1. Basic Structure

 
he basic structure of Korean indirect investment schemes is as follows:
First, the Indirect Investment Asset Management Business Act (the “Act”) provides overall regulation for indirect investment schemes. Previously, various indirect investment schemes (investment trust, investment company, unspecified money trust, and variable insurance product) had been regulated by acts applicable to each scheme such as the Securities Investment Trust Business Act, Securities Investment Company Act, Trust Business Act, and Insurance Business Act; but they have now come under the regulation of the Act based on the principle of applying the same regulation to the same function.
 
   Second, indirect investment vehicles can be divided into investment trusts (or contractual-type vehicles) and investment companies (or corporate-type vehicles). The establishment or amendment of an investment trust should be reported to the Asset Management Association of Korea (AMAK) or to the Financial Supervisory Service (FSS), while an investment company should register its Articles of Incorporation with the FSS at the time of their establishment or amendment.
 
 

2. Major Contents of the Act

 
A. A participant who wants to enter the asset management business should satisfy the applicable requirements and observe the related procedures. An asset management company should obtain permission from the Financial Supervisory Commission (FSC) for its establishment, while a trustee, a general administrator, a distributor, a bond pricing company, and an investment advisory company should register with the FSC.

B. The new act broadened the range of investment objects by adding exchange-traded derivatives/OTC derivatives, real estate, real assets, etc. to enable the establishment of various types of funds. Funds are classified as a securities fund, a derivatives fund, a real estate fund, a money market fund, or a fund of funds depending on the major investment objects.

C. Restrictions on management of fund assets are as follows:

  1. Investment by any one indirect investment vehicle in investment securities of the same issue shall not be more than 10% of the total asset amount of such indirect investment vehicle.
  2. An asset management company shall not invest in more than 20% of the total number of stocks issued by any one company using the total asset amount of all its indirect investment vehicles.
  3. An asset management company shall not acquire the stock of an affiliate in excess of 10% of the total asset amount of each indirect investment vehicle. (However, if the market weight of the affiliate's total issued shares exceeds 10%, it may acquire the stock of its affiliate up to the market weight.)

D. The protection of investors through the following special regulations.

  1. A derivative fund's VaR (value-at-risk) shall not exceed two times its total asset value.
  2. A real estate fund may lend money within 100% of its total net asset value, shall not borrow money exceeding two times of its total net asset value, and shall not dispose of real estate within three years from its acquisition. When an asset management company establishes an indirect investment vehicle for real estate, it shall invest less than 70% of the total asset amount of the indirect investment vehicle in real estate.
  3. A commodity fund shall be established in a form of a close-end type.
  4. A fund of funds shall not invest more than 20% of its total asset amount in another fund and shall not invest more than 50% of its total asset amount in funds belonging to one asset management company.

E. The Act aims at preventing conflicts of interest, for example a financial company engaged in the asset management business shall concurrently neither be a trustee of an investment trust being managed by itself nor acquire beneficiary certificates issued by itself.

F. The Act aims at increasing the specialty of asset management by securing fund managers specialized in the management of each indirect investment vehicle.

  1. An asset management company shall secure more than five fund managers. When managing real estate funds, an asset management company shall secure more than two real estate fund managers.
  2. A trustee shall secure more than two compliance staff and more than two accounting staff.
  3. A fund administrator shall secure more than two accounting staff.

G. The Act permits banks, securities companies, insurers, futures companies, investment banks, and securities finance companies to engage in sales of funds by broadening the range of distribution channels. Also asset management companies will be allowed to undertake direct sales of funds from January 4, 2006.

H. Forward pricing is applied to indirect investment securities issued by funds at the time of redemption. Partial redemption is allowed under the Asset Management Business Act if requested by an individual investor. Backward pricing is applied to MMFs (money market funds), and, if necessary, MMFs can be redeemed with a distributor’s proprietary assets.

I. An asset management company shall disclose changes, if any, in the matters that have a material effect on the assets and property of the funds that it manages.

  1. A truster shall submit a monthly business report and an annual performance report to the FSC.
  2. An asset management company is obliged to draw up an investment prospectus and quarterly performance reports, and provide them to its investors.
  3. AMAK is in charge of the public disclosure of funds and comparative results of funds performance.

J. A truster shall disclose every day the NAV of a beneficiary certificate.

K. The FSC may order asset management companies, trustees, distributors, etc. to submit materials concerned or report their financial and business standing in order for all possible measures for investor protection to be taken. Also the FSS may conduct an audit of a truster's business and property.

 
 

3. Private Equity Funds (PEF)

 
The National Assembly approved on September 10, 2004 a bill that allows the establishment of PEFs in order to channel more money into stock investments, corporate restructuring, and social overhead capital spending. Currently, asset management companies can create such funds in the form of a mutual fund only for the purposes of merger or acquisition (M&A). It will be effective from Dec. 5, 2004.
 
<Major Contents>

Classification 

Contents

 Offering   

- Private placement form

 Minimum  Investment amount

- Individuals: 2 billion won
- Institutions: 5 billion won

 Purpose

- Participation in management
- May use Special Purpose Company (SPC)

 Life time of the fund

- 15 years

Management limits

- Not allowed to sell equities within 6 months
- Leverage and debt guarantee should be less than 10% of fund assets

Fair Trade Law &
Financial Holding
Company Law 

- Exempt from Holding Company Law and Fair Trade Laws for 10 years from stablishment.

 Limits for  
state-owned banks
and conglomerates

- Korea Development Bank only to participate in infrastructure and restructuring
- Industrial Bank of Korea only to support small and medium sized firms
- Conglomerates are subject to the 4% limit on bank ownership if they are the largest shareholder and have voting rights in a private equity fund.
- The same limit will apply if affiliates of different conglomerates collectively hold more than a 30% stake in a private equity fund. 

 Investment in banks

- Re port to the F SC within 5 days any stake of more than 4% in any bank.