International Investment & ETFsREVIEW20

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EUR6115 IIETF 2011 FC AW_EUR5680 IISR 2010 FC AW 18/02/2011 10:36 Page 1

With the enactment of the Financial Investment

Services and Capital Markets Act (“FSCMA”), which

became effective on February 4, 2009, and the

regulations promulgated thereunder, Korean regulators

have accelerated the regulatory reform to further

develop the capital markets in Korea. Among others,

the FSCMA and the regulations thereunder include

rules affecting the offering of offshore funds and

investment services by foreign asset management

companies in Korea. In light of the rapid growth of the

Korean capital markets and the rising importance of the

asset management business, the regulatory framework

governing cross-border activities of foreign asset

management companies has great significance for

offshore fund managers and offshore funds.

Offering of offshore fundsRegistration requirements With the introduction of the FSCMA in 2009, all

offshore funds marketed and sold to Korean investors

(including institutional investors) are required to be

registered with the Financial Services Commission

(“FSC”). Although all funds are required to be

registered, the registration requirements are different

depending on whether the relevant funds are offered

to retail investors or to the qualified professional

investors as defined under the FSCMA (the “Qualified

Professional Investors”).

In case of an offering to retail investors, both the

fund registration application and the relevant securities

registration statement (and prospectus) must be filed

with the FSC. In order to register a fund to be offered

to retail investors in Korea, the relevant offshore fund

manager must meet certain eligibility criteria, which

include, among others, minimum net asset, the

absence of serious sanctions in its home jurisdiction or

by Korean regulatory authority in relation to its

financial business and the appointment of a qualified

domestic contact agent for the purposes of investor

protection. In addition, the relevant offshore fund

must meet various eligibility requirements, which

are more stringent than they would be if such

offshore fund were offered to the Qualified

Professional Investors only. Notably, offshore funds

are also subject to certain investment restrictions.

For example, the offshore funds are prohibited from

investing in more than 10% of the total number

of the issued and outstanding shares of a single

company.

On the other hand, when funds are offered to only

the Qualified Professional Investors, the registration

process becomes relatively simpler. First of all, the

securities registration statement and prospectus do

not need to be filed with the FSC, and only the fund

registration must be completed and filed. In addition,

the main eligibility requirements that must be met in

order to register the offshore fund with the FSC are

reduced to a great extent.

Marketing restrictions for offshore fundsUnder the FSCMA, onshore marketing of offshore

funds should be done through a local financial

investment company that is licensed to distribute

fund products. The managers of offshore funds and

their offshore placement agents may not therefore

contact Korean investors directly through telephone

calls, the mailing of marketing or offering materials,

or in-person visits for the purpose of selling fund

interests.

Contrary to the above, if the offshore fund

manager does not solicit or otherwise market its

offshore funds to Korean investors and the Korean

investor, on its own volition, approaches the offshore

fund manager for a specific offshore fund that the

offshore fund manager may be managing, then such

relevant offshore fund may be sold without being

registered in Korea (provided that the relevant foreign

Korean regulations for cross-border asset management business By Jae-Ho Baek and Wooyoung Cho, Kim & Chang

In Korea, there are various regulatory requirements for foreign assetmanagement companies in their offering of offshore funds and provision ofasset management services. Under the Financial Investment Services andCapital Markets Act, offshore funds can be sold to Korean investors subject totheir registration. Foreign asset management companies are permitted toprovide asset management services to Korean investors without having apresence in Korea upon obtaining a relevant cross-border licence and such services can be provided to Korean asset managers even withoutobtaining a cross-border licence.

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To obtain a cross-border discretionary investment

management licence, the offshore investment manager

should satisfy certain eligibility requirements as set

forth under the FSCMA. The requirements mainly

relate to, among others, capitalisation, personnel and

qualifications in the manager’s own jurisdiction.

As an exception to the above licence requirement,

the offshore investment manager is not required to be

licensed in Korea as a cross-border discretionary

investment management company if the service will

be provided to certain qualified investors and there

were no solicitation or advertising efforts by the

investment manager. In case there are marketing

efforts by the offshore investment manager, the

licence requirement would be triggered regardless of

the identity of Korean client.

The eligible Korean investors for which no

registration in Korea is required in order to provide

cross-border discretionary investment management

service (assuming there is no marketing) include: (i)

the Korean Government; (ii) Bank of Korea; (iii) Korea

Investment Corporation and (iv) certain pension

funds established under relevant statues (including

National Pension Service).

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exchange regulations must be complied with). In such

circumstances, reports on fund performance could be

sent to Korean investors in Korea and access to the

investor relations website could be provided to the

extent that the contents thereof are of a non-

marketing nature.

Cross-border discretionaryinvestment management andinvestment advisory businessAnother set of regulations affecting foreign asset

management companies are the regulations relating to

a cross-border discretionary investment management

business. Under the FSCMA a foreign entity must

register as a cross-border discretionary investment

management company in Korea in order to manage

assets on behalf of Korean Qualified Professional

Investors on a discretionary basis. With a cross-border

discretionary investment management licence, the

offshore investment manager may, directly or using

various communication channels, provide its

discretionary investment management services to the

Qualified Professional Investors without having to

establish a business presence in Korea.

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p50-52 IIETFs - Kim Chang 18/02/2011 11:46 Page 51

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There is a separate licence for foreign investment

advisers that provide investment advisory (only non-

discretionary based) services to Korean investors on

a cross-border basis. To register as a cross-border

investment advisory company, the offshore investment

manager should satisfy certain eligibility requirements

which are similar to the requirements for the

cross-border discretionary investment management.

The exception applicable to cross-border

discretionary investment management licence as set

forth above applies to cross-border investment

advisory licence as well.

Management delegationCompared to the previous laws regulating the capital

markets of Korea, the FSCMA has widened the

scope of delegatable services or functions from one

company to another. A local asset management

company may delegate its onshore fund management

of foreign currency denominated assets to offshore

asset managers, provided that: (i) the overseas

company is licensed or registered in its home

jurisdiction to engage in the asset management

business; and (ii) the local asset management

company reports the delegation to the Financial

Supervisory Service (“FSS”) and such report is

accepted by the FSS.

In addition, a Korean discretionary investment

management companies and investment advisory

companies (including an offshore company which

holds cross-border discretionary investment

management licence or investment advisory licence)

may delegate its provision of discretionary

management services or investment advisory services

relating to foreign currency denominated assets to an

overseas company without the requisite licence, as

long as the overseas company is licensed or registered

in its home jurisdiction to conduct the relevant

business and such delegation is reported to and

accepted by the FSS.

Onshore feeder fundOne of the recent trends in Korea is to set up a

domestic fund which invests all of its assets in an

offshore fund. Under the FSCMA, it is possible for a

local asset management company to set up a domestic

fund of funds which will invest in offshore funds. The

domestic fund of funds will be subject to various

diversification requirements, which would differ

depending on whether the domestic fund of funds will

be offered publicly or be privately placed. Among the

diversification requirements, in case of a public fund of

funds, the local asset management company may not

invest more than 20% of the fund’s assets in a single

offshore fund and no more than 50% of the fund’s

assets in offshore funds managed by the same

investment manager. However, if the offshore fund is

registered in Korea, the limitation on investment in a

single fund would be exempt. Thus, if an offshore

manager registers its offshore fund in Korea, the Korean

fund of funds may invest up to 100% of its assets in

such registered offshore fund.

Conclusion The cross-border regulations with respect to asset

management business have been relatively less stringent

than other areas of financial investment business in

Korea. However, in the aftermath of the 2008 global

financial crisis, regulators in Korea and around the

world considered that a failure of regulatory oversight

of the financial markets may have contributed to the

global crisis, which is evidenced in the recent regulatory

initiatives on collective investment schemes made in the

US and Europe. Along the same line, we understand

that there is ongoing discussion taking place within the

FSC and the FSS with a view to strengthening the

cross-border regulations so that more asset

management functions are conducted in Korea rather

than being delegated or outsourced to outside of

Korea. Accordingly, it would be necessary to watch

closely whether such discussion actually leads to any

regulatory changes in the future.

Authors:

Jae-Ho Baek, Partner

Wooyoung Cho, Foreign Attorney

Kim & Chang

Seyang Building, 223 Naeja-dong

Jongno-gu, Seoul 110-720

Korea

Tel: +82 2 3703 1114

Fax: +82 2 737-9091/3

Email: lawkim@kimchang.com

Web: www.kimchang.com

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