Financial Supervisory Service Uncovers Private Fund Managers for Investor Deception and Misappropriation of Funds... "Swift Removal if Unqualified"

The Financial Supervisory Service (FSS) announced on the 1st that it will disclose cases of violations found during a comprehensive inspection of private fund management companies and plans to take measures such as market expulsion if serious illegal activities are detected.

According to the FSS, 156 private fund management companies have newly entered the market over the past three years. As of the end of 2020, there were a total of 252 private fund management companies, which increased to 376 by the end of June this year. The assets under custody of private funds also rose from KRW 438.4 trillion to KRW 577.8 trillion during the same period.

Although the market entry of private fund management companies is increasing, the FSS explained that only four companies have been expelled despite being involved in serious illegal activities or accumulating losses leading to capital erosion.

As of the end of May, nine private fund management companies failed to meet the minimum capital maintenance requirements, and one company has passed the six-month grace period, with sanctions underway for violations of the minimum capital maintenance obligation. Two companies under sanction proceedings have not submitted business reports, so it is unclear whether they meet the minimum capital maintenance requirements. However, if fund assets remain, investor protection procedures such as fund transfer prevent unqualified private fund management companies from being promptly expelled from the market.

Excessive proportion of concurrent or ancillary business was also observed. As of the first quarter of this year, other revenues such as advisory, discretionary management, and loan brokerage accounted for 39.2% of private fund management companies' operating income. Among them, 61 companies showed a business pattern focused on short-term profit generation through concurrent businesses, with other revenues accounting for more than 50% of total fee income. There were also cases of violating the legal maximum interest rate limit of 20% during loan brokerage and arrangement processes.

The FSS also disclosed major violation cases found during the comprehensive survey of private fund management companies. First, cases of deceiving investors by falsely reporting progress without on-site inspections while promoting high-risk long-term projects with significant information asymmetry were detected.

Additionally, some companies privatized client assets by misappropriating fund money for the needs of major shareholders. Company A transferred fund money to related parties through a conduit company acting as an investment or financial intermediary when the family corporation of the major shareholder faced financial difficulties. When a special asset fund under management experienced insolvency, they concealed the problem by circularly using funds between special asset funds.

Furthermore, using documents falsely stating investments in safe assets such as government bonds, Company B attracted KRW 20 billion from Foundation B and used part of the funds to repay insolvent private bonds included in an existing special asset fund, causing a fund redemption suspension crisis.

Other cases included unqualified management companies failing to meet minimum registration maintenance requirements, concealing investment losses to maintain licenses, refusing inspections, violating the legal maximum interest rate of 20% on loans, and brokering loans between general corporations and individuals outside the permitted scope of loan brokerage business.

An FSS official stated, "Privatizing legally recognized financial company status to engage in illegal and unfair acts contrary to the purpose of the core business is a serious criminal act," and emphasized, "We will make various efforts to establish market order and restore trust so that the private fund market can be established as a stable asset growth means for investors."

He added, "We will promptly and strictly proceed with sanction procedures against management companies and executives who do not comply with the license purpose or commit illegal acts," and "We will promote institutional improvements to enable immediate expulsion for serious legal violations such as organized customer interest damage and embezzlement involving privatization of fund assets."

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