Preventing a Second Lime·Optimus Incident... Private Equity Fund Sellers to Review Operational Status Quarterly (Comprehensive)

Financial Authorities to Strengthen Administrative Supervision of Private Equity Funds Starting August 12

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[Asia Economy Reporter Koo Eun-mo] Going forward, securities firms and banks selling private equity funds must review their operational status every quarter. Custodians responsible for asset management of the funds must also monitor asset details for any irregularities at least once a month.

On the 28th, the Financial Services Commission and the Financial Supervisory Service announced that they have prepared an "Administrative Guidance Plan for the Sound Operation of Private Equity Funds" to restore trust in the private equity fund market.

According to the administrative guidance plan, sellers must conduct prior verification of the investment explanatory materials provided by the fund managers before offering them to investors. Even after selling the funds to investors, sellers must check, with the cooperation of the fund managers, whether the fund’s operation aligns with the main investment strategies stated in the explanatory materials.

If the fund manager provides the necessary information for operational review to the seller within 20 business days from the last day of each quarter, the seller must complete the operational review within 10 days from the date of receipt. If the fund manager’s operations do not conform to the investment strategies outlined in the explanatory materials, the seller must request withdrawal, modification, or correction of the operations.

Unless there are special reasons, the fund manager must comply with the withdrawal, modification, or correction requests within three days from the date of the request and notify the seller of the implementation details. Additionally, if the fund manager fails to comply with the operational review requests without valid reasons, the seller must promptly report this to the Financial Supervisory Service.

Investor protection measures by sellers will also be strengthened regarding fund redemption and repayment delays. Upon receiving notifications of redemption delays, sellers must immediately inform investors and suspend sales of the relevant fund.

Custodians, who actually trade, store, and manage assets under the instructions of the fund managers, will also be responsible for monitoring illegal or improper activities by the fund managers. Custodians must review the fund asset holdings, such as the fund property list, at least once a month. Any discrepancies must be reported immediately to the Financial Supervisory Service.

Previously, Optimus Asset Management, suspected of a 500 billion KRW fund fraud, exploited the lack of monitoring and checks by sellers and custodians. Optimus promoted investments in safe assets such as public institution accounts receivable but invested 98% of the fund money in private bonds of unlisted companies with no business substance. The fund money was then invested in various risky assets through these private bond issuers. The absence of explicit obligations for private equity fund sellers and custodians to monitor poor fund management under current law is considered a major cause of the Optimus incident.

The Financial Services Commission explained, "While institutional improvements are urgently needed to protect investors and eradicate improper fund management, legal amendments require time. We will proactively implement key tasks through this administrative guidance."

To maintain a sound business order in the private equity fund market, the commission also decided to restrict unhealthy business practices such as circular investments by fund managers and coercive fund subscriptions (forcing investment counterparties to join the fund as a condition for investment).

On the same day, the Financial Services Commission and the Financial Supervisory Service also released an administrative guidance plan containing detailed instructions related to a full-scale survey of about 10,000 private equity funds. On June 2, the commission announced a "two-track" approach: a self-inspection by the financial sector of 10,304 private equity funds and on-site inspections of 233 private fund managers by financial authorities. The administrative guidance plan explains the inspection system, methods, and scope to enhance the efficiency and systematic nature of the self-inspection.

The inspection targets all private equity funds in operation as of May 31. A "four-party inspection consultative body" consisting of private equity fund sellers, managers, trust companies (custodians, and PBS if a dedicated brokerage contract is signed), and fund administration companies (companies entrusted with tasks such as calculating fund base prices) will be formed to decide detailed inspection matters.

The inspection scope includes verifying whether asset details match among parties, whether assets actually exist, and whether the investment prospectus aligns with the management methods. Any unusual findings such as asset discrepancies must be reported immediately to the Financial Supervisory Service.

The financial authorities plan to collect opinions on this administrative guidance from June 29 to July 10, followed by deliberation and resolution by the Financial Regulation Deliberation Committee within the Financial Services Commission. If approved, the guidance is scheduled to be provisionally implemented from July 12.

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