Financial Supervisory Service, "Detected Acts of Self-Interest Pursuit Causing Fund Losses"

[Asia Economy Reporter Koo Eun-mo] An inspection of professional private equity management firms revealed that executives and employees of the management firms engaged in actions that caused losses to funds while pursuing their own interests.

On the 27th, the Financial Supervisory Service (FSS) announced this through the "Inspection of Professional Private Equity Management Firms and Progress on Private Fund Monitoring." However, it explained that the pointed-out cases were results of inspections prioritizing companies under watch due to redemption suspensions, making it difficult to conclude that these are widespread issues in the private equity management industry, nor do they imply that the funds of the respective management firms are generally deteriorated.

Following large-scale consumer damages from funds managed by Lime and Optimus Asset Management, a dedicated inspection team was launched on July 20 to prevent recurrence and restore investor confidence. The inspection team began inspections on August 24 targeting management firms related to major redemption suspension funds and those holding excessive non-marketable assets.

Looking at the main pointed-out cases from the inspection results, there were instances where fund profits were impaired or losses occurred due to deviations by fund managers. Executives such as the CEO of Company A purchased high-quality unlisted stocks held by their managed funds at low prices under the names of spouses or others, and sold some of them on the purchase day at twice the purchase price, repeatedly selling fund assets at significantly low prices to interested parties, thereby receiving unfair gains.

Cases of improper receipt of funds by executives and employees during work performance were also revealed. Notably, employees of Company B established a corporation under their control, referred to as Corporation A, while brokering and arranging loans with financial institutions and developers, and received unfair gains from multiple developers under the pretext of consulting fees, fund establishment, and loan arrangement commissions through Corporation A.

Additionally, cases were found where funds were established and managed following the involvement (OEM) of sales companies requesting the inclusion of specific assets without preparing internal risk management standards.

Along with the comprehensive inspection of private equity management firms, the industry is also conducting voluntary checks on professional investor-type private funds. Since August 18, the management industry?including sales companies, management firms, trust companies, and administrative service providers?has been conducting voluntary inspections on 9,043 (provisional) professional investor-type private funds. Each company is sequentially verifying the existence of managed assets according to fund asset details and checking whether the actual managed assets match the investment proposals.

As of the 18th, the overall inspection completion rate was about 50.5% based on the number of funds. Reports are required if managed assets do not exist or if there are regulatory violations, but no significant anomalies have been reported so far.

The FSS stated, "The industry's voluntary inspection is taking more time than initially expected because inspection tasks were concentrated on administrative service providers in September and October, and verification of non-deposited assets was done manually. Currently, inspections are mainly conducted at the trust company and sales company stages, but verifying the existence of non-deposited assets through supporting documents such as contract details will require some time."

The FSS also announced that it will do its best to complete the comprehensive inspection of 233 professional private equity management firms (as of the end of May this year) by 2023 as originally planned. Furthermore, during the inspection process, it will check whether internal controls of companies are functioning properly and encourage voluntary improvements in vulnerable areas. The FSS will continue to monitor the progress and any notable issues of inspections conducted by individual inspection entities such as trust companies and sales companies in the future.

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