coercive sales tactics.

The South Korean government has approved a bill to revise the ‘Enforcement Decree of the Financial Investment Services and Capital Markets Act’ to strengthen investor protection in the PEF (private equity fund) market.

The revision bill is scheduled to go into effect immediately after promulgation in mid-March. It is a follow-up to the measures to improve the regulatory framework on PEFs announced by the FSC (Financial Services Commission) and FSS (Financial Supervisory Service) in April 2020.

The measures included requirements for PEFs to undergo regular audits, adopt new valuation guidelines, conduct regular liquidity stress tests, and cap leverage at 400 percent of assets.

These measures were based on plans introduced in February 2020 following a review of the potential risks and vulnerabilities in the PEF market, also taking into account feedback from experts and other stakeholders.

The FSC says the key provisions of the newly approved revision bill are intended to close loopholes and prevent the evasion of tougher regulations. They are also aimed at strengthening regulations against unfair and inappropriate sales activities and tightening monitoring of PEFs.

The revised bill requires that when a number of feeder funds from a single PEF management firm invest in a master fund, and their total investment makes up 30 percent or more of the master fund, the number of investors in the feeder funds will be counted toward the total number of investors of the master fund.

This provision seeks to address the problem associated with investments by feeder funds.

Under current rules, when a number of feeder funds make investments of less than 10 percent each toward a master fund, the master fund can be operated as a PEF and not as a publicly-traded fund even when the actual number of investors exceeds the regulated threshold of fifty.

The revised bill also tackles the issue of cross investing between PEFs managed by the same entity, which can artificially inflate volumes or lead to dual compensation.

The bill also now prohibits inappropriate sales activities involving coercive sales tactics in return for monetary benefits, and allows for sanctions to be imposed for violations of the rules.

Additionally, the revised bill requires PEF managers to file reports on a quarterly basis with an expanded list of criteria to be included in their reports, such as risk assessments on derivatives products.

The announcement on the revision bill is available here.

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