The Financial Services Commission and the Financial Supervisory Service unveiled on February 14, 2020 an evaluation of hedge fund market and the measures to improve its regulatory framework. The measures are intended to ensure the autonomy of private fund management while addressing regulatory inadequacy and vulnerabilities found in the assessment by introducing a minimum necessary level of regulations.
BACKGROUND
Hedge funds play an important role in providing venture capital in startup investment ecosystem from business setup to scale-up to exit. However, the recent misselling, inadequate liquidity management and unlawful and/or unfair activities in the market have shown the necessity to improve the regulatory framework.
Against this backdrop, the government unveiled on November 14 last year the Measures to Strengthen Investor Protection with High-risk Investment Products, which a) prevented sales of public offering funds in the form of private funds, b) placed stronger investor protection for ‘highly complex investment products,’ c) raised entry requirements for retail investors from KRW100 million to KRW300 million, and d) tightened regulation standards for financial companies selling OEM funds.
From November 2019 to January 2020, the government conducted a review on the hedge fund market to assess potential risks and vulnerabilities. The assessment was made on 52 asset management companies and 1,786 private funds worth KRW 22.7 trillion. Most hedge funds did not show risky operation methods or investment structures unlike the large scale suspension of redemption cases surfaced recently.
Based on this market review, the government has prepared the following measures in order to strengthen investor protection and ensure credibility in the market.
KEY MEASURES
I. ENHANCE RISK MANAGEMENT BASED ON MARKET DISCIPLINES
The government will work to establish a foundation in which different market participants and players can provide a supervisory role and “checks and balances” against one another.
II. ADDITIONAL MEASURES FOR INVESTOR PROTECTION
The FSC will address vulnerabilities in the structure of funds with a minimum necessary level of regulatory measures to better protect investors.
III. STRENGTHEN SUPERVISION AND INSPECTION BY FINANCIAL REGULATORS
The financial regulators will bolster the supervision and inspection of hedge fund market.
► Enhance monitoring and strengthen reporting requirements so that the government is able to respond properly at appropriate times and take precautionary steps.
► Introduce a fast-track revocation of registration with fund management companies that fail to meet regulatory requirements in capital and human resources.
► Strengthen self-regulatory functions of the Korea Financial Investment Association.
LIME ASSET MANAGEMENT’S REDEMPTION SUSPENSION
With regard to Lime Asset Management which recently suspended redemption of its funds, the government will work on the following.
► Continue to closely monitor the process and ensure that redemptions take place in an orderly and fair way.
► Promptly conduct an investigation on dispute resolution cases related to misselling and work on providing remedies for investor losses.
► Impose strict penalties for unlawful activities and cooperate with the prosecutor’s office (if the misselling charges are confirmed, the government will also look into the fund sellers for any violations)
The government will bolster market monitoring of hedge funds and take necessary measures promptly when similar cases arise in the future.
FURTHER PLANS
The government plans to finalize and announce specific measures for improving the regulatory framework on hedge fund market in March this year, after gathering opinions from stakeholders and experts.
* Please refer to the attached PDF for details.