FSS to require upfront disclosure of maximum losses for high-risk funds from Sept. 30

Starting Sept. 30, financial firms launching new high-risk public funds — including leveraged and inverse products — will be required to inform investors of the maximum potential loss under extreme market conditions.

Asset managers that have previously recorded losses exceeding 20 percent on comparable products will also be required to disclose that history.

The Financial Supervisory Service said Tuesday it will introduce a "fund core risk standard" on Sept. 30 to improve how investment risks in public funds are communicated to retail investors. The move follows calls to overhaul public fund prospectuses after last year's total-loss incidents involving overseas real estate funds.

The standard covers 10 fund types in total. Four categories with a history of large-scale losses are included: overseas real estate funds, overseas real estate investment trusts, equity-linked funds and derivative-linked funds — the latter two tied to past loss incidents involving equity-linked securities and derivative-linked securities.

Two product types with high structural risk — leveraged and inverse funds — are also covered. Four additional product types prone to investor misunderstanding round out the list: covered-call funds, target-return funds, physical gold funds and overseas fund-of-funds.

When launching any of these fund types, firms must clearly disclose the key investment risks. All funds must include a "principal loss risk" warning, and each fund may list up to three product-specific risks.

For leveraged and inverse products, firms must also provide the maximum projected loss under an extreme scenario. For example, if the underlying asset — stock A — hits the daily lower limit of minus 30 percent, the maximum single-day loss on a single-stock leveraged product would be estimated at minus 60 percent.

Up to four key risks may be listed, but if market conditions require additional explanation, further details may be added as footnotes.

In addition, asset managers must disclose a record of any past losses exceeding 20 percent on their own products. The FSS said the requirement is intended to strengthen accountability among managers of high-risk funds and improve investors' understanding of the risks involved.

A loss exceeding minus 20 percent on a comparable in-house product will be classified as a large-scale loss, and disclosures must include the fund name, investment region and asset name, the date the loss occurred and its scale.

The FSS said the standard sets the minimum requirements for prospectus disclosures, and added that each asset manager needs to strengthen internal controls so that investors can fully understand the risks before committing to a fund.