CONTENTS
- 1. Investment Trust | Concept and Legal Structure
- - Legal Definition
- - Legal Structure
- 2. Investment Trust | Types, Management, and Regulatory Framework
- - Classification by Investment Target
- - Management and Regulatory Framework
- - The Profit Structure and Costs of an Investment Trust
- 3. Investment Trust | Legal Issues and Potential Disputes
- - Principal Issues
- - Potential Disputes
- 4. Investment Trust | How to Respond When a Dispute Arises
- - The Corporate Perspective
- - The Individual Investor's Perspective
- - The Assistance of Daeryun Law Firm
1. Investment Trust | Concept and Legal Structure
An investment trust is one type of collective investment scheme defined under the Financial Investment Services and Capital Markets Act (the Capital Markets Act).
It rests on a structure in which funds are pooled from multiple investors, a professional management institution manages those funds, and the results of that management are attributed to the investors.
Legal Definition
(4) For the purposes of this Act, the term "collective investment business" means engaging in collective investment as a business.
(5) For the purposes of paragraph (4), the term "collective investment" means acquiring, disposing of, or otherwise managing investment-target assets with property value, using money and similar funds pooled from two or more investors without receiving day-to-day management instructions from the investors, and distributing and attributing the results thereof to the investors.
Article 6 of the Capital Markets Act defines collective investment as pooling funds from two or more persons, investing and managing those funds, and attributing the results to the investors.
An investment trust is the form of collective investment scheme that carries out this collective investment through a trust agreement.
Legal Structure
Unlike an ordinary contract, an investment trust follows a three-party structure built on a trust.
Investors contribute funds and acquire beneficial interests, the asset management company manages those funds, and the trust business operator holds and oversees the assets.
The independence of the trust property lies at the center of this structure.
Under Article 80 of the Capital Markets Act, collective investment property is kept separate from the proprietary property of the management company and the trust business operator.
As a result, even if the management company or the trustee becomes bankrupt, the investment trust property is, in principle, not subject to execution by their creditors.
Party | Legal Status | Role |
Investor | Beneficiary | Contribution of funds and attribution of returns |
Asset Management Company | Truster | Investment decisions and management |
Trust Business Operator | Trustee | Custody and oversight of assets |
The trust business operator also carries a duty of oversight, confirming that the acts of the asset management company conform to the relevant statutes and the trust agreement.
2. Investment Trust | Types, Management, and Regulatory Framework
Investment trusts fall into several categories based on their legal regulation and investment structure.
First, the method of solicitation divides them into public offering and private placement.
A public-offering investment trust targets an unspecified number of persons, so disclosure obligations such as submitting a securities registration statement apply under Article 119 and the articles that follow in the Capital Markets Act.
A private-placement investment trust, by contrast, targets a limited number of investors, and the regulation is comparatively relaxed.
The availability of redemption divides them into open-end and closed-end types.
In the open-end type, the investor's right to demand redemption is guaranteed, so redemption may be made at any time, whereas the closed-end type restricts redemption for a set period.
Investment trusts are also classified by their investment target, as set out below.
Classification by Investment Target
Type | Characteristics |
Equity Type | High price volatility |
Bond Type | Relatively stable |
Mixed Type | Diversified investment |
Special Asset Type | Includes real estate, infrastructure, and similar assets |
This classification also shapes the applicable regulation and the level of disclosure.
Management and Regulatory Framework
Investment trusts are subject to strict regulation that protects investors.
Under Article 79 of the Capital Markets Act, an asset management company must manage the trust property for the benefit of the investors, and it owes a duty of care of a good manager and a duty of loyalty.
Article 50 of the Capital Markets Act also governs the sale of financial investment products, so a financial company must weigh the investor's investment objectives, financial circumstances, and similar factors, recommend a suitable product, and fully explain the structure and risks of that product.
The prospectus system is another key regulatory element.
Under Article 123 of the Capital Markets Act, a prospectus must be provided to the investor, and it must contain the information needed for the investment decision.
The Profit Structure and Costs of an Investment Trust
The returns of an investment trust are determined by its net asset value (NAV).
The net asset value is calculated as follows.
• The net asset value is divided by the total number of units to set the base price
The investor's profit and loss follow the changes in the base price.
3. Investment Trust | Legal Issues and Potential Disputes
The issues that arise repeatedly in connection with investment trusts are set out below.
Principal Issues
First, the principle of investor protection.
A financial company must consider the investor's level of understanding and risk preference, and a substantive suitability assessment is required.
Second, the independence of the trust property.
This safeguard is central to investor protection, and it provides the basis on which collective investment property is separated from the creditors of the management company and the trustee.
Third, the rights of the beneficiary.
A beneficiary holds the right to demand redemption and the right to request information, and may hold the manager responsible for unlawful management.
Potential Disputes
• Violation of the duty to explain
• Management that differs from the prospectus
• Deviation from or abuse of discretion in management
Where any of these occurs, liability for damages may be recognized.
4. Investment Trust | How to Respond When a Dispute Arises
An investment trust is a financial product whose structure carries the possibility of loss, yet not every loss falls on the investor.
A violation of the statutes during the sales process or the management process can give rise to a dispute, and an appropriate response to that dispute is necessary.
The Corporate Perspective
From the perspective of a financial company or an asset management company, a systematic response matters when a dispute arises.
The first step is to examine whether the suitability principle and the duty to explain were lawfully met in the investment recommendation and sales process.
This calls for securing investor-profile analysis materials, evidence of whether a prospectus was provided, and recordings and records of the explanation process.
Internally, a response strategy should be built around the following matters.
• Verification of compliance with internal control standards and procedures
• Review of the scope of discretion in the management process
• Review of whether the actual management matches the prospectus and disclosure content
Where a dispute reaches the Financial Supervisory Service, it is important to respond on the basis of objective materials about the facts.
The Individual Investor's Perspective
When an investment loss occurs, it is important to distinguish whether the loss stems from market fluctuations or whether it is damage caused by the unlawful act of a financial company.
Because not every loss becomes subject to compensation, the circumstances of the loss and the overall investment process must be examined together.
In particular, if a product unsuitable for the investor's investment profile was recommended, if the risks were not sufficiently explained, or if there are signs that the funds were managed in a manner different from the prospectus, a legal response should be considered.
In practice, a response generally begins with filing a complaint with the financial company, proceeds to the dispute mediation procedure of the Financial Supervisory Service, and may, depending on the case, extend into civil litigation.
The Assistance of Daeryun Law Firm
Because disputes involving investment trusts arise where the structure of the financial product and the legal regulation work together, a response that addresses both the organization of the facts and the application of legal principles is necessary.
Daeryun Law Firm, drawing on its understanding of the finance and capital markets field, offers the following assistance.
• Analysis of whether the suitability principle and the duty to explain were violated
• Development of dispute mediation and litigation strategies
• Claims for damages and defense responses
Where a legal determination is needed, you can develop a specific response strategy through the 🔗Finance Attorney Legal Consultation Booking.
