"Preventing Lime Incident Recurrence"…Financial Authorities Announce Legislative Notice on Multi-layered Fund Regulation

Financial Services Commission's Follow-up Measures on Private Equity Fund Improvement Plan

[Asia Economy Reporter Minji Lee] Going forward, complex layered fund structures involving circular investments such as between master funds and sub-funds, like those of Lime Asset Management, will be prohibited. If asset management companies operate fund money differently from what was explained, they will be regulated as unfair business practices and subject to sanctions.

According to financial authorities on the 2nd, the Financial Services Commission announced the legislative notice of a partial amendment to the "Enforcement Decree of the Capital Markets and Financial Investment Business Act" containing these details the day before. This is a follow-up measure to the "Private Fund Improvement Plan" announced last April.

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According to the amendment, the "layered investment structure" involving circular investments between master funds and sub-funds will be banned. Such fund structures were one of the reasons behind the Lime Asset Management redemption suspension incident. Although Lime Asset Management effectively corresponded to a public offering fund (with 50 or more investors), it used a loophole by splitting it into sub-funds with fewer than 50 investors to avoid regulation, recruiting many investors, and then managing them as one master fund.

The amendment stipulates that if multiple sub-funds invest 30% or more in a master fund, the number of investors in the master fund must include all investors in the sub-funds. This strengthens the criteria for determining public offering funds to prevent evasion of public offering regulations.

When the improvement plan was announced last April, the FSC explained, "In the case of layered investments, it is difficult for investors to clearly understand the management situation, and there is a risk that losses in a specific fund may spread or transfer to other funds, so institutional improvements are necessary."

If an asset management company operates fund money differently from what is stated in the fund investment explanatory materials, it will be regulated as an unfair business practice and subject to sanctions. In addition, mutual circular investments among the company's own funds, forcing subscription to the company's funds as a condition for fund investment, and evasion of the single-person fund establishment ban will also be restricted as unfair business practices.

Also, the submission frequency of private fund business reports will be shortened from "semiannual" to "quarterly."

On the same day, the FSC also announced the legislative notice of amendments to the Financial Investment Business Regulations. The amendment includes a plan to limit self-dealing transactions between an asset management company's own funds to within 20% of the average custody balance over the previous three months. It also includes provisions to apply more conservative risk assessment calculations when total return swaps (TRS) or similar transactions effectively result in borrowing.

The improvement plan regarding the lack of monitoring functions by custodians and distributors, which was pointed out as a cause of the Optimus Asset Management redemption suspension incident, is expected to take more time as it requires legal amendments.

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