FSS chief calls ETF false advertising 'gravely serious,' orders asset managers to clean up

Financial Supervisory Service Governor Lee Chan-jin has labeled false and exaggerated advertising in the fast-growing exchange-traded fund market a serious investor-protection issue, calling on the asset management industry to make "extraordinary self-regulatory efforts." He also demanded that firms overhaul their formulaic "copy-and-paste" voting disclosures and strengthen internal controls to back up the exercise of shareholder rights.

Lee convened a CEO roundtable Monday at the Korea Financial Investment Association in Yeouido, Seoul, attended by the association's chairman and the chief executives of 20 asset management companies, to discuss ways to improve order in the ETF market and reinforce fiduciary responsibilities.

"Because investors rely primarily on asset managers' advertising when choosing ETFs on their own, false or exaggerated advertising by managers is a gravely serious matter from an investor-protection standpoint," Lee said. "Extraordinary self-regulatory efforts are needed to address market-order violations such as misleading advertising."

The net asset value of domestic ETFs grew from 78.5 trillion won ($52.2 billion) in 2022 to 297.1 trillion won last year, and reached 507.4 trillion won as of May this year. The market's rapid expansion has intensified competition among asset managers over market share, advertising and new product launches. As products tracking similar indexes or themes have proliferated and managers have competed to attract investors by highlighting returns and distributions, the accuracy of advertising claims and the degree of product differentiation have emerged as key challenges for market order.

Lee said managers must convey accurate investment information during the advertising production and internal review process. He also urged them to work closely with securities firms acting as liquidity providers to keep the gap between market prices and net asset values under tight control.

Lee said asset managers also need to reform their voting practices. The voting participation rate for public and private equity funds rose from 79.6 percent in 2024 to 91.6 percent last year and 91.8 percent this year, while the rate of dissenting votes climbed from 5.2 percent to 6.8 percent and then 8.2 percent over the same period.

Yet disclosure quality has in many cases remained superficial. Among the 285 asset management companies reviewed this year, 121 — or 42.4 percent — recorded more than half of their voting rationales using boilerplate language such as "minimal impact on the general meeting" or "no infringement of shareholder rights."

"The exercise and disclosure of voting rights by funds is an important channel through which managers, as agents for investors, report their positions on key issues at investee companies and the outcomes of their actions," Lee said. "Please put in place a voting policy and disclosure framework that enables substantive communication with investors."

Lee also called for stronger internal controls related to shareholder engagement, including dedicated teams, stewardship committees and key performance indicators. The FSS said managers with the relevant organizational structures and compensation systems in place were in fact more active in shareholder activities.

Domestic pension funds plan to increase the weight assigned to stewardship activities when evaluating external managers, and Lee said CEOs must personally ensure their internal controls are functioning effectively.

The FSS plans to hold briefing sessions in July and August for staff responsible for voting and disclosure at both public and private fund managers, sharing review criteria and examples of good and poor practice.

In this year's review of shareholder engagement frameworks, Samsung Asset Management, NH Amundi Asset Management and VIP Asset Management were named as best-practice firms. Mirae Asset Global Investments, Kyobo AXA Investment Managers, Truston Asset Management and Shinyoung Asset Management received favorable ratings for the second consecutive year, while Korea Investment Management and KB Asset Management were recognized for marked improvement.