On September 25, 2023, Korea’s Financial Services Commission (“FSC”) announced a legislative notice for a proposed amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “FSCMA”). This follows a proposed amendment of the FSCMA passed by Korea’s National Assembly in June 2023 (the “Proposed Amendment”), a primary goal of which was to strengthen sanctions against unfair trading activities in Korea’s capital markets. Through the Proposed Amendment, Korea’s financial regulators are looking to revamp the current system of unfair trade practice sanctions and secure fair market order by imposing administrative penalties on unfair trading activities, implementing standards for calculating unfair gains and providing leniency measures for voluntary reporting.

Proposed Amendment – Key Features

1. Administrative Penalties on Unfair Trading Activities1

A new provision of the Proposed Amendment imposes administrative penalties on unfair trading activities up to two times the amount of illegally earned profits (“Unfair Gains”), with a maximum cap of KRW 4 billion in the event of no Unfair Gains or no comprehensible means of calculating Unfair Gains.

2. Standards for Calculating Unfair Gains2

A new provision of the Proposed Amendment provides for more specific standards for calculating Unfair Gains. Under the Proposed Amendment, the basis for calculating Unfair Gains will be the difference between the total income earned from unfair trading activities and the total costs generated from such activities.

3. Leniency Measures for Voluntary Reporting3

A new provision of the Proposed Amendment introduces leniency measures for voluntary reporting of violations whereby criminal sanctions or administrative penalties may be reduced for individuals who voluntarily report his or her own violation of the FSCMA or testify against a third party’s unfair trading activity.

Notwithstanding these new provisions, the Proposed Amendment has been criticized for lacking specific guidelines for (i) calculating Unfair Gains and (ii) administrating the newly implemented leniency measures.

Proposed Enforcement Decree Amendment – Key Features

The FSC’s proposed amendment to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “Proposed Enforcement Decree Amendment”) sets forth more detailed standards and measures to implement the main objective of the Proposed Amendment.4

1. Detailed Administrative Penalty Imposition Process5

A new provision of the Proposed Enforcement Decree Amendment provides a more coherent process for the imposition of administrative penalties on unfair trading activities. The Proposed Enforcement Decree Amendment stipulates that the FSC may impose administrative penalty upon receipt of the outcome of an investigation and prosecution (or the lack thereof) (collectively, the “Prosecution Outcome”) against persons accused of engaging in unfair trading activities. Notwithstanding the foregoing, the FSC may impose administrative penalty prior to the receipt of the Prosecution Outcome if one year has passed after the FSC’s report of unfair trading activity allegations to the Prosecutor’s Office (except where there are legitimate reasons for the delay in the investigation or prosecution, or the Prosecutor’s Office requests otherwise based on a reasonable concern on the effect on the Prosecution Outcome).

2. Detailed Standards for Calculating Unfair Gains6

A new provision of the Proposed Enforcement Decree Amendment provides the definitions of “total income” as encompassing realized profits, unrealized profits and avoided losses and “total cost” as including fees, transaction taxes and other costs incurred during trading. The Proposed Enforcement Decree Amendment introduces calculation formulae for Unjust Gains depending on the types of unfair trading practices which include violations of Article 174 (Prohibition on Use of Material Nonpublic Information), Article 176 (Prohibition on Market Price Manipulation), Article 178 (Prohibition on Unfair Trading), Article 178-2 (Prohibition on Market Disturbances), Article 180 (Restrictions on Short Sales) and Article 180-4 (Restrictions on Acquisition of Stocks by Public Offering or Sale by Short Sellers).

3. Detailed Leniency Measures for Voluntary Reporting7

A new provision of the Proposed Enforcement Decree Amendment allows for administrative penalties to be reduced from 50% to 100% (depending on the level of cooperation) for individuals who voluntarily report unfair trading activities committed by third parties. Notwithstanding the foregoing, no reduced criminal sanctions or administrative penalties will be available in the event such reporting individual has (i) coerced any third party into participating in unfair trading practices or (ii) repeatedly engaged in unfair trading activities.

Conclusion

The Proposed Amendment and the Proposed Enforcement Decree Amendment (collectively, the “Proposed FSCMA Amendments”) will be under public notice until November 6, 2023 and go into effect on January 19, 2024. It is expected that the Proposed FSCMA Amendments, which look to bolster the current sanctions system for unfair trade practices will be met with Korean financial regulators’ enthusiasm for taking stronger measures against unfair trading practices, hoping to restore the public’s trust in Korea’s capital markets.

 

1 Article 429-2 of the Proposed Amendment.
2 Article 442-2 of the Proposed Amendment.
3 Article 448-2 of the Proposed Amendment.
4 Financial Services Commission. (2023, September 25). Legislation Notice of Proposed Amendments to Enforcement Decree of the Financial Investment Services and Capital Markets Act. [Press release]. https://www.fsc.go.kr/no010101/80807srchCtgry=&curPage=4&srchKey=&srchText=&srchBeginDt=&srchEndDt=
5 Articles 379-2 and 380-3 of the Proposed Enforcement Decree Amendment.
6 Article 388-3 of the Proposed Enforcement Decree Amendment.
7 Article 389-2 of the Proposed Enforcement Decree Amendment.