Financial Services Commission (FSC) recently announced proposed changes to regulations regarding asset management businesses and called for industry feedback. A number of the proposed changes include items that will be of interest to foreign asset managers. The updated regulations are expected to be finalised and take effect around November this year.
Although the following would not necessarily reflect the forthcoming amended regulations, the items discussed will provide insights to the direction in which Korean fund regulations are heading. This discussion should provide valuable lead time to strategise your future business opportunities in Korea.
- Private fund business for Korean High Net Worth Individuals (HNWI)
- Introduction of public fund of hedge funds investing diversified private funds
- Flexibility for asset allocation FoFs.
- Others
Under current laws and regulations, if a foreign asset manager wishes to sell offshore funds to Korean HNWIs, the offshore funds must be registered in Korea pursuant to ‘regular registration’ requirements. These requirements involve complicated eligibility tests, extensive disclosure obligations and maintenance burdens.
However, according to the proposed changes, foreign funds will be allowed to be sold to broader group of professional investors provided that the relevant foreign fund is registered pursuant to the ‘simplified registration’ requirements. Notably, HNWIs and listed companies will be considered as eligible professional investors as defined under the expanded simplified registration regime.
More detailed information regarding this expansion of scope and the specific criteria of the high net worth test are available upon request.
Under current laws and regulations, public funds domiciled in Korea are not allowed to invest in private funds.
However, according to the proposed changes, Korean public funds will be allowed to invest in private funds (in the case of foreign funds, such foreign funds need to be registered in Korea), provided that the target funds are diversified. This will increase business opportunities for foreign asset managers vis-à-vis Korean public fund managers for the fund of funds (FoFs) business. According to the proposed changes, the general single manager concentration limit will not apply (up to 100%), but the concentration limit of 20% in a single product will continue to apply.
More detailed information regarding the structure and regulation of the new FoFs business model is available upon request.
Under current laws and regulations, FoFs investing in diversified (public) funds are subject to 50% single manager concentration limit.
However, according to the proposed changes, if a FoFs employs an investment strategy whereby the asset manager, (i) selects a number of target funds (such target funds may be foreign funds and would be exempt from registration under this structure) with different asset classes or investment strategies, and (ii) periodically rebalances the allocation of such target funds, such FoFs will be exempt from the single manager concentration limit. However, the concentration limit of 20% in a single product will continue to apply.
More detailed information regarding the structure and regulation of the new FoFs business model is available upon request.
Other proposed changes include a number of other aspects of asset management business. Notable examples include: (1) introduction of guidelines for so-called ‘Robo Advisors’, (2) enhanced flexibility with performance fee bearing public funds, and (3) the introduction of actively managed ETFs.
Ben B. Hur is a partner and head of the finance department at Yulchon LLC. His practice and extensive experience spans a broad range of bank products including loans, capital markets, structured finance, derivatives and structured products. He has particular expertise in advising, structuring and executing cutting-edge and innovative financial transactions and products with novel features. Since the global credit crisis in 2008, he has frequently been involved in resolving disputes related to complex financial products and providing strategic solutions to institutional clients by combining industry knowledge with experience as both a lawyer and a banker.
Kyu Rim Lee is a partner at Yulchon LLC practicing in capital markets, financial regulation, collective investments, private equity, and M&A. Prior to joining Yulchon, Mr. Lee built an extensive career practising in M&As, corporate restructurings, capital markets and financial regulation first at Kim & Chang and then as vice president at Goldman Sachs Asset Management, where he supervised and managed complex legal and regulatory matters arising in relation to operation and business activities. With such extensive experience, he is well qualified to manage and resolve legal issues in a balanced manner to better accomplish client’s business goals.
Wonhee William Rhee is an English qualified foreign attorney and practices in finance including OTC derivatives, structured finance, funds and banking. He previously worked at Kim & Chang where he focused on OTC derivatives, structured finance including asset backed securitization and covered bonds and funds and banking related matters. Previously, he worked at Ashurst LLP London concentrating on a full range of OTC derivatives matters including master agreement documentation and collateral arrangements involving interest rates, FX, credit, equity, commodities underlying assets and in the context of structured finance, project finance, real estate finance, funds M&A, restructuring and disputes matters.
Yulchon LLC is one of the leading full-service international law firms in East Asia. ‘Yulchon’ literally means a “law village” and denotes our approach of multidisciplinary group of experts working together in a congenial environment. It seeks to provide creative, pragmatic solutions to the practical and commercial challenges our clients face. Yulchon has grown into one of the largest law firms in Korea with more than 360 lawyers and professionals. It has been selected as the Most Innovative Korean Law Firm by the Financial Times in 2015/16 and 2016 Asian Law Firm of the Year by The American Lawyer. For more information, please visit www.yulchon.com.
