[비즈한국] The financial authorities are scrutinizing the operations of Exchange Traded Funds (ETFs) by asset management firms. It has been confirmed that the Financial Supervisory Service (FSS) recently requested comprehensive ETF-related data from major asset management companies. With FSS Governor Lee Bok-hyun gathering CEOs of these firms for a meeting on the 10th to demand a crackdown on noise marketing and the reorganization of internal regulations, some suggest that the Governor, whose term is nearing its end, is looking to leave behind a tangible legacy.
Focusing on the Manager-Brokerage Connection?
According to industry reports and media coverage, the FSS requested ETF-related data from major firms including KB, Mirae Asset, Samsung, and Hanwha Asset Management on the 11th. The FSS is reportedly asking for data covering the entire scope of ETF operations, including ETF establishment history, synthetic ETF collateral, and stock lending and borrowing transactions. An FSS official stated, "There are various pending issues in the industry, so we requested data from multiple perspectives."
As the FSS requested a vast amount of data, it is reported that the firms are currently busy preparing the materials. An official from an asset management firm noted, "Looking at the list of data requested by the FSS, it seems the focus is on identifying benefits (favors) exchanged between asset managers and brokerage firms."
Among the items requested, synthetic ETFs are funds that are managed indirectly through over-the-counter derivative (swap) contracts with brokerage firms, unlike general ETFs managed directly by asset management firms. Stock lending and borrowing refers to financial companies with stock holdings lending their securities to other financial institutions for a fee. In a 2022 regular inspection of ETFs, the FSS took the view that managers were lending securities to brokerage firms, which act as Liquidity Providers (LPs), at excessively low fees.
On the 10th, FSS Governor Lee Bok-hyun held a meeting with CEOs of 23 major domestic asset management firms and the chairman of the Korea Financial Investment Association, urging them to uphold market order. Governor Lee pointed out, "Asset management firms are entrusted with a fiduciary duty to investors under the Capital Markets Act. However, cases that undermine the investor-first principle—such as formalistic exercise of voting rights, pursuit of private interests by major shareholders and employees, and decision-making skewed toward interested parties—are occurring."
He also issued a warning, stating that he would inspect any asset management firm that fails to improve these issues. Governor Lee mentioned, "Driven by some large firms, a fee-cutting competition to expand the scale of business is overheating. On top of that, errors have been repeated in fund pricing, which is the foundation of management. This fundamentally shakes investor trust." He added, "To protect market trust, we will inspect the overall product management and control systems of firms that neglect their primary duties and focus only on noise marketing."
As Governor Lee mentioned, several problems have occurred in the market recently. On March 28, calculation errors for the Indicative Net Asset Value (iNAV) occurred in over 170 ETFs. The Net Asset Value (NAV) of an ETF is the price calculated by dividing the total net assets—after deducting management fees and other costs—by the number of shares issued. iNAV is provided in real-time to prevent investors from trading ETFs at prices higher or lower than their actual value. At the time, asset management firms were criticized for failing to immediately notify investors even though the iNAV was calculated to be higher than the actual value.
In February, starting with Mirae Asset Global Investments, followed by Samsung Asset Management and KB Asset Management, firms began successively cutting the total expense ratios of their ETFs tracking major U.S. indices, igniting a fee war. Financial authorities issued warnings and hit the brakes on the firms' noise marketing aimed at boosting their rankings.
Summoning CEOs and Investigations… Asserting 'Presence' Before Leaving Public Office?
On the other hand, some view this as Governor Lee Bok-hyun, whose term is nearing its end, trying to produce results before stepping down. Governor Lee, who took office on June 7, 2022, sees his term expire on June 6 of this year, leaving less than two months. The interpretation is that he is asserting his presence before leaving public service.
Previously, Lee had even expressed an intention to resign while opposing the veto of the commercial code amendment, but was ultimately unable to stop it. Prime Minister Han Duck-soo, who returned to the role of Acting President following the dismissal of the impeachment motion, exercised his veto power on the commercial code amendment on April 1.
In the process, he also stood in opposition to the ruling party. The People Power Party had opposed the amendment, which would add "shareholders" alongside the "company" as subjects to whom directors owe a fiduciary duty under the commercial code, claiming it could "infringe upon corporate management rights." However, when Governor Lee stated in March, "I will put my job on the line to oppose (the veto of the commercial code amendment)," People Power Party leader Kweon Seong-dong criticized him, saying, "That is an inappropriate remark. It seems the habits from his days as a prosecutor are surfacing even in his role as FSS Governor."
The recent report that the Board of Audit and Inspection requested a "history of financial institution interim inspection announcements" for the past three years has also drawn attention. Since this period overlaps with Governor Lee's tenure, analysts suggested that he might be the target.
Governor Lee has chosen to complete his term rather than entering politics. Appearing on the CBS radio program "Kim Hyun-jung's News Show" on the 2nd, Governor Lee said regarding his future, "I received offers to run in the 22nd general election, but after consulting with my family, I concluded it was better not to," adding, "I have been in public service for over 25 years, so if possible, I would like to do something that broadens my horizons in the private sector."