Starting Sept. 30, when selling high-risk public offering funds, firms must disclose the risk of principal loss and up to four fund-specific risk factors. If they launch a product similar to a fund that previously recorded a loss rate exceeding 20%, they must also disclose the scale of the loss at the time and details of its occurrence.
The Financial Supervisory Service said on the 25th it will implement a "standard for key risks of public offering funds" starting Sept. 30. The move follows criticism, prompted by last year's full-loss debacle in overseas real estate funds, that there is a need to improve public offering fund registration statements and disclosure forms so investors can sufficiently recognize fund risks in advance.
The standard applies to funds that share any of the following: ▲ overseas real estate funds and REITs; equity-linked funds (ELF) and derivative-linked funds (DLF) related to past loss incidents involving equity-linked securities (ELS) and derivative-linked securities (DLS), or other products with large-loss cases; ▲ high-risk products such as leverage or inverse; ▲ funds that could mislead consumers, such as covered call, target-maturity, gold spot, and overseas fund-of-funds.
These funds must all note the "risk of principal loss." In addition, they must disclose up to three special risks that reflect the fund's characteristics. Financial authorities directed the use of consumer-friendly terms instead of jargon so investors can more easily understand the risks.
If there have been cases where the past loss rate exceeded 20%, that information must also be listed separately. This reflects criticism that, even when an asset manager with a history of large losses launches a similar product again, there were no separate restrictions and insufficient mechanisms to fully inform investors of the facts. The fund name, investment region and asset name, loss occurrence date, and scale must be stated.
When calculating the loss rate, closed-end funds apply the cumulative loss rate because mid-term redemption is not possible. Open-end funds apply the maximum drawdown (MDD) because entry and redemption are available at any time.
For example, in the case of overseas real estate and REITs, they must state that a risk of principal loss can occur, and that if the fund has borrowed money and the borrowing fund is senior, fund investors become junior and recovery rates may decline. They must disclose risks such as not receiving dividends due to reduced rental income, or reduced revenue due to exchange-rate fluctuations.
In addition to the risk of principal loss, ELFs and DLFs must inform investors that losses can occur due to changes in the price of the underlying asset and that losses can occur due to the issuer's default or bankruptcy. The risk that investment losses may occur if early redemption conditions are not met is also presented as a key risk factor.