The Financial Services Commission announced that the government approved the revision bill for the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) intended to establish new sanctions mechanisms against unfair trading and illegal short sale activities at the cabinet meeting held on April 14. The revised Enforcement Decree is scheduled to go into effect on April 23, 2025 along with the revised FSCMA and subordinate regulations.

Background

The government has continuously worked to strengthen monetary sanctions through the introduction of penalty surcharge and the increased level of fine imposable against unfair trading and illegal short sale activities in capital markets. However, in order to more effectively prevent the recurrence of unfair trading activities, the need for introducing non-monetary sanctions mechanisms—such as an account freeze and a restriction from being appointed or serving as an executive officer at listed companies—has been called for taking examples from major overseas countries, such as the U.S., Hong Kong, and Canada.

Therefore, this revision bill introduces the following non-monetary sanctions mechanisms—(a) a restriction for rule-breakers from engaging in transactions of financial investment products and being appointed or serving as an executive at listed companies and (b) an account freeze (payment suspension) on the accounts suspected to have been used in unfair trading or illegal short sale activities.

Key Revision Details

I. Restriction from Engaging in Transactions of Financial Investment Products

Application of Regulation

Under the revised FSCMA, the FSC is authorized to restrict rule-breakers (those who have engaged in unfair trading and/or illegal short sale activities) from engaging in transactions of financial investment products for up to five years depending on the nature, seriousness, period, frequency, and the level of unfairly gained profits of the rule-breaking activities.

In this regard, the revised Enforcement Decree prescribes the restriction period in a more detailed and segmented way considering the impact of rule-breaking activities on prices, the volume of short sale orders, and the level of unfairly gained profits. For instance, if the impact on prices was considerable and if false documents were submitted in attempt to conceal or downplay rule-breaking activities, it will be possible to impose a restriction for up to five years. On the other hand, if the possibility of recommitting unfair trading activities is deemed to be low—for instance, when the violator has no prior record of engaging in unfair trading activities—it will be possible to impose a reduced level of sanction.

Exemptions from Restriction

Under the revised FSCMA, the transactions restriction applies to all types of financial investment products in principle. However, it allows exemptions to be provided under the Enforcement Decree considering the nature of transactions and other relevant circumstances.

In this regard, the revised Enforcement Decree prescribes exemptions to be granted in the following cases—(a) disposition or exercising the right of financial investment products that have been in one’s possession since before the issuance of transactions restriction order and that have no particular relationship to unfair trading activities, (b) transactions taking place due to external factors, such as acquisition of financial investment products resulting from inheritance or stock dividend, or merger, and (c) transactions of debt securities that are not likely to be involved in unfair trading activities.

Ensuring Effective Enforcement of Sanction

If the rule-breaker subject to the transactions restriction violates the restriction order and acquires a financial investment product, the FSC can impose an order to dispose of that financial investment product in a specific time period not exceeding six months. In the case of non-compliance, the FSC can impose a compliance fine.

II. Restriction from Serving as an Executive at Listed Companies

Application of Regulation

Under the revised FSCMA, the FSC is authorized to restrict rule-breakers from being appointed or serving as an executive at listed companies for up to five years depending on the nature, seriousness, period, frequency, and the level of unfairly gained profits of the rule-breaking activities.

In this regard, the revised Enforcement Decree prescribes the restriction period in a more detailed and segmented way considering the impact of rule-breaking activities on prices, the volume of short sale orders, and the level of unfairly gained profits. For instance, if the impact on prices was considerable and if false documents were submitted in attempt to conceal or downplay rule-breaking activities, it will be possible to impose a restriction for up to five years. On the other hand, if the possibility of recommitting unfair trading activities is deemed to be low—for instance, when the violator has no prior record of engaging in unfair trading activities—it will be possible to impose a reduced level of sanction.

Scope of Corporate Entities Restricted for Executive Appointment

Under the revised FSCMA, the restriction to be appointed or serve as an executive officer is applied to both listed stock companies and the corporate entities prescribed by the Enforcement Decree.

In this regard, considering the need to ensure an order in market transactions and guarantee confidence from consumers, the revised Enforcement Decree additionally includes financial companies—banks, insurance companies, savings banks, specialized credit finance businesses, etc.—as specified under the Act on Corporate Governance of Financial Companies.

Ensuring Effective Enforcement of Sanction

If a rule-breaker is appointed as an executive or is not removed from the current executive position at a listed company, the FSC can demand the listed company to dismiss the rule-breaker from the executive position. Relevant information on the issuance of the restriction order and measures taken by the company should be included in their periodic disclosure filing.

III. Payment Freeze on Suspected Accounts

Circumstances Allowing Termination of Payment Freeze

Under the revised FSCMA, the FSC can demand financial companies to completely or partially freeze payment activities on the accounts suspected to have been used in unfair trading activities for up to one year (six months plus additional six months renewable). If it is officially recognized that the account holder had no involvement in unfair trading activities, the payment freeze can be lifted, and the circumstances allowing the termination of payment freeze can also be prescribed by the Enforcement Decree.

In this regard, the revised Enforcement Decree additionally includes the following circumstances under which the termination of payment freeze is allowed—(a) when there is a seizure, provisional seizure, or injunction order already issued under the Civil Execution Act, which constitutes a legal action on a par with payment freeze, (b) when the demand for payment freeze has been lifted by an investigative authority, and (c) when non-seizable assets have been transferred to the account subject to the payment freeze.

Ensuring Effective Enforcement of Sanction

Financial companies that are not in compliance with the demand for payment freeze on suspected accounts may be subject to an administrative fine of KRW100 million. After freezing relevant account activities, if financial companies fail to notify the account holder and the FSC, they may be subject to an administrative fine of KRW18 million.

Application Process for Terminating Account Freeze

The account holder or relevant stakeholder is able to apply for the termination of account freeze within 60 days from the time of becoming aware of the suspension status. The FSC should then notify the result to the applicant within 60 days (30 days plus additional 30 days renewable). The FSC may decide to lift the account freeze in part or in whole taking into account the circumstances described above and the need to maintain the account freeze. Upon receiving such a request from the FSC, financial companies should immediately lift the payment freeze.

Expectation and Further Plan

The introduction of various non-monetary sanctions mechanisms that have been already taken up by major overseas countries will improve regulatory consistency with global standards, while boosting investor protections and helping to establish a sound order in capital market transactions. In particular, since there tends to be a high recidivism rate in unfair trading activities, the new sanctions measures restricting transactions of financial investment products and banning appointment to serve as an executive at listed companies will have the effect of ousting rule-breakers from capital markets.

The FSC will maintain close coordination with related authorities and businesses to make sure to swiftly prevent the concealment of unfairly gained profits in a timely manner and effectively ward off illegal activities. At the same time, the FSC plans to continue to look into ways to make improvements regarding the process of making decisions and implementing payment freeze and restriction orders.

* Please refer to the attached PDF for details.