From now on, institutional private equity funds (PEFs) will be forced out of the market even if they commit just one unfair trading act, such as using undisclosed material information. The government will also strictly screen PEF controlling shareholders to the same standard as financial companies to block entry into the PEF market by controlling shareholders with a history of violations.
On the 22nd, the Financial Services Commission (FSC), chaired by Lee Eog-weon, held the third meeting on the "grand shift to productive finance" at the Korea Exchange (KRX) in Yeouido, Seoul, and announced "measures to improve the institutional PEF system." The FSC said, "We will restructure the PEF regulatory framework to meet global standards so that PEFs can return to their original role of supplying venture capital and supporting industrial reorganization and restructuring, without being fixated on short-term profit-taking."
First, the Financial Services Commission (FSC) decided to introduce a "one-strike-out" system under which a PEF general partner (GP) will have its registration canceled if it commits even a single serious legal violation. Although the law already allows for canceling a GP's registration, the grounds are limited to violations of the obligation to maintain registration requirements or repeated similar violations, making it difficult to cancel the registration of a GP when problems arise.
The Financial Services Commission (FSC) also decided to introduce a fitness requirement for GP controlling shareholders at the level applied to financial companies. The aim is to block entry into the PEF market by controlling shareholders with a history of violations and to swiftly expel from the market any already registered GP whose controlling shareholder commits an illegal act.
GPs will be required to establish internal control standards appropriate to the level of financial companies, and the relevant system will be revised to impose an obligation to appoint a compliance officer for mid- to large-sized GPs with assets under management exceeding 500 billion won.
In addition, to prevent soundness problems from arising due to excessive borrowing by PEFs, it will be mandatory to report to financial authorities the reason, the impact on management, and future control plans if borrowings exceed 200% of net worth (asset minus liability). The existing 400% borrowing limit for PEFs will be maintained.
The Financial Services Commission (FSC) explained, "Although multiple amendments to the Financial Investment Services and Capital Markets Act have been proposed to reduce the PEF borrowing limit to 200%, the United States and the European Union (EU) do not directly regulate PEF limits," adding, "In light of the potential weakening of domestic PEF competitiveness due to regulatory arbitrage with overseas PEFs, we decided not to reduce the borrowing limit."
In addition, the Financial Services Commission (FSC) will require GPs to regularly report to supervisory authorities on the status of the PEFs they manage, including detailed investment status across all PEFs and the liquidity status of acquired corporations, as well as the fees received from each PEF and how those fees are calculated.
The scope of information that a GP must provide to investors (LPs) will also be expanded. The goal is to create an environment in which LPs can closely review the status of PEF operations and check and monitor GPs.
The Financial Services Commission (FSC) said, "We will propose an amendment to the Financial Investment Services and Capital Markets Act reflecting these measures, with the goal of passage in the first half of next year," adding, "Before the law is amended, we will form a separate task force to prepare 'PEF discretionary management guidelines' to build self-regulation for PEFs."