FSS Conducts Intensive Review of Overseas Real Estate Funds... Past Losses Exceeding 20% Also Disclosed

[Financial News] The Financial Supervisory Service is strengthening its review of high-risk public funds, such as overseas real estate funds. Asset management companies must specify in their securities registration statements the details of losses and the possibility of principal loss for products with past loss rates exceeding 20%, so that investors can easily identify the risks of the products.
On the 9th, the Financial Supervisory Service held a meeting attended by representatives from eight major real estate fund management companies and the Korea Financial Investment Association to discuss measures to strengthen investor protection for high-risk funds.
Overseas real estate funds and REITs typically feature a structure that combines senior debt from overseas entities with subordinated equity investments from domestic investors. If the appraised value of the real estate declines, an Event of Default (EoD) or forced sale may occur regardless of rental income, potentially resulting in the loss of part or all of the investment. Recently, some products have even caused total losses of the investment due to the distress of underlying assets and the subordinated equity structure.
Since last April, the Financial Supervisory Service has required overseas real estate fund managers to conduct internal reviews of due diligence results from local firms. The internal control department must prepare an evaluation opinion on this matter, and the CEO and compliance officer must also sign off on it. Fund profit and loss graphs and stress test scenario analysis results are also attached to the securities registration statement to allow investors to anticipate investment outcomes in worst-case scenarios.
Starting on the 30th, the 'core risk standard' will be applied to 10 types of high-risk funds, including overseas real estate funds, REITs, equity-linked funds (ELF), derivative-linked funds (DLF), leveraged funds, and inverse funds.
Fund managers must list four key investment risks on the first page of the simplified investment prospectus, including one risk of principal loss and three special risks specific to the product. In the case of overseas real estate funds, risks such as borrowing, non-receipt of dividends, and exchange-rate fluctuations are included.
Past history of large-scale losses must also be disclosed. Asset managers must list the name of a fund with a past loss rate exceeding 20%, the investment region and assets, the scale of the loss, and the date of occurrence in the securities registration statement.
In particular, rental-type real estate funds must specify that, due to the subordinated equity investment structure, senior creditors may exercise their collateral rights if real estate prices fall. They must also inform investors that, in this process, the real estate may be disposed of regardless of their wishes, potentially resulting in the loss of part or all of their investment.
In January of this year, the Financial Supervisory Service established a special review team within the Asset Management Supervision Bureau and introduced a "concentrated review system" that assigns multiple reviewers to high-risk funds, such as overseas real estate funds. Going forward, the Financial Supervisory Service plans to closely examine self-assessment reports from on-site due diligence on overseas real estate funds and whether key risks are disclosed. It will also focus on scrutinizing whether the product structure is high-risk, allowing senior creditors to dispose of real estate regardless of the investors' wishes.
Seo Jae-wan, Deputy Governor of the Financial Supervisory Service, stated, "When launching high-risk products with a high potential for consumer harm, such as mezzanine or subordinated investments, the possibility of losses must be reviewed very carefully from the design and manufacturing stages," adding, "We will strictly scrutinize high-risk funds, including overseas real estate funds, from the perspective of investor protection."
[email protected] Lee Jeong-hwa Reporter