After Lime Asset disaster, regulators crack down

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After Lime Asset disaster, regulators crack down

With 1.6 trillion won ($1.3 billion) of investor assets frozen by Lime Asset Management, financial regulators issued a slew of measures on Sunday designed to tighten the supervision of private funds and heighten the protection of investors in these funds.

According to revised regulations, operators of private funds with more than 200 billion won in assets will now have to lodge a risk control report with the regulators on a regular basis. Private funds with more than 50 billion won in assets must be audited by a third party.

The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) said Sunday they have finalized the revised regulations for private funds in Korea after releasing preliminary regulations in November.

“With the latest suspension of withdrawals from some funds in Korea, market distrust toward private equity funds has intensified,” the FSS said in a release.

“Selling funds without properly informing clients, failing to manage liquidity and conducting illegal acts regarding fund management have put investors at risk.”

Until now, fund assets that don’t have market price, such as unlisted stocks or convertible bonds, were valued by the operator. As a result, the operators could easily camouflage distressed assets and inflate profitability. This loophole enabled Lime Asset to conceal its loss for more than four months.

Regulators said they will release detailed guidelines which operators have to follow when evaluating assets. Funds with more than 50 billion won in assets will be obliged to undergo external audit to prevent manipulation.

In cases where investors consent to valuation by the operator, the external audit process can be skipped. Trading between funds controlled by the same operator will be limited each month to 20 percent of average assets for the past three months.

More responsibility will be placed on marketers selling the funds, as they allegedly failed to inform investors of the risks of Lime Asset vehicles.

From now on, banks and brokerages will have to independently verify the adequacy of the funds, based on the operator’s prospectus, before selling them. They will also have to continually monitor whether the funds are being managed under the terms of conditions of the prospectus. If problems arise, they will not only have to request the operators to fix the issue, but they will also have to file a report with the regulators.

Korea has been keen to promote the private equity fund market over the past few years. The market, which totaled 28.1 trillion won in assets in 2013, grew to nearly 62 trillion won in 2019.

Side effects accompanied the exponential growth.

Last year, derivative-linked funds and securities sold in Korea tracking the interest rates of 10-year German treasury bonds and some other safe assets lost over 400 billion won.

Four funds managed by Lime Asset Management, a mainstream private equity group in Korea with over 5 trillion won in assets, were frozen due to the lack of liquidity which prosecutors claim is related to misdeeds perpetrated by a senior executive and an acquaintance.

The FSC and FSS said the latest measures are based on the monitoring of 1,786 funds from 52 operators with 22.7 trillion won is assets. The new regulations will be published in the second quarter before going into effect.

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