The Asset Management

Review

Law Business Research

Editor

Paul Dickson

2

The Asset Management Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Asset Management Review, 1st edition(published in October 2012 – editor Paul Dickson).

For further information please emailAdam.Sargent@lbresearch.com

The Asset Management

Review

EditorPaul Dickson

Law Business Research Ltd

The Law Reviews

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Contents

5

PuBLishER Gideon Roberton

BusinEss DEvELoPMEnT MAnAGER

Adam sargent

MARkETinG MAnAGERs nick Barette, katherine Jablonowska, Alexandra Wan

PuBLishinG AssisTAnT

Lucy Brewer

EDiToRiAL AssisTAnT Lydia Gerges

PRoDucTion MAnAGER

Adam Myers

PRoDucTion EDiToR Anne Borthwick

suBEDiToR

caroline Rawson

EDiToR-in-chiEf callum campbell

MAnAGinG DiREcToR

Richard Davey

Published in the united kingdom by Law Business Research Ltd, London87 Lancaster Road, London, W11 1QQ, uk

© 2012 Law Business Research Ltdwww.TheLawReviews.co.uk

© copyright in individual chapters vests with the contributors no photocopying: copyright licences do not apply.

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts

or omissions contained herein. Although the information provided is accurate as of september 2012, be advised that this is a developing area.

Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the

Publisher – gideon.roberton@lbresearch.com

isBn 978-1-907606-45-8

Printed in Great Britain by Encompass Print solutions, Derbyshire

Tel: +44 844 2480 112

i

AcknoWLEDGEMEnTs

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

AfRiDi & AnGELL

ALLEn & GLEDhiLL LLP

AnDERson MŌRi & ToMoTsunE

ARThuR cox

BA-hR

BinDER GRÖssWAnG REchTsAnWäLTE GMBh

BonELLi EREDE PAPPALARDo

cAins ADvocATEs LiMiTED

conyERs DiLL & PEARMAn LiMiTED

DE BRAuW BLAcksTonE WEsTBRoEk nv

ELvinGER, hoss & PRussEn

Ens (EDWARD nAThAn sonnEnBERGs)

GAnADo & AssociATEs ADvocATEs

GEoRGiADEs & PELiDEs LLc

GiLBERT + ToBin

GoRRissEn fEDERsPiEL

hAiWEn & PARTnERs

hEnGELER MuELLER

J sAGAR AssociATEs, ADvocATEs & soLiciToRs

kiM & chAnG

LEnz & sTAEhELin

MAnnhEiMER sWARTLinG ADvokATByRå AB

MAPLEs AnD cALDER

MouRAnT ozAnnEs

nAuTADuTiLh

PAuL, WEiss, RifkinD, WhARTon & GARRison LLP

sLAuGhTER AnD MAy

sTikEMAn ELLioTT LLP

uRíA MEnénDEz ABoGADos, sLP

uRíA MEnénDEz – PRoEnçA DE cARvALho

Acknowledgements

ii

iii

Editor’s Preface ��������������������������������������������������������������������������������������������viiPaul Dickson

Chapter 1 EuRoPEAn ovERviEW ��������������������������������������������������� 1Michael Sholem

Chapter 2 AusTRALiA ����������������������������������������������������������������������� 42Adam Laura, Peter Reeves and Richard Francis

Chapter 3 AusTRiA���������������������������������������������������������������������������� 56Michael Binder and Stefan Frank

Chapter 4 BELGiuM �������������������������������������������������������������������������� 73Benoît Feron and Marie-Laure De Leener

Chapter 5 BERMuDA ������������������������������������������������������������������������ 86Anthony Whaley and Elizabeth Denman

Chapter 6 cAnADA ��������������������������������������������������������������������������� 97Alix d’Anglejan-Chatillon and Jeffrey Elliott

Chapter 7 cAyMAn isLAnDs �������������������������������������������������������� 111Jon Fowler

Chapter 8 chinA ����������������������������������������������������������������������������� 123Pei Wang

Chapter 9 cyPRus ��������������������������������������������������������������������������� 139Marcos Georgiades

Chapter 10 DEnMARk ���������������������������������������������������������������������� 149Søren Fogh, Jakob Skaadstrup Andersen and Charlotte Møller

conTEnTs

Contents

iv

Chapter 11 GERMAny ����������������������������������������������������������������������� 161Thomas Paul and Christian Schmies

Chapter 12 honG konG����������������������������������������������������������������� 173Jason Webber, Peter Lake and Ben Heron

Chapter 13 inDiA ������������������������������������������������������������������������������ 188Dina Wadia, Jay Gandhi and Swati Mandava

Chapter 14 iRELAnD ������������������������������������������������������������������������ 201Kevin Murphy, David O’Shea, Jonathan Sheehan and Sarah McCague

Chapter 15 isLE of MAn ����������������������������������������������������������������� 213Nancy Matthews and Richard Vanderplank

Chapter 16 iTALy ������������������������������������������������������������������������������� 225Giuseppe Rumi, Daniela Runggaldier, Riccardo Ubaldini and Michele Dimonte

Chapter 17 JAPAn ������������������������������������������������������������������������������ 239Naoyuki Kabata and Takahiko Yamada

Chapter 18 JERsEy ����������������������������������������������������������������������������� 258Jacqueline A Richomme

Chapter 19 koREA ���������������������������������������������������������������������������� 271Jae Ho Baek, Kyle Park and Sae Uk Kim

Chapter 20 LuxEMBouRG ��������������������������������������������������������������� 282Jacques Elvinger and Kim Kirsch

Chapter 21 MALTA ����������������������������������������������������������������������������� 297Andre Zerafa and Matthew Mizzi

Chapter 22 nEThERLAnDs ������������������������������������������������������������� 307Francine Schlingmann, Joost Franken and Sacha Leeman

Contents

v

Chapter 23 noRWAy ������������������������������������������������������������������������� 320Peter Hammerich and Markus Heistad

Chapter 24 PoRTuGAL ��������������������������������������������������������������������� 330Carlos Costa Andrade

Chapter 25 sinGAPoRE �������������������������������������������������������������������� 342Jek-Aun Long and Danny Tan

Chapter 26 souTh AfRicA �������������������������������������������������������������� 353Arabella Bennett and Johan Loubser

Chapter 27 sPAin ������������������������������������������������������������������������������� 368Juan Carlos Machuca and Miriam Pich-Aguilera

Chapter 28 sWEDEn ������������������������������������������������������������������������� 381Helena Rempler, Emil Boström and Jonas Andersson

Chapter 29 sWiTzERLAnD �������������������������������������������������������������� 393Shelby R du Pasquier and Philipp Fischer

Chapter 30 uniTED ARAB EMiRATEs �������������������������������������������� 405Stuart Walker and Ronnie Dabbasi

Chapter 31 uniTED kinGDoM ������������������������������������������������������ 417Paul Dickson

Chapter 32 uniTED sTATEs ������������������������������������������������������������ 450Mark S Bergman, Udi Grofman, David W Mayo, Philip A Heimowitz, Patricia Vaz de Almeida, Lyudmila Bondarenko and Allison J Rekkali

Appendix 1 ABouT ThE AuThoRs ����������������������������������������������� 465

Appendix 2 conTRiBuTinG LAW fiRMs’ conTAcT DETAiLs ... 489

vii

editor’s preface

2012 is an auspicious year for the first edition of The Asset Management Review, coming as it does in the wake of the global financial crisis and in the midst of a continuing period of economic uncertainty in the eurozone, both of which have had a significant impact on asset management activity around the globe. Many governments have spent the past few years reflecting upon the existing frameworks for regulation of their financial services industries with a view to avoiding a repetition of past regulatory failings and encouraging a more appropriate risk appetite among investors and investment managers. The products of that reflection are beginning to emerge in 2012 and it appears that in many cases, large-scale overhaul of asset management regulation and greater intervention in previously lightly regulated industry sectors are likely to be the end result.

in some countries, and particularly at the supranational level in the european Union, it appears that a greater appreciation of the systemic importance of asset management entities in the broader financial system has been another product of the financial crisis, with a corresponding increased focus on transparency and disclosure to permit national regulators to monitor their activities. as a result, the debate about the type and extent of information that funds and their managers may be required to divulge publicly looks set to be another recurring theme throughout the coming year and beyond.

While there has certainly been a rebound in asset management operations since the lows of 2008, it would be fair to say that the outlook for investment fund activity over the next year remains uncertain. The continuing volatility of equities on global stock exchanges and the ongoing turbulence in bond markets, particularly in relation to concerns about the quality of some sovereign debt, have led to changes in investment behaviour and have done little to dispel any nervousness among investors. Nonetheless, there are some bright spots in an otherwise clouded investment landscape, with new prospects opening up in emerging markets, particularly in parts of asia and Latin america. perhaps the best that one can say from the present vantage point is that the next 12 months look likely to feature a combination that will be familiar to any seasoned investor – that of risk and opportunity.

The publication of the first edition of The Asset Management Review is a significant achievement that would not have been possible without the support of the

Editor’s Preface

viii

many lawyers and law firms who have contributed so much of their valuable time, knowledge and experience to this edition. i am grateful to them all. i would also like to thank Gideon roberton and his team at Law Business research for all their efforts to bring this book into being.

it is hoped that The Asset Management Review will prove to be a useful and practical companion in the increasingly complex, globalised and regulated world of asset management as we face the impending challenges of the coming year.

Paul Dicksonslaughter and MayLondonseptember 2012

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Chapter 19

Korea

Jae Ho Baek, Kyle Park and Sae Uk Kim 1

I OVERVIEW OF RECENT ACTIVITY

The Korean asset management market continued to show a steady growth in volume thanks to its rebounding from the global financial crisis in 2008, but this growth trend has somewhat subsided due to the recent European financial crisis. From 2006 to 2011, the domestic retail equity-type funds showed better returns than the Korea Composite Stock Price Index. Although recently the global economic environment appears to be holding back investors from investing in funds, once the current instability overseas starts to show some sign of improvement, the growth trend in Korea is likely to pick up pace again.

However, there may be obstacles that could hamper the continued growth of the fund market in Korea. For instance, the average investment horizon of asset management companies (‘AMCs’) in Korea is only around four months, which appears to be quite short compared to other major fund markets. This may be due to the tendency of Korean investors to react to the market rather quickly by redeeming their shares. Frequent concentration of redemption requests in the past forced asset managers to dispose of fund assets in order to meet redemption requests. Another key characteristic of the Korean domestic fund market is that capital inflows and outflows tend to be highly volatile compared to other major fund markets.

Considering these recent trends and characteristics of the Korean fund market, suggestions have been made such as introducing more incentive schemes for long-term fund investments, and allowing more flexibility in investment management so that fund managers can more effectively hedge risks and manage losses by relying on risk management methods other than disposing of the underlying assets of the fund.

1 Jae Ho Baek and Sae Uk Kim are attorneys and Kyle Park is a foreign attorney at Kim & Chang.

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II GENERAL INTRODUCTION TO ThE REGULATORY FRAMEWORK

Under the Financial Investment Services and Capital Markets Act (‘the FSCMA’) enacted on 4 February 2009, collective investment schemes can largely be divided into ‘domestic funds’ and ‘offshore funds’ depending on whether they were established onshore or offshore. All onshore funds, and some offshore funds, depending on the circumstances, are regulated by the Korea Financial Supervisory Service (‘the FSS’) under the mandate of the Korea Financial Services Commission (‘the FSC’).

‘Domestic funds’ can be classified into four broad categories: a funds offered to retail investors, or ‘public funds’; b funds offered to 49 or fewer investors, or ‘private funds’ – retail investors are

allowed to invest in ‘private funds’ so long as the total number of investors does not exceed 49;

c private funds offered only to certain professional investors (i.e., institutional investors) and high-net-worth individuals, or ‘hedge funds’; and

d buyout private equity funds.

‘Offshore funds’ can be classified into two categories: funds whose interests can be offered to retail investors; and funds whose interests can only be offered to certain ‘qualified professional investors’ (‘QPIs’, as prescribed by the FSCMA). QPIs include the government of Korea, Bank of Korea, Korea Investment Corporation, financial institutions (such as banks, securities companies, AMCs and insurance companies), certain statutory pension funds and other statutory entities (such as the National Pension Service and Korea Asset Management Corporation), but do not include listed companies, general corporate or individual investors regardless of their net worth.

While all offshore funds (even if marketed to QPIs only) are required to be registered with the FSS, registration requirements largely differ depending on whether the fund targets retail investors or only QPIs. In the case of targeting retail investors, the offshore fund, and its manager and investment advisers, are required to satisfy various eligibility requirements and, assuming such requirements can be met, both a fund registration statement and securities registration statement must be filed and accepted by the regulators. On the other hand, in the case of an offering only to QPIs, only a simplified fund registration application needs to be filed with the FSS.

The list of registration requirements of offshore funds offered to retail investors is quite extensive; therefore, only the key eligible requirements are highlighted as follows:a eligibility requirements of the fund: • the fund must have been issued, or scheduled to be issued, pursuant to the

laws of an OECD member country, Hong Kong or Singapore; • the fund has been created and established lawfully in compliance with the laws

of the home country; • redemption shall be processed within 15 days from the redemption request (in

the case of offshore funds mainly investing in illiquid assets (e.g., real estate) the redemption should be processed at least on a quarterly basis);

• the fund should not, in principle, engage in borrowing (certain special case exceptions exist);

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• the fund should meet various diversification requirements; and • the fund should not be a fund that is established or managed by a Korean

institutional investor; andb eligibility requirements of the manager: • assets under management (‘AUM’) of 1 trillion won or more; • shareholders’ equity of 4 billion or 8 billion won (depending on the type of

fund); and • the manager should not have been sanctioned in its home jurisdiction on a

level equal to or more serious than a criminal fine or suspension of business for the past three years.

In order to be eligible for the simplified registration for targeting QPIs only, the offshore fund is required to satisfy certain reduced eligibility requirements, the key requirements of which are as follows:a the fees and expenses to be borne by the fund and the investors are to be clearly

disclosed in the fund documents;b the asset manager (or general partner) of the offshore fund has not been sanctioned

by the Korean regulators for the past three years;c the asset manager, the trustee or custodian, the distributor, and the administrator

are not subject to a suspension of business; andd the offshore fund has been created and established lawfully in compliance with

the laws of the home country.

Separately, under the FSCMA, the marketing of offshore funds to Korean investors (regardless of the target investors) should be conducted through a locally licensed distributor, which is a domestic financial institution that is licensed to market and sell fund products (‘a local distributor’). There are no express exemptions under the current regulations from the requirement to engage a local distributor for marketing of offshore funds. Therefore, in principle, representatives of the offshore fund who do not have a local fund distribution licence should not be engaged in direct marketing of the funds in relation to potential Korean investors. However, if there are no marketing or solicitation activities in respect of the offshore fund, and such offshore fund will be sold to the Korean investor on an unsolicited basis, then the requirements noted above (i.e., fund registration and appointment of a local distributor) would not apply.

III COMMON ASSET MANAGEMENT STRUCTURES

Funds established under the FSCMA can generally be classified into three broad categories: corporate-type fund, trust-type fund, and partnership-type fund. Before the FSCMA was enacted in 2009, only the corporate-type and the trust-type funds were recognised in Korea. Although the FSCMA has recognised the partnership-type fund, which is somewhat similar to a limited partnership in the US, it has yet to become a commonly used fund vehicle in Korea, perhaps due to asset managers’ familiarity with the two traditional types (i.e., the corporate-type and the trust-type). Therefore, this

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section only discusses the corporate-type and the trust-type funds, which are the two most commonly used fund vehicles in Korea.

In a corporate-type fund structure, an asset management company (‘AMC’) licensed by the FSC acting as the corporate director of the fund is given the power of management of the fund assets. A custodian company, an entity licensed by the FSC, would keep the assets of the fund in custody and monitor the asset management activities of the AMC. A distributor, a financial institution such as a securities company, bank or insurance company licensed by the FSC, would engage in the sale of the shares of the fund. A corporate-type fund is required to appoint an administrator under the FSCMA.

In a trust-type fund structure, an AMC is given the power to establish and terminate the fund, and manage and instruct the management of the fund assets. However, in a trust-type fund structure, a trust company licensed by the FSC would hold the title to the assets of the fund and monitor the asset management activities of the AMC. There is no difference from the corporate-type funds, in that the trust-type funds also should appoint a distributor in selling the units of the fund. Unlike the corporate-type, however, trust-type funds are not required to appoint an administrator, although the general market practice is to appoint an administrator.

Public funds and hedge funds are almost always open-ended with periodic redemption rights granted to the investors. On the other hand, private equity funds are established as closed-ended funds.

IV MAIN SOURCES OF INVESTMENT

During the past 10 years the Korean asset management market has grown with the introduction of various fund products such as real estate funds (‘REFs’), index funds, ETFs and hedge funds. As of June 2012, there were 82 AMCs in operation, the aggregate AUM of which was approximately 312 trillion won. Out of that amount, approximately 197 trillion won (mainly sourced from retail investors) was invested in public funds, while institutional investors principally invested in private funds, the aggregate AUM of which amounted to 115 trillion won. In terms of foreign investments, while they were mainly focused on private fund investments, they represent only a small portion of the total investments in the Korea asset management market.

V KEY TRENDS

The Korean capital markets have significantly transformed and grown since the Asian financial crisis. Following a period of major investments by foreign firms in distressed companies and other assets, Korea has recently been inundated with strong competition among foreign and domestic sponsors looking for opportunities in alternative investments and fundraising. For example, the FSS has reported that following the amendment of the Indirect Investments Asset Management Business Act in 2004 to permit the formation of domestic private equity funds, more than 189 funds have been registered in Korea, accounting for over 33 trillion won in capital committed on a cumulative basis (as of February 2012). In addition, the Korean financial regulations were drastically reformed through the FSCMA in February 2009. Prior to the enactment of the FSCMA,

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brokerage, asset management, futures and trust companies had been regulated by separate legislation, and were constrained in the services and products they could offer separately under respective regulations. The FSCMA consolidated 14 different financial regulations (including the Securities and Exchange Act, the Futures Trading Act and the Trust Business Act) into a single regulatory framework, which relaxed the boundaries between the regulated entities, and expanded the range of products and services each entity could provide.

More recently, the FSC has taken further steps to develop the alternative investment market in Korea with the amendment of the Enforcement Decree of the FSCMA in September 2011, which permits the local formation and distribution of hedge funds. Since its introduction, a total of 17 hedge funds have been registered, accounting for an estimated 500 billion won of funds raised. Although still in its early stages, some estimate that the Korean hedge fund market could reach 2 trillion won by 2015.

In addition to hedge funds, the amended regulations now permit the domestic provision of prime brokerage services, including credit extension (e.g., loan and securities lending), fund custody services, trade execution and clearing, fundraising and reporting. Such regulations legally distinguish prime brokers from regular securities firms with the creation of ‘investment banks’, which may provide, in addition to the above-mentioned services, corporate lending and settling of orders of non-listed equities without going through an exchange.

The Korean private equity industry is also expecting to see some of the major changes in the relevant regulations as an amendment to private equity fund regulations under the FSCMA, which is currently pending at the National Assembly and expected to be ratified by the end of 2012. Most noteworthy changes would relate to the GP entities. Currently, while Korean private equity funds are required to be registered with the FSS, the GP of a Korean private equity fund is not required to carry any type of licence or subject to any registration requirements. Under the proposed amendment, GPs of Korean private equity funds will be required to register with the FSS and will have to meet certain eligibility requirements. Further, the amendment calls for relaxation of investment restrictions for Korean private equity funds by allowing mezzanine investments to acquire securities such as convertible bonds and bond warrants under certain circumstances.

VI SECTORAL REGULATION

i Insurance

The fundamental principle of asset management by an insurance company under the Insurance Business Law of Korea (‘the IBL’) is to secure the safety, liquidity, profitability and public interest of the assets. The asset management regulation for insurance companies adopts a negative system (i.e., it generally permits the use of assets except those specified).

Under the IBL, an insurer shall not engage in the following asset management activities:a owning non-business purpose real property;b owning of real property through special accounts;

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c lending funds for the purpose of speculation on products or securities;d extension of loans, either directly or indirectly, for the purpose of purchasing the

insurer’s shares;e extension of loans, either directly or indirectly, for the purpose of making political

donations;f extension of loans to the insurer’s officer or employee, excluding policy loans and

small-size loans as designated by the FSC;2

g foreign exchange transactions or financial derivatives transactions that do not meet the standards designated by the FSC;3 and

h investment in partnerships formed under the Civil Code or special laws (with certain exceptions).

The IBL provides some restrictions on the method and ratio of certain asset management activities that are permitted. Under the IBL, the insurance company shall set up and operate a special account, separately from the general account, for the assets acquired with respect to certain insurance businesses (e.g., employee retirement pensions), and the asset management method and ratio restrictions for special accounts would differ from the restrictions on the general account.

ii Pensions

Pension funds are not subject to any special regulations in Korea. Rather, most of the pension funds and their operations are governed by the internal guidelines of their respective supervisory organisation. For example, the National Pension Service of Korea manages its funds in accordance with the internal guidelines set out by the Ministry of Health & Welfare, its supervisory organisation. In general, such internal guidelines are evaluated annually, and detailed investment strategies may be subject to changes.

iii Real property

In terms of REFs, the FSCMA sets forth the corporate-type fund, trust-type fund and partnership-type fund. Since the trust-type REFs and the limited liability company-type REFs (‘LLC-type REFs’) are the most common in Korea, the regulatory rules on these two types are discussed below.

Trust-type REFThere are no shareholders in a trust-type REF, since the underlying fund vehicle used for a trust-type REF is not a corporate entity but rather a trust. Rather, the investors acquire beneficial certificates in the trust. Day-to-day asset management functions of a trust-type

2 Under the Insurance Business Supervisory Regulation (‘the IBSR’), ‘small-size loans’ means loans falling within any of the following categories: ordinary consumer loans of 20 million won or less; housing loans (including ordinary consumer loans) of 50 million won or less; and coverage loans (including ordinary consumer loans and housing loans) of 60 million won or less.

3 Appendix 8 and Appendix 9 of the IBSR set forth the detailed criteria for the permitted types of foreign exchange transactions and financial derivatives transactions.

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REF are carried out by an AMC. Title to the assets of a trust-type REF is held by a trust company. The trust-type REF structure is subject to a simplified governmental approval process compared to other structures, as the trust-type REF structure does not involve the incorporation of a corporate entity.

One key disadvantage of the trust-type REF is that, in order to qualify as an REF, the investor may not exercise any influence over the AMC. Thus, the investor’s control over the management of the underlying asset is much more limited than in other investment structures.

Currently, there are no limitations on the maximum percentage of beneficiary interests in a trust-type REF, which may be acquired by a single investor, provided that the trust-type REF initially offered its interests to two or more persons. A trust-type REF may not have debt in excess of 200 per cent of its net capital (unless resolved by a special beneficiaries’ meeting, in which case, no ceiling may apply). A trust-type REF must have a limited lifespan, but the FSCMA does not prescribe a maximum permitted lifespan. Therefore, the lifespan of a trust-type REF is a matter to be decided by the AMC and investors. However, typically, the lifespan ranges from five to 15 years in order to avoid risks that may be caused by regulatory changes.

LLC-type REFThe basic structure of an LLC-type REF is essentially the same as the trust-type REF, except that in lieu of a trust, a limited liability company is used as the underlying fund vehicle. The degree of control that an investor may exercise over the underlying asset is still limited by applicable law, although slightly more than in the case of a trust-type REF. As with trust-type REFs, there is no limitation on the maximum amount of equity interests in an LLC-type REF that a single investor may own. Because this structure involves the establishment of a corporate entity, the regulatory requirements for documentation, incorporation and operation procedures are more stringent compared to a trust-type REF. More specifically, a limited liability company with a minimum capital amount of at least 100 million won must be established by an AMC (in contrast, a trust-type REF is not subject to a minimum capital amount). Like a trust-type REF, an LLC-type REF may not have debts in excess of 200 per cent of its net capital (unless resolved by a special equity holders’ meeting, in which case, no ceiling may apply).

iv Hedge funds

In general, there are no restrictions on the type of assets that local hedge funds may invest in, and each leveraged transaction (i.e., borrowing) and investment in derivative products are allowed up to 400 per cent of the net assets of the relevant hedge fund. With respect to the licence requirements, there are certain types of domestic entities that are eligible to apply for a licence, which include securities companies, AMCs and investment advisers that meet:a the equity capital requirement of at least 6 billion won; b the additional capital requirements or minimum track record requirements (e.g.,

shareholders’ equity of at least 1 trillion won for securities companies, AUM of at least 10 trillion won for AMCs and discretionary investment management accounts totalling at least 500 billion won for investment advisers); and

c the personnel requirements of at least three investment management experts.

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Offshore hedge fund managers who wish to manage local hedge funds are required to establish an entity in Korea, and such Korean entity must meet certain licensing requirements such as the equity capital of at least 6 billion won and at least three investment management experts. In this regard, as a licensing policy, Korean regulators will require offshore fund managers to have the global AUM of at least US$1 billion, which is much less than the amount of the AUM that is required for Korean AMCs to obtain the licence to manage hedge funds in Korea (i.e., at least 10 trillion won). It is widely understood that these relaxed AUM requirements for offshore managers were adopted for the purpose of encouraging offshore hedge fund managers to operate their hedge fund businesses in Korea.

v Private equity

Private equity funds in Korea are in the form of a corporate vehicle (i.e., limited liability company, or a partnership called hapja hoesa under the Korean Commercial Code) as prescribed in the FSCMA (‘a Korean private equity fund’). First introduced in 2004, the Korean private equity fund is designed to make and hold controlled-equity investments that would be comparable to a typical ‘buyout’ fund in other jurisdictions. For example, there are certain management requirements for Korean private equity funds, such as having to invest in a company for the purpose of participating in that company’s management, and having to hold shares of the target company for at least six months after the acquisition. In short, the asset classes that a Korean private equity fund is permitted to acquire is quite narrow, and hence other types of private equity funds, such as mezzanine funds, venture capital funds and distressed asset funds, cannot be formed as a Korean private equity fund. Rather, these funds are governed by separate regulations.

Under the current private equity fund regulations in Korea, a Korean private equity fund must be set up as a corporate entity that has features that are considerably similar to a hapja hoesa partnership. Basically the company has certain members with limited liability and is managed by a manager (i.e., a general partner (‘GP’)). The detailed terms of the private equity fund and capital allocation would be governed by the private equity fund’s articles of incorporation (written in Korean). In terms of its composition, a Korean private equity fund should have at least one member with unlimited liability (i.e., a manager or GP) and at least one member with limited liability (i.e., a limited partner). The minimum investment amount of a limited partner is 1 billion won for an individual and 2 billion won for a corporation or any other organisation.

A Korean private equity fund can only manage its assets, among others, in the following manner:a investing in 10 per cent or more of the outstanding shares with voting rights of a

target; b investing in an arrangement that would enable it to exercise de facto control over

the target with respect to major management decisions, including the appointment of directors of the target; and

c investing in a special purpose company (‘SPC’) established for the purpose of the above investments.

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There are also various restrictions on the management of investment assets by a private equity fund, including the requirement to invest at least half of its invested amount of the private equity fund by its members in a way allowed under the FSCMA, within two years after its members make equity investments. In addition, borrowing by a Korean private equity fund is limited to 10 per cent of its assets, and this is only permitted in cases of a temporary shortage of funds. The amount of borrowing and issuance of guarantees by an SPC, which is used for acquisitions that are often set up below the Korean private equity fund, is also limited to 200 per cent of the shareholder’s equity of the SPC.

Similar to other jurisdictions, only private offering is allowed for Korean private equity funds. The total number of partners in a Korean private equity fund cannot be more than 49. In counting the total number of partners of a Korean private equity fund, if a partner is a fund, then the number of investors of that fund would be counted only when such fund has at least a 10 per cent stake in the Korean private equity fund. Otherwise, that fund will be counted as a single partner for the purpose of the 49-partner restriction.

VII TAX LAW

In general, onshore asset management funds, including hedge funds and private equity funds, are not taxed at the fund level, while the investors are subject to income tax with regard to the gains realised from investing in the fund. Investment managers are also generally subject to corporate income tax.

For example, a Korean private equity fund is in principle treated as a corporate entity separate from its investors for Korean income tax purposes. However, a Korean private equity fund can elect for the flow-through treatment under the Korean partnership taxation rules and, in such a case, any income of the Korean private equity fund allocated to its limited liability investors will be characterised as dividend income. Further, the Korean private equity fund may make investments in a portfolio company through an SPC that is incorporated pursuant to the Korea private equity fund regulations. Such an SPC, if any, may claim the dividend declared to its shareholders as deductible if 90 per cent or more of its distributable profits are declared as dividend. Therefore, the Korean private equity fund and the special purpose company may effectively be exempt from Korean income taxation.

Capital gain made on a sale of securities issued by a Korean company by a non-resident individual or non-Korean corporation, including offshore funds (e.g., limited partnerships), offshore companies, any other non-Korean entities formed by such offshore funds to hold their investments in Korea (each of the foregoing being ‘a non-resident’), is generally subject to a withholding tax in Korea at the lesser of 11 per cent of the gross realised proceeds or (subject to the production of satisfactory evidence of the acquisition costs and certain transaction costs) 22 per cent of the capital gain made, unless exempted under Korean tax laws or an applicable tax treaty.

Dividends or interest paid by a Korean company to a non-resident, unless exempt under Korean domestic tax law, is subject to withholding tax in Korea at the rate of 22 per cent (or 15.4 per cent for interest paid on bonds issued by a Korean issuer,

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including a local income tax) or a reduced rate under an applicable tax treaty. The relevant tax amount is withheld by the payer or its agent of the dividends or interest.

A non-resident (i.e., an offshore investor) may be deemed to have a permanent establishment in Korea if it has a fixed place of business through which the business of the non-resident is wholly or partly carried on; or if it conducts the business through an agent who performs an important part of the business of the non-resident in Korea, such as concluding contracts, exclusively for the non-resident. If an offshore fund or its limited partners were determined to have a permanent establishment in Korea, the portion of the investment income that is attributable to or effectively connected with such permanent establishment would be subject to Korean income taxation on a net income basis at the top marginal tax rate of 24.2 per cent in the case of being viewed as a corporate entity, or 41.8 per cent in the case of being viewed as an individual.

VIII OUTLOOK

It is expected that the onshore hedge fund market in Korea will continue to grow over the coming years. In December of 2011, when it had only been a few months after onshore hedge funds first became available, the total AUM of all the onshore hedge funds amounted to approximately only US$135 million. However, after only seven months, as of 25 July 2012 the total AUM stands at approximately US$650 million (according to a recent newsletter published by the FSC). Growth is evident not only in terms of AUM but also the variety of investors investing into hedge funds. Korean pension funds are planning to expand the proportion of hedge fund investment in their portfolios. For example, the National Pension Service, which is the biggest pension fund in Korea, has announced that it will expand its allocation for alternative investments, including hedge funds, from 6 per cent to 10 per cent by 2016. In addition, the government of Korea, in order to foster the success of its new deregulation, is also expected to encourage pension funds in Korea to invest significant amounts in hedge funds.

Being in the initial stage of hedge fund deregulation, the government of Korea expects several foreign hedge funds to participate in the newly launched platform, as they would be able to offer their best-of-breed products and advanced risk management system. Although enormous amounts of liquid funds exist in the Korean capital markets, most large-scale investors, such as pension funds, are adopting a ‘wait and see’ approach, because domestic hedge funds have yet to establish a robust track record. This represents a favourable opportunity for overseas hedge funds with extensive track records and seasoned fund managers to raise funds in Korea. Domestic hedge funds typically lack a sophisticated risk management system designed solely for hedge funds or a strict internal monitoring system to control portfolio managers, or they lack both. Therefore, the tried and tested risk-management and monitoring systems of overseas hedge funds will be among the most competitive factors in fundraising in Korea.

It is also anticipated that the current legal framework of having different types of private equity funds under several different laws will be changed into a single legal scheme under the FSCMA that will encompass almost all types of private equity funds, hedge funds and other alternative funds. Such change will lower the regulatory hurdles in setting up a fund, and hopefully translate into further robust growth of the private equity

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market in Korea. We also expect to see some additional amendments to the FSCMA and regulations thereunder to promote further development of the private fund industry, and to improve the regulatory framework incorporating international standards in terms of industry practice and relevant rules and regulations.

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Jae Ho Baek

Kim & ChangJae Ho Baek is an attorney in the firm’s banking, securities regulations, foreign direct investment, and mergers and acquisitions practice groups, and is also a member of the investment management and the private equity practice groups.

Mr Baek has extensive experience advising publicly and privately held multinational and Korean companies and financial institutions in a wide range of international and domestic transactions, including share and asset purchases, joint ventures, corporate governance and securities. He also advises on regulatory matters for financial institutions and on various issues in insolvency laws.

In addition, Mr Baek’s investment management practice includes establishing various onshore and offshore funds and advising asset management companies.

Mr Baek graduated from the College of Law at Seoul National University in 1996, and received his LLM from the University of Virginia in 2008. He is admitted to the Korean and New York State Bars.

kyle Park

Kim & ChangKyle Park is a foreign attorney in the firm’s corporate department, and serves as a member of the asset management company and cross-border fund formation groups. Since joining Kim & Chang Mr Park has advised private equity and hedge funds clients on both onshore and offshore fundraising, cross-border fund structuring and related regulatory and tax matters.

Prior to joining Kim & Chang, Mr Park was an associate at a law firm in Washington, DC, where he provided legal counsel to US investment companies and foreign public companies regarding various disclosure and compliance issues in connection with fund formation and IPOs under US federal securities law. Mr Park was also actively involved in advising investment advisers, broker-dealers and commodity pool operators with regard to legal and compliance matters.

Mr Park received his LLM in securities and financial regulation from Georgetown University Law Center, his LLM in taxation from NYU School of Law, his JD from

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ABOUt tHe AUtHOrS

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American University Washington College of Law and his BS in finance from Drexel University. Mr Park is admitted to the New York State and District of Columbia Bars.

Sae Uk kim

Kim & ChangSae Uk Kim is an attorney who serves as a member of the firm’s asset management and cross-border fund formation groups. Since joining Kim & Chang in 2010, Mr Kim has been working closely with major asset management companies in Korea. He has been closely involved with registering funds with the Korean regulatory authorities, and applying for discretionary investment or investment advisory licences in Korea. Besides these practices, he has also handled numerous banking-related litigations representing major commercial banks in Korea.

Mr Kim graduated from the College of Law at Seoul National University in 2004. He was admitted to practice after completing the programme at the Judicial research and training Institute of the Supreme Court of Korea in 2007.

kim & CHang

39 Sajik-ro 8-gil(Seyang Bldg, Naeja-dong)Jongno-guSeoul 110-720Koreatel: +822 3703 1114Fax: +822 737 9091/3jhbaek@kimchang.comkyle.park@kimchang.comsaeuk.kim@kimchang.comwww.kimchang.com