On March 22, 2012, Korea’s Financial Services Commission (FSC) made an announcement concerning certain amendments that are expected to be enacted with regard to the trust system provisions of the Financial Investment Services and Capital Markets Act (FSCMA). According to the announcement, the trust regulatory system will be reformed by, among other things, expanding the scope of trust categories eligible to issue beneficiary certificates (which has up until now been limited only to monetary trust assets) to allow the issuance of beneficiary certificates by all types of trusts, including negative assets (debt) and security interest trusts.
The proposed amendments to the FSCMA are related to the recent amendment of the Trust Act (expected to go into effect on July 26, 2012) and are intended to make the specific changes needed in the trust related provisions of the FSCMA in order for the new trust system contemplated by the amended Trust Act to become fully activated. The relevant changes planned for the trust-related provisions of the FSCMA are as follows:
- Expansion of Scope of Assets That Can Be Held in Trust
Under the revised Trust Act, the scope of objects that can be held in trust is now comprehensively stated to be “assets.” Accordingly, even negative assets (debt) can be the subject of trust arrangements, and such things as security interests and business operations are also expressly included within the scope of assets that may be held in trust.
Pursuant to the expansion of the scope of eligible trust assets under the Trust Act, the proposed amendments to the FSCMA include debt and security interests (i.e. interests in collateral) as types of assets that may be held in trust. The FSCMA amendments have excluded “business operations,” however, citing concerns about potential harm to investors, and negative impacts on the overall soundness of trust business operations as reasons for such exclusion.
- Introduction of Secondary Entrustment System
Previously, the Trust Act did not contain any express provisions or provide any clear guidance on the issue of whether secondary entrustments [(i.e. a trust company’s entrustment of trust assets to another trust company)] were permitted. This situation gave rise to a certain amount of confusion in the market. The amended Trust Act now provides that secondary entrustments are permitted, so long as the trust beneficiary consents to such arrangement.
Accordingly, the proposed amendments to the FSCMA also provide that trust companies may make secondary entrustments to other trust companies. Additionally, it should be noted that, in order to protect investors, prevent confusion and ensure that rights and obligations related to the management of relevant trust assets will be clearly defined, the proposed FSCMA amendments prohibit any further re-entrustment of the trust assets by the secondary trust company to any other trust company.
- Expansion of Scope of Trusts Eligible to Issue Beneficiary Certificates
Previously, the Trust Act did not contain any provisions concerning the eligibility of trusts to issue beneficiary certificates and the relevant provisions of the FSCMA have only permitted the issuance of beneficiary certificates by money trusts. Under the amended Trust Act, however, provisions have been added that allow for the issuance of beneficiary certificates by trusts in relation to all types of trust assets.
The proposed amendments to the FSCMA also reflect this aspect of the amended Trust Act by adding provisions allowing the issuance of beneficiary certificates for all types of trust assets.
However, the proposed amendments to the FSCMA impose certain conditions to protect investors with respect to the issuance of beneficiary certificates, such as: (i) a requirement that the issuance of beneficiary certificates by a trust company will be regarded as falling within the scope of regulated investment dealer services and the issuing trust company will therefore be subject to the same business conduct rules that apply to licensed investment dealers, (ii) a requirement that the underlying trust assets be appraised (in accordance with the same appraisal standards that apply to the valuation of fund assets) to determine the actual market price or fair value , and (iii) a requirement that the total amount/price of issued beneficiary certificates will not exceed the total value of underlying assets. Additionally, in order to promote greater transparency in financial transactions and to take into account concerns with regard to loss and theft-related risks, as well as related transaction costs, the proposed FSCMA amendments only permit the issuance of beneficiary certificates in registered form and require that all issued beneficiary certificates be deposited with the Korea Securities Depository.
The proposed FSCMA amendments summarized above completed the advance public notice period of 40 days, which ended on May 5, 2012, and have been submitted to the Ministry of Government Legislation.