Korea's first Integrated Managed Account (IMA) product, which has drawn investor interest for its principal protection feature, will launch on Wednesday.
Financial authorities have decided to classify IMA investment returns as dividend income and have strengthened investor protection measures in sales documents including prospectuses and terms of service.
Korea Investment & Securities will become the first Korean brokerage to launch an IMA product on Wednesday, according to financial investment industry sources on Monday. The launch comes approximately one month after the Financial Services Commission designated the firm alongside Mirae Asset Securities as IMA operators on December 19.
Korea Investment & Securities is reportedly preparing products with two-year maturities offering annual returns in the high 3% to 4% range. Mirae Asset Securities also plans to launch IMA products this year with three-year maturities and annual rates exceeding 4%.
For the initial product, a lump-sum payment at maturity is the likely payout method rather than interim dividends. This is because IMA is a new type of product, making fund management for interim dividend payments difficult.
"Whether it's interim dividends or lump-sum payment at maturity, that's for the operators to decide when structuring products," a financial authority official said. "However, tax-related matters should be clearly explained in the prospectus."
Concerns raised about potential "IMA tax bombs" are unlikely to significantly affect ordinary investors, excluding some high-net-worth individuals. Both Korea Investment & Securities and Mirae Asset Securities are considering setting per-person investment limits for each product, making unlimited investment in IMA products difficult.
"For IMA returns to be subject to comprehensive financial income taxation, assuming no other financial income, the investment would need to be at least 200 million won, based on a three-year maturity, 4% annual rate, and lump-sum dividend payment at maturity," a securities firm official said.
The Ministry of Economy and Finance and the Financial Services Commission have completed consultations to classify IMA investment returns as dividend income rather than interest income. The dividend income tax rate is 15.4%.
The decision considered that returns from other financial investment products such as funds are also taxed as dividend income under the Income Tax Act.
Ahead of the IMA product launch, the Financial Supervisory Service has significantly enhanced the content and format of sales documents including prospectuses and terms of service to meet investor expectations.
Product prospectuses must now describe IMA's key investment risks in specific and clear terms. Scenario analysis results, including worst-case scenarios that could occur during management, must also be included in prospectuses. Investors must be immediately notified when significant events occur, such as distressed assets or inability to repay principal at maturity.
IMA asset management reports must be provided to investors quarterly, with information on major investment holdings and return performance at a level comparable to public funds. IMA operators must clearly state in advertisements that IMA products are investment products with potential for principal loss. Fees and commissions including performance fees must be clearly displayed, and expected returns cannot be advertised as the products offer performance-based dividends.
Since both individual and corporate investors can subscribe to IMA products, significant "money moves" are expected. "Corporations have previously invested in products like equity-linked securities with principal loss risk to earn interest returns," an industry official said. "IMA products that protect principal while offering higher rates than deposits will be attractive investment destinations."
