Jean Lee and Jae-Hak Kim, Kim & Chang, Korea
In accordance with the passage of the historic Financial Investment Services and Capital Market Act (the FSCMA), which was enacted on 3 August 2007 and became effective on 4 February 2009, the Korean Government has released a series of related laws and regulations to implement the broad reform agenda established by the FSCMA. Specifically, the Presidential Decree of the FSCMA (the Presidential Decree) and other regulations were enacted, and became effective on 4 February 2009, simultaneous with the FSCMA. Following their enactment, the FSCMA and the Presidential Decree have each undergone further amendment, as the Korean Government and regulators work to fine-tune the new comprehensive regulatory framework governing capital markets in Korea.
The broad reforms ushered in by the FSCMA, and the laws and regulations promulgated thereunder, appear to lift certain regulatory obstacles that have, thus far, hindered the development of an active onshore hedge fund industry in Korea. In particular, a recent amendment to the Presidential Decree (the PD Amendment), which came into force on 21 December 2009, further permits Korean collective investment business companies to establish and operate onshore funds that employ leverage, although such funds may only be offered to certain qualified investors. In theory, the PD Amendment opens the door for the development of an onshore hedge fund industry, a change long-awaited by the Korean financial services industry. As a practical matter, however, current regulations continue to impose significant restrictions that continue to hamper true de-regulation of onshore hedge funds.
The comprehensive scope of the FSCMA, and its derivative laws and regulations, also includes rules affecting offshore hedge fund activity in Korea. Notably, the FSCMA imposes new registration requirements applicable to offshore hedge funds seeking to market to qualified investors in Korea. This expansion of regulatory authority initially generated considerable criticism from offshore hedge fund managers, as well as Korean investors, particularly with respect to registration qualification criteria, which many considered to be too onerous. Although regulators subsequently loosened the original registration qualification criteria, offshore hedge funds wishing to conduct marketing activity in Korea will continue to be subject to new registration requirements.
Onshore hedge funds
Under the FSCMA, all domestic collective investment schemes, or ‘domestic funds’, are classified into four broad categories:
i. funds offered to retail investors without restriction, or ‘public funds’;
ii. funds offered to 49 or fewer investors, or ‘private funds’;
iii. private funds offered only to certain qualified investors, or ‘onshore hedge funds’; and
iv. private equity funds, or ‘PEFs’.
As a general matter, the FSCMA regulates private funds and onshore hedge funds through the same regulatory framework applicable to public funds, but provides private funds and onshore hedge funds with various exemptions from the raft of rules with which public funds must comply. On the other hand, the FSCMA governs PEFs under a separate set of regulations, which generally permits greater latitude regarding who may be eligible to manage PEFs, and what types of investments PEFs may make.