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Successfully Defended Against KRX’s Imposition of Sanctions Regarding Alleged Incompliance with Obligation to Respond to Closing Price Participation-related Unfair Trading Activities


Lead and Background 

In this case, a monitoring system operated by a foreign securities company (the “Company”) flagged certain index-tracking trades (based on indices such as the MSCI and FTSE) carried out by global passive asset management companies on a rebalancing day (the “Trades”) to be unfair trading activities in the form of closing price participation.  Upon reviewing the flagged transactions, the Company determined that the Trades did not constitute unfair trading activities and accordingly, decided not to take remedial measures in relation thereto.  Subsequently, the Korea Exchange (the “KRX”) attempted to impose sanctions against the Company on the grounds that it failed to comply with its obligation to take remedial measures against unfair trading activities.

Details and Significance

A total of five foreign securities companies, including the Company, were subject to investigations by the KRX based on similar accusations.  This case is significant as any sanction placed against the Company could have negatively impacted the business operations (i.e., execution of index-tracking trades) of not only other foreign securities companies, but also of global asset management companies that trade through such companies.  Due to the significance of the potential sanctions, key players in the industry, including the Compliance Officer Association and the Asia Securities Industry & Financial Markets Association (the “ASIFMA”) paid keen attention throughout, submitting petitions, etc.  Ultimately, the KRX Market Oversight Committee determined that the imposition of sanctions would be inappropriate taking into account the arguments put forth by the Company, and cancelled all sanctions that have been proposed.
Our Representation

On behalf of the Company, Kim & Chang provided a one-stop legal service in all stages of the investigation process, from engaging in fact-finding activities, researching domestic and foreign cases and rulings, forming jurisprudential arguments, submitting legal opinions, and attending hearings with the KRX Disciplinary Committee and the Market Oversight Committee.  This was the first and only case since the KRX Market Oversight Committee introduced the adversarial process, where after hours of dispute, the KRX Market Oversight Committee decided not to pursue sanctions, accepting the arguments put forth by the respondent (the Company).  Our firm successfully defended the Company with the help of its domestic and foreign attorneys, together with advisors that previously worked with or for supervisory authorities including the KRX.