'OEM Fund in Regulatory Blind Spot Faces Judgment... FSC Reconsiders NongHyup Bank Sanctions Next Week'

Discussion on NH Nonghyup Bank OEM Fund Sanctions Around the 20th... Conclusion by Early Next Month at the Latest
First Possible Sanction on OEM Fund Distributor if Underwriter Status Recognized... Controversy Over Retroactive Legal Application

[Asia Economy Reporters Haeyoung Kwon, Jihwan Park] Financial authorities will decide by the end of this month whether to impose sanctions on NongHyup Bank, which is suspected of selling 'illegal Original Equipment Manufacturer (OEM) funds.' If sanctions against NongHyup Bank are confirmed, it will be the first punishment for sellers who have been in a regulatory blind spot regarding OEM funds. Amid the recent spread of controversies over private equity fund OEMs, this is expected to serve as a benchmark for predicting the future intensity of related financial regulations.

According to financial authorities and the financial sector on the 12th, the Securities and Futures Commission under the Financial Services Commission will discuss the sanction agenda for NongHyup Bank's OEM funds as early as the 20th. Although the sanction decision was postponed at the end of last year, it is reported that a conclusion will be reached by the end of this month at the earliest or early next month at the latest.

NongHyup Bank is suspected of ordering funds from Fine Asia Asset Management and Aram Asset Management via the OEM method between 2016 and 2018, splitting them into private equity funds with fewer than 49 investors to evade public fund regulations. OEM funds are funds created and managed by asset managers under the instructions of sellers such as banks and securities firms, which are prohibited under the Capital Markets Act.

The Financial Supervisory Service (FSS), recognizing that only the asset managers of OEM funds can be punished under current law, shifted to indirect sanctions by broadly interpreting NongHyup Bank as a 'broker' and disciplining it. When public funds are split into private equity funds, public fund regulations such as submitting securities registration statements apply, and the FSS imposed a fine of 10 billion KRW on NongHyup Bank for failing to fulfill this obligation as a broker. The Securities and Futures Commission, which makes the final sanction decision based on the FSS's judgment, debated whether NongHyup Bank qualifies as a broker and whether brokers have the obligation to submit securities registration statements but failed to reach a conclusion.

A Securities and Futures Commission official said, "The result of a lawsuit, which was to be referenced while postponing the sanction decision on NongHyup Bank, has come out," adding, "Commission members will refer to this ruling and discuss and decide on the sanction of NongHyup Bank as early as the 20th."

Previously, the Securities and Futures Commission imposed a fine on the underwriter of Bioinfra Life Sciences for violating the obligation to submit a securities registration statement during a paid-in capital increase. The underwriter filed an administrative lawsuit against this, and last month the court ruled that the underwriter does have this obligation. Since the Securities and Futures Commission decided to reference the lawsuit outcome for the NongHyup Bank sanction agenda, market observers believe that if the broker status is recognized, NongHyup Bank is highly likely to be sanctioned.

On the other hand, NongHyup Bank maintains that it is unfairly accused. It argues that it is not the broker of the OEM funds and that the financial authorities are retroactively applying the 'Mirae Asset Prevention Act,' enacted in May 2018, to funds sold before that period. This law essentially applies public fund regulations even to private equity funds if the same securities are issued in two or more parts. NongHyup Bank also emphasizes that there were no investor losses at all.

A banking sector official pointed out, "Applying the Mirae Asset Prevention Act retroactively to products sold before the law was enacted is tantamount to a 'forced fit' sanction," adding, "There is a possibility that the financial authorities are avoiding responsibility for regulatory gaps and placing all the blame on financial companies."

Within the financial sector, close attention is being paid to whether NongHyup Bank will be sanctioned, as it could be the first sanction against an OEM fund seller. A financial sector official said, "Private equity funds such as overseas interest rate-linked derivative-linked funds (DLF), Lime Asset Management funds, and Australian real estate funds have been repeatedly embroiled in OEM fund controversies," adding, "Since the financial authorities have announced strengthening sanctions against OEM fund sellers, this first case could influence other OEM fund inspections and sanctions, making it unavoidable for the market to pay close attention."

This content was produced with the assistance of AI translation services.