On September 23, 2022, the Financial Services Commission (the “FSC”) announced a plan to propose an amendment to the Financial Investment Services and Capital Markets Act (the “FSCMA”) regarding the penalties for engaging in unfair trade practices. This would include imposing restrictions, for up to ten years, on (i) trading and opening accounts for financial investment products, and (ii) being appointed as a director at a listed company or a financial company.
Currently, the FSCMA stipulates that criminal penalties may be imposed for committing three major types of unfair trade practices (i.e., insider trading, market manipulation and unfair trading). Given the regulators’ perception that the current FSCMA penalty provisions do not provide a sufficient basis for active imposition of administrative measures and for preventing unjust enrichment, the proposed amendment is intended to strengthen the regulators’ authority to impose various administrative measures on parties that engage in unfair trade practices in addition to the existing criminal liabilities.
The key changes expected to be included in the proposed FSCMA amendment are as follows:
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Restriction on trade: The Securities and Futures Commission (the “SFC”), which is a sub-commission within the FSC, has the authority to designate parties that are deemed to have committed unfair trade practices as a “Restricted Party.” The Restricted Party may be subject to a temporary ban on engaging in new trading of financial investment products (securities and derivatives) and opening new accounts for financial investment products trading. The parties may be subject to the “Restricted Party” designation for engaging in one of the three major types of unfair trade practices mentioned above (i.e., insider trading, market manipulation and unfair trading) or partaking in other types of unfair trade practices prescribed under the FSCMA, such as market disruption and naked short selling. Additionally, financial regulators may publicly disclose on their website the name of the entities that are given the “Restricted Party” designation. In the event the “Restricted Party” engages in the trading of financial investment products, said entity and the licensed financial companies which facilitated such trading may be subject to administrative fines.
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Restriction on Directorship Appointment: Individuals who are given an “Ineligible Party” designation would not be eligible to be appointed as director of a listed company or a financial company for up to ten years. If an individual is designated as an “Ineligible Party” while serving as a director of a listed company or a financial company, such individual will have to step down as director. The financial regulators may publicly disclose the name of who have been designated as an “Ineligible Party.” In the event a listed company or a financial company appoints an “Ineligible Party” as its director, the relevant individual as well as the listed company or financial company may be subject to administrative fines.
| Restriction on Trade | Restriction on Directorship Appointment | |
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| Scope of Restriction |
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| Duration of Restriction |
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| Protected Rights and Interests of the Designated Parties |
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| Measures to Enhance Effectiveness |
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1 Certain exceptions may be granted for instances involving but not limited to transactions that were executed prior to the designation, transactions that would unlikely involve unfair trade practices, and transactions necessitated by external factors.
2 Includes de facto executive officers; existing directors will lose their positions.
Thus far, enforcement against unfair trade practices related to capital markets was initiated by the financial regulators’ referral of the case to, or by the filing of a complaint with, the criminal authorities, which then triggered judicial proceedings and the issuance of judgments at the courts. We expect the proposed amendment to enable the financial regulators to impose administrative sanctions independent of the judicial process, thereby allowing a more prompt imposition of various legal measures.
Improving the effectiveness of penalties against unfair trade practices was one of the key policy objectives announced by the new administration in May 2022. Therefore, the FSC is expected to push forward with the legislative procedures required to pass the proposed amendment to the FSCMA by drafting the proposed amendment and submitting the draft amendment to the National Assembly. In this regard, the FSC indicated that it also plans to actively support the swift passage of the other amendments to the FSCMA currently pending before the National Assembly, which intend to (i) codify the calculation method for determining the amount of unjust enrichment gained from unfair trade practices; and (ii) introduce a new ceiling for the imposable administrative monetary penalties amounting to as much as twice the amount of unjust enrichment gained from unfair trade practices.
The proposed amendment to the FSCMA authorizes imposing restrictions of up to ten years on performing trading activities and/or being appointed as a director of a listed company or a financial company against parties that engaged in unfair trade practices and the relevant financial companies and listed companies. Considering its ramifications, market participants should closely follow the proposed amendment.
Related Topics
#Capital Markets #Unfair Trade #Securities #2022 Issue 4 #Newsletter
