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South Korea is set to amend laws to better protect private equity investors after the recent series of fraud scandals laid bare a culture of systemic misconduct in the country’s fledgling hedge fund market and caused massive losses to retail investors.

Kim Byeong-wook, a lawmaker from the ruling Democratic Party, is expected to submit the revised capital market law to parliament for approval.

According to the proposal obtained by Maeil Business Newspaper, sellers would be required to increase oversight of suspicious private equity funds and provide investors with a quarterly management report. Brokerages offering prime brokerage services would also be obligated to assess the credit risk of private equity funds and file reports on bad assets upon three days of their discovery.

Kim Byeong-wook

Funds with non-marketable assets, or assets with poor liquidity, making up more than 50 percent of the total would be restricted from being marketed as an open-ended fund. But exceptions may be allowed if the private equity fund is composed of professional investors capable of monitoring or keeping a check on the brokerages.

Privately placed funds that had formerly been categorized as either business involvement or strategic investment funds would be regrouped into funds for institutional or retail investors. Regulations pertaining to institution-only funds would be eased to meet global standards.

Korean investor appetite for homegrown hedge funds has soured amid a string of financial fraud scandals. Late last year, the country’s largest hedge fund, Lime Asset Management Co., suspended redemptions worth an estimated 1.6 trillion won (US$1.3 billion) after it was accused of covering up massive losses and embezzling fund money. Korea’s financial watchdog in July found another Seoul-based hedge fund, Optimus Asset Management, guilty of deceiving investors and brokerages and fabricating documents to hide its illegal transactions.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]