The Financial Services Commission announced on October 22 that the government has approved regulatory changes regarding the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) and subordinate regulations with aims to strengthen early response and bring more stern measures against unfair trading activities in capital markets. The revised Enforcement Decree will go into effect from October 28 and the subordinate regulations from October 22.

Key Revision Details

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

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

Thus, this revision 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.

This “individual-centered” market surveillance system at the KRX will begin to operate from October 28 after conducting a series of test operations with business members (57 securities firms in total).

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 could 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).

Moreover, for illegal short-selling activities, authorities will make distinctions between serious violations and minor mistakes. When illegal short-selling is found to have been involved in unfair trading activities, or if there were any attempts to conceal wrongdoing, the penalty surcharge level in principle will be set at 100 percent of the amount of short sale orders subject to violation.

b) Penalty surcharge for disclosure violations

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

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 also 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 revised rules newly add 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 penalty 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 are also newly subject to the penalty surcharge at an aggravated level of maximum 30 percent.

In this regard, relevant disclosure rules at the KRX have also been updated to strengthen penalties on false disclosures.

With these revised rules in place, it is expected that unfair trading activities can be more quickly identified and detected, and authorities will be able to bring more stern measures against unfair trading activities and unfaithful disclosures, thereby promoting fairness and ensuring investor protection in the market.

* Please refer to the attached PDF for details.