"Preventing a Second Optimus Incident"...FSS Establishes Fund Custody Guidelines

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[Asia Economy Reporter Ji-hwan Park] The financial authorities have announced specific action guidelines for private fund custodians to monitor private funds.

The Financial Supervisory Service (FSS) announced on the 31st that, in collaboration with the Korea Financial Investment Association, it has established a guideline for custodians outlining compliance requirements in the fund custody process, monitoring of management activities, and verification items.

This fund custody guideline is based on the amended Capital Markets Act, which will take effect in October, and the administrative guidance plan for sound operation of private funds announced last year.

The amended Capital Markets Act explicitly requires custodians to monitor all aspects of fund management. According to the amendment, custodians must oversee the entire fund management process, including whether management instructions or activities are lawful and whether they comply with the collective investment regulations and prospectus.

However, the custodian industry has repeatedly expressed difficulties, stating that the law only imposes monitoring obligations without specifying monitoring methods. Therefore, the need arose to establish guidelines clarifying the duties and scope of responsibility related to the custodian’s monitoring obligations.

According to the new guidelines, custodians must first establish compliance monitoring personnel of two or more, experts in collective investment asset calculation, and necessary IT and security facilities for custody operations. In principle, the primary custodian performs the monitoring function, and sub-custodians fulfill obligations only within the scope entrusted to them.

The guidelines also define the scope of custody and management of collective investment assets. This includes custody and management of collective investment assets, acquisition and disposal of assets according to management instructions, payment of redemption proceeds for beneficiary certificates, and monitoring of management instructions. It is stipulated that instructions related to custody and management of collective investment assets by the asset manager should primarily use the Korea Securities Depository’s IT system. If assets that cannot be deposited are managed, the custodian may separately manage them with certificates proving the existence of the assets.

At the end of each quarter, custodians must compare the asset holdings of private funds for asset managers (general administrative managers) and general investors to check for abnormalities and retain supporting documents. After the day’s management instructions are closed, the custodian aggregates the details and cross-checks them with the asset manager to verify whether funds have been processed properly.

The expansion of monitoring targets, considered the biggest change in the custodian industry, has also been specified. The amended Capital Markets Act requires custodians to monitor the management status of all private funds involving general investors. It distinguishes between general private funds and institution-only private funds according to investors and defines public funds and private funds for general investors as monitoring targets. Until now, custodian monitoring obligations applied only to public funds.

Custodians must verify whether the instructions for acquisition, disposal, custody, and management of assets comply with laws, regulations, and investment prospectus materials after executing them. A monitoring checklist is distributed, and custodians must take corrective actions such as requesting rectification of violations after performing monitoring tasks according to the monitoring system. Custodians may request submission of related materials from asset managers and others to perform monitoring duties, and asset managers and others cannot refuse without justifiable reasons.

The guidelines also include suggestions from the custodian industry. If it is impossible to execute due to unclear management instructions from the asset manager, the custodian may request correction such as withdrawal of the management instructions. Additionally, if the asset manager issues management instructions by methods other than the Korea Securities Depository’s IT system, custodians may request confirmation from the asset manager’s compliance officer.

An FSS official stated, "We expect the guidelines to resolve uncertainties regarding the scope of responsibilities and obligations related to custodians’ monitoring of management activities." The custodian operation guideline will be implemented on the 28th of next month.

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