South Korea's financial watchdog will review internal controls at private equity fund managers operating in the country, including how they manage employees' trading in financial investment products.
The Financial Supervisory Service said on the 12th that it will carry out the work in stages starting this month at about 30 private equity-only managers registered in Korea, reviewing how their internal controls operate, sharing best practices and advising firms on areas needing improvement.
The FSS said it selected firms centered on major large general partners (GPs) while striking a balance between companies where issues requiring review were spotted in the course of supervisory work and small and mid-sized managers. Combined capital commitments at these managers account for 46.5% of total commitments at private equity-only managers in Korea.
The review comes six months after the standard internal control rules for GPs of institution-only private equity funds were adopted in March, and is intended to check whether self-regulation is working in practice across the industry. The standard rules are a form of self-regulation that private equity managers must observe, as they had not been subject to internal control requirements under the Act on Corporate Governance of Financial Companies or the Financial Investment Services and Capital Markets Act.
The review will focus on five areas: the organization and framework for internal controls, the operation of the compliance officer function, management of information exchange, assessment of conflicts of interest, and management of employees' trading in financial investment products. On employee trading, the FSS will look mainly at account-opening reports, under which employees are allowed one account in their own name, the handling of trading reports and the operation of internal reporting systems. Trading records must be reported every half year, and firms must build a computer system that allows transaction records to be checked at any time.
The FSS said it will examine whether internal control systems actually work, not merely whether firms have formally complied by drawing up in-house rules. It plans to conduct a documentary review using a checklist, collecting in-house rules and compliance records from all firms covered. For large GPs and some other companies, it will also hold interviews with staff in charge and conduct on-site inspections.
"Going forward, we will continue to guide private equity toward balanced growth by expanding the scope of reviews and differentiating supervision and inspections according to the level of internal controls," an FSS official said. "We expect this to help prevent a recurrence of the series of incidents that recently caused public controversy as a result of internal control failures, while also strengthening the industry's own efforts to restore market confidence."