Together with amendments to the Financial Investment Services and Capital Markets Act (the “FSCMA”) and the Capital Markets Investigation Regulations – which primarily pertain to new sanctions against unfair trading activities (e.g., the use of material non-public information, market manipulation, unfair trading and market disruption) and naked short selling – amendments to the Enforcement Decree of the FSCMA (the “Enforcement Decree”), which prescribe details of the newly introduced sanction measures, became effective on April 23, 2025.
There have been calls for stricter monetary sanctions and the introduction of non-monetary sanctions to prevent the recurrence of unfair trading activities. The amended Enforcement Decree sets forth a new sanction regime under which (i) a person who has engaged in unfair trading activities or naked short selling may be restricted from trading financial investment products and from being appointed or reappointed as an executive of a listed company, and (ii) the use of trading accounts suspected of being used for unfair trading activities or naked short selling may be subject to account freeze measures. The details of the amended Enforcement Decree regarding the implementation of these sanctions are further detailed below.
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Restriction on Trading of Financial Investment Products
Under the amended FSCMA, a person who has engaged in unfair trading activities or naked short selling may be restricted from trading financial investment products for up to five years, taking into consideration the nature, degree, duration and frequency of the violation, as well as the amount of benefits gained from illegal conduct. The amended Enforcement Decree specifies the factors to be considered in determining the duration of restrictions, such as the impact of the violation on market prices, the volume of short sale orders and the amount of improper gains. The period may be (i) extended for up to five years (i.e., if there are aggravating factors, such as material impact on the market price or submission of false information to conceal or misrepresent the violation), or (ii) alternatively shortened (i.e., if the violation is found to be immaterial or the violator promptly took remedial action or compensated investors for damages caused by the violation).
The following activities are exempt from the restrictions on trading of financial investment products: (i) the disposal of or exercise of rights related to the financial investment product that a restricted person held prior to the imposition of restrictions which are not related to the unfair trading activity in question, (ii) transactions arising from external factors such as the acquisition of a financial investment product through inheritance, stock dividend declaration or mergers, (iii) the sale or purchase of financial investment products that are less likely to give rise to unfair trading[1] such as debt securities. A person subject to the trading restriction may engage in the trading of a financial investment product by submitting evidence supporting such exemption to the financial investment business.
If a restricted person acquires a financial investment product in violation of the trading restriction, the Financial Services Commission (the “FSC”) may issue an order requiring the disposal of such financial investment product within up to six months and impose a penalty for non-compliance.
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Restriction on Appointment as Executive of Listed Company
The amended FSCMA restricts a person who has engaged in unfair trading activities or naked short selling from being appointed or reappointed as an executive of a listed company for up to five years. The amended Enforcement Decree (i) further specifies that financial companies would also be subject to these restrictions, and (ii) sets forth detailed standards for determining the duration of the restriction based on factors such as the impact of the violation on market prices, the volume of short sale orders and the amount of improper gains. For example, the restriction may last for up to five years if there are aggravating factors, and it may be shortened if the likelihood of recurrence of the unfair trading activity is low.
If a listed company appoints a restricted person as an executive or fails to dismiss an executive who becomes a restricted person, the FSC may request that the company dismiss the concerned individual. The FSC also plans to require the subject company to publicly disclose information regarding the order restricting the appointment and the actions taken by the company in their periodic reports by amending the public disclosure format.
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Suspension of Trading Accounts Used for Unfair Trading Activities or Naked Short Selling
The amended FSCMA provides that (i) a suspension may be imposed on all or some of the trading accounts suspected of being used for unfair trading activities for up to one year, and (ii) the suspension may be lifted in one of the circumstances prescribed in the Enforcement Decree as well as when it is recognized that the account holder did not engage in the alleged unfair trading activity. The circumstances where the suspension may be lifted as provided in the amended Enforcement Decree include the following: (i) where an action similar to suspension has already been imposed on the relevant trading account under another law, (ii) where an investigative agency has withdrawn the suspension request, and (iii) where the amount of claims, the seizure of which is prohibited, has been deposited into the suspended account.
The holder of the suspended account or any interested person may file an application to lift the suspension with the FSC within 60 days of becoming aware of the suspension. The FSC must notify the applicant of the result within 60 days (which may be extended once for up to 30 days). The FSC may lift the suspension, in whole or in part, and the financial company, upon receiving a request for lifting from the FSC, must comply with such request without delay.
Any financial company that fails to suspend relevant trading accounts notwithstanding the request or fails to notify the account holder and the FSC of relevant information after imposition of a suspension may be subject to an administrative fine.
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In addition to strengthening penalties and sanctions against unfair trading and naked short selling, the financial regulators plan to amend the corporate public disclosure templates to require listed companies to publicly disclose in their periodic reports any actions taken regarding the restriction on the appointment or reappointment of executives. The regulators also plan to work closely with criminal authorities and the Korea Exchange to review and improve the decision-making process and the implementation of account suspension or restriction orders.
Financial companies and listed companies, as well as investors and other participants in capital markets, are required to comply with the strengthened regulations and requirements. As such, they should closely follow relevant enforcement actions, penalties and regulatory changes, and implement any necessary preventive or corrective measures.
[1] Excluding any convertible bonds, bonds with warrants, participating bonds and equity securities, as well as any exchangeable bonds that may be exchanged into convertible bonds, bonds with warrants or participating bonds.
[Korean Version]
