FSS to inspect internal controls at 30 PEF management firms

[Financial News] The Financial Supervisory Service (FSS) will review internal control practices at about 30 domestic private equity fund (PEF) managers. The review will focus on large firms, but will also include companies identified as needing inspection during supervisory work, as well as small and midsize managers.
The FSS said on the 13th that, starting this month, it will conduct phased reviews of internal control practices at about 30 PEF-only management firms registered in Korea, share best practices and provide guidance on areas needing improvement.
The review is intended to assess whether the “Standard Internal Control Standards for General Partners of Institutional Private Equity Funds,” announced last March, are working properly in practice. The standards set out the roles and responsibilities of CEOs and compliance officers, measures to prevent conflicts of interest, and prohibitions on receiving money or valuables and making improper solicitations.
The FSS plans to examine not only formal compliance, such as whether firms have established relevant internal rules, but also whether their internal control systems work effectively. It will also assess whether the person responsible for compliance oversight is qualified to perform internal control duties, taking into account their experience and position.
The FSS will obtain checklists, relevant internal rules and records of implementation from the firms and conduct document-based reviews. For some firms, including large general partners (GPs), it will also interview personnel in charge and conduct on-site inspections.
The five main areas for review are: internal control organizations and systems; the operation of compliance officers; management of information exchange; assessment of conflicts of interest; and management of employees’ trading in financial investment products.
The FSS will examine the roles and responsibilities of CEOs and boards of directors; reporting and response procedures for internal control incidents; and procedures for appointing and dismissing compliance officers, as well as their compensation systems. It will also review physical separation between departments, differentiated IT access permissions, and systems for managing external leaks of information.
The review will also cover procedures and reporting systems for identifying and assessing conflicts of interest, and responses when conflicts are discovered. The FSS will examine whether employees follow the principle of using a single account in their own names and the status of their trade reporting, and assess management’s efforts, including internal control training and the operation of whistleblower systems.
The FSS plans to share best practices and cases of shortcomings identified through the reviews with the industry and provide guidance to each firm on improvements. Matters requiring institutional changes will be reflected in the standard internal control standards and other measures.
The FSS also plans to expand the scope of future reviews and pursue differentiated supervision and inspections according to firms’ internal control levels. Through these measures, it aims to prevent a recurrence of incidents that caused public controversy because of internal control failures and strengthen the PEF industry’s capacity for self-regulation.

[email protected] Lee Jeong-hwa Reporter