OEM Fund to Establish Sanctions Regulations Within First Half of Year... Preventing Second DLF vs Excessive Burden

Simple matters outside consultation are governed by OEM regulations
Preventing situations that evade regulations
Judgment based on each case rather than existing specifics

Blurred boundaries between consultation and instructions during sales and operation
Financial companies worry about increased uncertainty

Experts point out, "A clear message must be sent to the market through exemplary sanctions"

[Asia Economy Reporter Park Jihwan] As financial authorities push to establish regulations for sanctioning distributors related to Original Equipment Manufacturer (OEM) funds by next month, attention is focused on the potential impact on the industry. There are expectations that such measures could prevent major financial accidents like the Derivative Linked Fund (DLF) scandal in the private equity fund sector, but concerns also arise that the OEM fund sanction regulations may be ambiguous and impose excessive proof burdens on distributors, resulting in disconnected regulations.

According to financial authorities on the 12th, the Financial Services Commission plans to introduce grounds for sanctioning distributors currently in a regulatory blind spot regarding OEM funds through improvements to the private equity fund system announced after the DLF controversy in the first half of the year. Until now, distributors such as banks and securities firms have significantly influenced everything from product composition to management instructions by leveraging their dominant position, but when problems occurred with related products, distributors escaped punishment due to the absence of sanction regulations.

The financial authorities initially aimed to introduce related regulations within the first quarter, but the plan has been somewhat delayed. Currently, after the legislative notice of the Capital Markets Act enforcement decree amendment in January and February, follow-up procedures are underway. A Financial Services Commission official stated, "The sanctioning of OEM fund distributors is currently under regulatory review. Although the initial goal was the first quarter, the schedule has been delayed due to reviews by the Regulatory Reform Committee."

The broader plan of the financial authorities regarding OEM fund sanctions is to basically consider matters beyond simple business consultations as OEM funds. The Financial Services Commission finds it difficult to enumerate OEM fund judgment criteria in the law, and if the criteria are specified, there is a risk of regulatory evasion by strictly avoiding the presented standards. Therefore, they intend to determine OEM fund status on a case-by-case basis.

A Financial Services Commission official said, "Except for simple consultations and market trend monitoring between distributors and asset managers, we plan to consider all cases as OEM funds by default. If the asset manager independently evaluates and judges (regarding management) and furthermore creates evidence to prove this, it will be regarded as consultation between the asset manager and distributor, but otherwise, all will be considered OEM funds."

The problem lies in the ambiguity of the OEM fund boundary despite the financial authorities' firm stance. It is not easy to distinguish between 'consultation' and 'instruction' in exchanges between distributors and asset managers. For example, in overseas real estate funds, it is common for distributors and asset managers to consult from the real estate acquisition process due to the nature of the fund. This means the boundary between consultation and instruction can be unclear.

From the distributors' perspective, this makes predicting sanctions difficult. Even opinions traditionally considered as consultation with asset managers could later be reclassified as instructions based on the financial authorities' judgment. It is also problematic that asset managers, often in a relatively weaker position, represent these as consultations rather than instructions from distributors. Suspecting OEM funds and actually bringing cases into administrative or sanction domains are different issues.

There are also criticisms that excessive proof burdens will be imposed on distributors. A securities industry official said, "It is understandable that financial authorities want to establish grounds for sanctioning distributors to align with the existing punishment regulations for OEM fund asset managers, but requiring distributors to bear the excessive burden of proving that a fund is not an OEM fund is a double hardship," adding, "Clear definitions of sanction targets and fund definitions should be provided to create an environment where companies can make predictions."

Experts believe that since sanctioning OEM funds is not easy, if a fund is clearly recognized as an OEM fund, exemplary sanctions should be imposed to send a strong message to the market. Hwang Sewoon, Director at the Korea Capital Market Institute, said, "The criteria for judging OEM funds should be whether there is infringement related to the basic structure, management method, and management targets, which are the full authority of asset managers, and if infringed, it should be interpreted as OEM. OEM funds are difficult to prevent proactively, so a strong punishment for distributors after an OEM determination would be effective."

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