The Act, which is based on the Securities Investment Trust Business Act, enables all asset management activities to be regulated at an equivalent level by unifying all asset management-related regulations. Accordingly this makes it possible to have regulation in accordance with function. Also there was a strengthening of devices for investor protection in order to regain investor confidence in the asset management industry, while regulations on the asset management business were improved in order to activate the industry.

The Act has significance in four main areas as follows:
First, it promotes efficiency and fairness by turning from institution-based to function-based regulations. The Korean government had regulated the asset management business based on regulations specific for a financial institution or for a product, leading to an imbalance in regulations with different regulations applied to the same asset management activity. Also the regulations could not keep up with the fast-developing asset management industry. The Act, and its functional supervisory structure, has increased regulatory efficiency and fairness as well as created an environment easily adaptable to financial innovation. Such a transition is in line with the trend in other countries, for example the UK's Financial Services and Markets Act 2000 (FSMA) and Japan's Act of Investment Trust and Investment Corporation, which were promulgated as single acts based on the principle of regulation by function.

Second, the Act will contribute to the development of the Korean capital market by broadening the range of the investment objects, asset managers, and distributors while strengthening devices for investor protection. The type and range of investment objects are critical factors for the competitiveness of a product. Under the old Securities Investment Trust Business Act, which limited the main investment object to "marketable securities", it was difficult to develop a variety of products to satisfy the varied demands of investors. To overcome such limitations, the new Act widened the scope of investment objects to include exchange-traded derivatives, OTC derivatives, real estate, real assets, etc. In addition, it added insurance companies and asset management companies to the list of authorized distributors and provided the legal background for payment in securities at the time of fund subscription, partial acquisition of unsold fund units by distributors, various fee structures, and consolidation of funds. Also the Act strengthened the compliance functions of a trustee and introduced a general meeting of beneficiaries.

Third, the Act has laid the basis for the creation of various products by establishing special purpose indirect investment vehicles, including Exchange Traded Funds, Multi-class Investment Vehicles, Umbrella Indirect Investment Vehicles, Securities Investment Companies for Corporate Restructuring, Securities Investment Companies for Corporate Acquisition, Indirect Investment Vehicles for Real Estate, Indirect Investment Vehicles for Commodity Assets, and Private Equity Funds.

Fourth, the Act will contribute to the promotion of the safe and efficient management of long-term savings vehicles, such as pension funds, by the asset management industry in preparation for an aging society. The percentage of old people in Korea already exceeds 7%, and the country is heading towards an aged society, where the percentage exceeds 14%, at the fastest rate among OECD countries. The development of the asset management business can be a solution for an aging society by allowing adequate income for the aged, and the Act will help the efficient management of pension and public funds by promoting asset management business activities.

The Act, which came into effect from January 4, 2004, is putting a new face on the asset management industry and allowing investors to have opportunities for investment in various indirect investment products.

2. History of Development 

   Korea Investment Corporation (KIC) was launched in December 1969, while the first equity investment trust was introduced in 1970. Korea Investment Trust Company (KITC), the first full-scale company specializing only in securities investment trust products, was established in 1974. Bond investment trusts were also introduced soon afterwards. The range of services and products were expanded by KITC, including unit investment trusts (1975) and trust-type securities savings accounts (1976).

   Another important development came in 1977 with the establishment of the second ITC (Investment Trust Company), Daehan Investment Trust Company (DITC). KIC was dissolved and DITC took over the investment trust business of KIC. Also in 1977, four new merchant banking corporations were allowed to engage in the business of bond investment trusts in addition to merchant banking business.

   Citizens Investment Trust Company (CITC), the last of the big three investment trust companies (ITCs) that were authorized to undertake operations nationwide, was established in 1982. In 1989, five regional ITCs (Korea First, Dongyang, Hannam, Central, and Shinsegi) were established in provincial areas outside Seoul. Each regional ITC was authorized to distribute investment trusts in Seoul and in its own specified regional area.

   As restrictions on the establishment of new ITCs were lifted in the summer of 1996 as part of the gradual reform of the financial markets, 23 investment trust management companies (ITMCs) were licensed to engage in investment trust business, leaving the total number of domestic fund management companies at 31 before the onset of the financial crisis in late 1997.
After the currency crisis in the financial markets, seven companies ceased operations and 3 ITCs and 21 ITMCs remained in business as of the end of 1999. Since 2000, however, ten more ITMCs have been established thanks to the dramatic increase in total assets stemming from remarkable improvements in the protection for investors and transparency in asset management, leaving the total number of ITMCs at 45 as of the end of 2004, including 11 foreign ITMCs, where foreign investors have shareholdings of over 50%.

   The size of contractual-type fund assets under management by ITCs grew dramatically from 240 billion won in 1978 to 3.6 trillion won in 1983 and then expanded even more rapidly in the mid-1980s. Favorable growth continued owing to the increases in personal savings as a result of the rapid economic growth and the expansion in the number of clients interested in investment trust products. In spite of uncertainty about the financial market caused by the currency crisis, the merits of investment trusts, such as their comparative stability with the separate custody of the assets by an independent trustee and comparatively high yields, resulted in further growth in investment trust savings.

   In addition, the widening gap with savings products at banks because of the emphasis on financial soundness by banks to meet BIS capital adequacy ratio targets drove investors towards investment trust savings. Total assets under management as of August 1999 reached a record high of 240 trillion won (about US$ 200 billion), astonishing growth from 151 trillion won in the previous year.

   After the financial turmoil, the uncertainty over future interest rates led to an increase in short-term Money Market Funds (MMFs), but the market structure then became more stable through the increase of equity funds after the beginning of the stock market rally.

   In August 1999, however, Daewoo¡¯s domestic creditors decided to undertake a debt rescheduling program. Then, the credibility of the fund industry was damaged seriously because of the illiquidity of non-performing bonds and commercial papers in the trust assets. Total assets plunged to 130 trillion won as of June 2000 through large-scale redemptions.
As the fund industry systems have improved dramatically since 2000 with the implementation of several new systems such as mark-to-market evaluation, internal control standards, external audit of trusts assets, etc., investment trusts have regained their attractiveness. As a result, total assets increased to 171 trillion won (about US$144.2 billion) as of the end of 2002.

   At the beginning of 2003, money flowed from bank deposits into short-term funds; however, the SK Global accounting scandal and liquidity problems at credit card companies accelerated outflows from the investment trust sector during the remainder of the year. As a result, the assets of contractual-type funds experienced a decline of 22,648 billion won during the year.

   Meanwhile, corporate-type investment funds, SICs (Securities Investment Companies, usually referred to as mutual funds in Korea), were introduced in late 1998 when stock investment was becoming popular as the stock market was soaring and interest rates were at record low levels. SICs made a favorable impression upon investors in the first stage because of transparency and sound governance, which investors believed were lacking with contractual-type investment funds at that time. Furthermore, only closed-end type funds were allowed at first, leaving SICs relatively unaffected by the Daewoo crisis. Assets under management by SIC managers totaled over 10.1 trillion won (approximately US$8.5 billion) as of the end of 2002. With demand for SIC products booming, sales of open-end type funds were allowed from January 2001 and fifteen SIC managers were in business as of the end of 2002.

   In contrast to contractual-type funds, the assets of corporate-type funds were relatively stable for most of the year and showed little reaction to market volatility; however, owing to a rapid drop in assets in December, the outstanding amount of corporate-type funds showed an outflow of 188 billion won in 2003.