On January 19, 2023, the Financial Services Commission (the “FSC”) held a meeting of the Financial Regulatory Innovation Committee (the “Committee") to discuss among other things the regulatory reform measures intended to promote foreign investors’ participation in the Korean capital market. In particular, the members of the Committee and the officials from the FSC, the Financial Supervisory Service (the “FSS”) and the Korea Financial Investment Association proposed to (i) abolish the existing foreign investor registration regime and replace it with a simpler system utilizing the Legal Entity Identifier (“LEI”) system consistent with global standards; (ii) amend the regulatory requirements applicable to the foreign investors’ use of the omnibus accounts and (iii) relax the existing restrictions on the OTC transfer of listed Korean securities by foreign investors. In addition, the participants at the meeting agreed to adopt the English public disclosure requirements for certain listed Korean companies.
The current plan is to implement most of the proposed changes in the second or third quarter of this year, while the English public disclosure requirements would be implement in a phased manner over the next few years.
Abolition of Foreign Investor Registration Requirement
Under the Financial Investment Services and Capital Markets Act of Korea (the “FSCMA”) and subordinate regulations, foreign investors are required to obtain the investor registration certificate (the “IRC”, also referred to as foreign investment ID) from the FSC in order to purchase or sell Korean securities listed on the Korea Exchange (the “KRX”). The process of obtaining the IRC has been criticized by foreign investors as being onerous and time-consuming.
The proposed changes would abolish the IRC requirement and permit foreign investors to trade listed Korean securities by providing their LEI (in case of corporate entities), a 20-character, alpha-numeric unique global identifier for legal entities participating in financial transactions developed by the International Organization for Standardization, or passport numbers (for individuals) to a local securities broker and opening their securities account. Accordingly, the FSS will amend the relevant rules to make sure that local securities brokers adequately obtain and maintain each foreign investors’ ID (e.g., LEI or passport numbers) as well as other account information. Even after the LEI system is implemented, the foreign investors who have already obtained an IRC would be able to continue to use their IRC in connection with the trading of listed Korean securities. Also, the FSS will no longer collect and monitor all trading information by each IRC on a real-time basis but will separately request trading information of individual foreign investors from the local brokers on a need-to-know basis.
The omnibus account system was first introduced in 2017 to allow foreign broker-dealers and asset management companies to collectively execute and settle the trading of listed Korean securities by multiple foreign investors through the same omnibus account, and the omnibus account holders are obligated to submit to the regulators details of the transactions of each end investor who invested through the omnibus account immediately upon settlement. Due to this burdensome reporting requirement, it is reported that there is no foreign investor who uses an omnibus account to date.
Thus, it is proposed that the omnibus account holders be no longer subject to the requirement to immediately report to the regulators the transaction details of each end investor using the omnibus account. Rather, under the proposed changes, (i) the omnibus account holders will be required to verify each end investor and (ii) the local securities brokers which facilitate the transactions through the omnibus accounts will be obligated to keep information on the transactions of each end investor who invest in listed Korean securities through the omnibus account. The securities brokers in turn would be obligated to provide the information on transactions of such end investors to the financial and tax regulators upon request. Please note that the proposed changes would not be applicable with respect to the foreign investors’ trading of equity shares issued by Korea Electric Power Corporation or Korea Gas Corporation, which are subject to individual foreign ownership limits.
OTC Trading by Foreigners
Under the FSCMA and subordinate regulations, a foreigner may not sell, purchase or transfer the KRX-listed securities outside the KRX unless (i) the sale, purchase or transfer falls under any of the prescribed exceptions or (ii) it is approved in advance by the FSS (the “OTC Trading Rule”). The proposed changes to the OTC Trading Rule purport to expand the types of OTC transactions subject to ex post facto-reporting requirements (instead of the prior approval requirement), e.g., where there is no change of beneficial owner such as transfer of listed Korean securities in relation to a merger of funds, certain transfers among funds and asset managers, in-kind contribution or dividend declaration. The regulators have also indicated the possibility of considering outright abolition of the OTC Trading Rule after observing the market impact of the proposed changes.
Phased Implementation of the English Public Disclosure Requirements
In addition to the foregoing, the regulators announced a phased approach to implement the requirements to make public disclosures in English. Specifically, during Phase one which is scheduled to commence in 2024, the KOSPI-listed companies with (i) total assets of KRW 10 trillion or more or (ii) foreign ownership of at least 30% and total assets of between KRW 2 and 10 trillion would be required to publicly disclose in English matters which are deemed material within three days from the date the corresponding public disclosures in Korean language are made. Below is a non-exhaustive list of such matters that may be subject to the English public disclosure requirement:
Occurrence of capital deficit
Declaration of dividend
Capital increase or decrease
Acquisition of treasury shares
Decision to delist the shares
Decision to cancel or consolidate shares
During Phase two which is scheduled to commence in 2026, all KOPSI-listed companies with total assets of KRW 2 trillion or more would be required to publicly disclose in English matters which are subject to the English public disclosure requirements during Phase one as well as additional matters to be prescribed in relevant regulations. In addition, during Phase two, the English public disclosures will be required to be made simultaneously with the corresponding Korean public disclosures.
Please note that during both phases, the English public disclosures would be made for reference purposes only and the Korean version of the corresponding public disclosures will prevail if there is any inconsistency between the Korean and English versions.
This content is also available in Kim & Chang’s Korea Legal Insight 2023(link), where you can find out more updates and outlooks on Korea’s legal developments in 2023.