"Requirements for Establishing Private Equity Fund Management Firms and Strengthening Regulations on Distributors Needed... Consideration of Special Investigation Office Establishment Also Required"

Seminar Hosted by Yoon Chang-hyun's Office of the United Future Party: "Private Equity Funds as Hotbeds of Crime, Causes and Countermeasures"

[Asia Economy Reporter Eunmo Koo] To alleviate the ongoing private equity fund redemption suspension crises, from Lime Asset Management last year to Optimus Asset Management recently, there are calls to simultaneously strengthen the establishment requirements for private equity fund management companies and regulations on distributors. Additionally, it has been argued that a specialized investigative agency is necessary to eradicate large-scale financial economic crimes related to private equity funds.

Professor Bongsoo Kim of the Department of Law at Sungshin Women’s University pointed out at the seminar titled “Private Equity Funds as Hotbeds of Crime: Causes and Countermeasures,” hosted by Representative Changhyun Yoon’s office of the United Future Party at the National Assembly Library on the 23rd, that “The financial authorities failed to prevent fraudsters from establishing private equity fund management companies, and investors invested trusting the credibility of distributors without properly understanding private equity funds, which is the core issue.”

Professor Kim argued that to mitigate the recent private equity fund crisis, regulations on both the establishment requirements for private equity fund management companies and distributors must be simultaneously strengthened. First, he suggested reverting the establishment of private equity fund management companies back to an approval system or making registration requirements more stringent. Since the amendment of the Capital Markets Act in July 2015, the establishment of private equity fund management companies changed from an approval system to a registration system. The registration capital requirement was reduced from 6 billion KRW to 2 billion KRW, and the qualification for professional personnel was relaxed from at least two years of public fund management experience to at least three years of work experience in financial companies, effectively rendering the qualification requirements meaningless.

He emphasized, “While some worry about investment contraction, the real cause of investment decline will be the spreading perception that private equity funds themselves cannot be trusted, as seen in recent incidents.” He stressed the need to thoroughly verify capability and morality from the establishment stage to prevent unqualified individuals from founding private equity fund management companies.

He also stated that strengthening the requirements for banks and securities firms to sell private equity funds is necessary to prevent investments relying solely on the distributor’s credibility. Professor Kim criticized, “It has been revealed that banks and securities firms either did not know or ignored the risks of the products they sold and whether the private equity fund management companies were operating honestly. The biggest reason for the recent widespread damage from private equity fund incidents is that banks and securities firms did not perform supervisory functions over private equity fund management companies while selling the funds.”

Specifically, Professor Kim proposed that banks should be allowed to sell private equity funds only if they provide guarantees for a certain percentage of the investment amount. He also suggested that securities firms should clearly state that the operation of private equity funds is entirely entrusted to the private equity fund management companies.

There was also a call for a specialized investigative agency to eradicate large-scale financial crimes such as the recent private equity fund scandals. Lawyer Jongmin Kim, co-representative of the Barun Society Movement Alliance, proposed the need to consider establishing a Financial Economic Crime Investigation Office under the Ministry of Justice. The plan suggested by Lawyer Kim involves integrating the financial crime investigation personnel of the prosecution and police to create a separate special investigation agency. Even former prosecutors assigned to this office would investigate with judicial police authority, be subject to the prosecution’s investigative supervision and judicial control, and prosecutions would be handled by the prosecution.

Lawyer Kim explained, “To respond to large-scale financial economic crimes, it is primarily necessary to revive and strengthen the Securities Crime Joint Investigation Unit of the prosecution,” but added, “In the long term, it is desirable to abolish direct investigations by prosecutors as in France and Germany, and have the Financial Economic Crime Investigation Office conduct direct investigations while being supervised and controlled by the prosecution.”

He also called for the introduction of special investigative procedures. Lawyer Kim said, “Since most financial economic crimes are conducted secretly using advanced financial techniques, it is necessary to introduce special procedures across the board, such as wiretapping, account tracing, and search and seizure, to enable swift investigations.” He added, “For specific serious financial crimes like money laundering, as in France, it is worth considering introducing a presumption of burden of proof shift, requiring suspects to prove that their financial transactions are legitimate, and if they fail to do so, they would be punished accordingly.”

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