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South Korea

The Korean government has combined the Securities Investment Trust Business Act and the Securities Investment Company Act to create the Indirect Investment Asset Management Business Act, covering both investment trusts and investment companies. Under the new Act, effective from January 4 2004, a single set of regulations governs all types of asset management. The new Act strengthens the protection available to investors and expands the scope of assets subject to management.

The Securities and Exchange Act regulations governing investment advisory businesses and discretionary investment businesses have also been moved to the new Act. The scope of advisory services under the new Act has been expanded. Asset managers may undertake a greater variety of discretionary investments. But the law has strengthened restrictions on engaging concurrently in other businesses.

The new Act provides that indirect investments include returns on investments in the following types of assets: investment securities, over-the-counter and market-traded derivatives products, real estate, tangible assets (that is, agricultural products, livestock, marine products, lumber, minerals, energy products and products derived from them), as well as other assets specified in a presidential decree, allowing for the flexible expansion of the definition as the market continues to develop.

Under the new Act, a licensed asset management company must enter into an agreement with a trust company to engage in the investment trust business. The trust company cannot be an affiliate of the asset management company. An asset management company for an investment trust or company wishing to sell indirect investment securities must enter into an agreement with a brokerage firm. An investment company must entrust the custody and maintenance of its assets to a custodian company, which may not be an affiliate of either the investment company or its corporate directors. Also, depending on the type of investment company and the scope of its business, an investment company may need to register with the Financial Supervisory Service.

Finally, the law enacts safeguards to protect investors. It sets up a general meeting of beneficiaries system for investment trusts and a corporate directors system for investment companies. Investments in similar asset classes are limited and related-party transactions are restricted.

By Joshua Margolis

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