The Financial Services Commission issued a preliminary notice of regulatory changes on July 23 regarding the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) and subordinate rules to strengthen early response and bring more stern measures against unfair trading activities.

Key Revision Details

I. Establish a regulatory ground to upgrade KRX’s surveillance system to make it more individually-focused (from account-based system currently)

Under the current system, the KRX performs surveillance based on accounts—and not based on individuals—as it is not authorized to make use of investors’ personal information. As such, surveillance targets remain too broad and it is difficult to identify activities connected to the same entity.

Thus, the revision proposal authorizes the KRX’s market surveillance committee—in its surveillance capacity—to process investors’ personal data (resident registration number in pseudonymized form). Based on this, the KRX will be able to perform more individually-focused market surveillance.

This transition from the current “account-based” to a more “individual-centered” approach will help to boost the efficiency in market surveillance as surveillance targets will be reduced by about 39 percent. Moreover, it will allow the authorities to more effectively and quickly find out and identify whether certain activities have been carried out by the same entity, what and how much role did the rule-breaker play in manipulating stock prices, and whether there was cross trading involved.

II. Strengthen the criteria for imposing penalty surcharges and introduce aggravated sanctions criteria

a) Penalty surcharge for unfair trading activities

Under the current penalty surcharge standards, unfair trading activities can be subject to penalty surcharges amounting to either 50 percent to 200 percent of the amount of unfairly gained profits (for use of undisclosed material information, price manipulation, or unfair transaction) or 50 percent to 150 percent of the amount of unfairly gained profits (for market disrupting activities).

To more strictly deal with unfair trading activities and more effectively collect unfairly gained profits, these penalty surcharge standards will be raised to either 100 percent to 200 percent of the amount of unfairly gained profits (for use of undisclosed material information, price manipulation, or unfair transaction) or 100 percent to 150 percent of the amount of unfairly gained profits (for market disrupting activities).

b) Penalty surcharge for disclosure violations

Under the current penalty surcharge standards, disclosure violations can be subject to penalty surcharges amounting to 20 percent to 100 percent of the maximum penalty imposable under the FSCMA. Moreover, when disclosure violations are concerning securities registration or public tender statement, company executives such as largest shareholders aside from the violator may be also subject to penalty surcharges.

These penalty surcharge standards will be raised to 40 percent to 100 percent of the maximum penalty imposable under the FSCMA. The same penalty surcharge rates (40 percent to 100 percent of the maximum penalty imposable under the FSCMA) will apply to company executives such as largest shareholders.

c) Aggravated sanctions for employees of financial companies

Unfair trading activities such as the use of undisclosed material information—when carried out by employees of financial companies in their line of duty—can cause significant ripple effects throughout the entire market and industry and have damaging impact on the level of confidence among financial consumers.

In this regard, the revision proposal newly adds the use of undisclosed material information and unfair trading activities by employees of financial companies in their line of duty to the aggravated sanctions criteria. Under this system, rule-breakers can be subject to penalty surcharges at an aggravated level of maximum 30 percent. They may also be prohibited from engaging in transactions of financial investment products and/or from serving as an executive at a listed company for up to 66 percent longer period of time. False disclosures of material information by listed companies will also become newly subject to penalty surcharges at an aggravated level of maximum 30 percent.

With the revised rules in place, authorities are expected to more quickly identify and detect unfair trading activities and take more stern measures against unfair trading activities and unfaithful disclosures, thereby promoting fairness and strengthening investor protection in the market. The revision proposal will enter a comment period from July 24 to September 2, and go through a successive legislative review and approval process before entering into force in October this year.

* Please refer to the attached PDF for details.