On June 30, 2023, the National Assembly, during its plenary session, passed the proposed amendment to the Financial Investment Services and Capital Markets Act (the “FSCMA”), which would significantly strengthen the sanctions that may be imposed for engaging in market abuse behaviors, such as the use of material non-public information, market manipulation and unfair trading activities (the “Proposed Amendment”). The Proposed Amendment will come into effect on January 19, 2024.

The Proposed Amendment newly introduces (i) the imposition of administrative penalties for market abuse behaviors in breach of the FSCMA, (ii) calculation methods and standards for determining the amount of unjust enrichment, and (iii) a leniency program for those who voluntarily report their own market abuse-related violations to the regulators or cooperate with enforcement efforts. The regulators have indicated that the intention of the Proposed Amendment is to implement a fair market order and prevent investors’ losses by promptly penalizing market abuse behaviors and facilitating the forfeiture of any unfairly obtained profits, as market abuse behaviors in the capital market are becoming more sophisticated and organized and considering the difficulties related to promptly holding parties that engage in such behaviors responsible solely by utilizing criminal proceedings that require satisfying strict burden of proof.

Key details of the Proposed Amendment are further explained below.
 

• The Proposed Amendment establishes a new provision for the imposition of an administrative penalty of up to two times the amount of unfair profits obtained or losses avoided in connection with market abuse behaviors (in the event no profit is gained or it is difficult to calculate the exact amount of profit gained, an administrative penalty of up to KRW 4 billion can be imposed).

• While the FSCMA currently provides for the imposition of administrative penalties only with respect to market disruption activities (Article 178-2 of the FSCMA), the Proposed Amendment provides for the imposition of administrative penalties for insider trading (Article 174 of the FSCMA), market manipulation (Article 176 of the FSCMA), as well as unfair trading activities (Article 178 of the FSCMA).

• If a party that has received an administrative fine for engaging in market abuse behavior pursuant to the Proposed Amendment also receives a criminal fine for the same conduct, the administrative penalty amount (including confiscated and additionally collected amounts) may be cancelled or reduced.
   

• The Proposed Amendment introduces the standards to be used in calculating unfair profits, which would serve as the basis for the imposition of criminal sanctions and administrative penalties for unfair trading practices and market disruption activities.

• In principle, the amount of unfair profits would equal the “difference between the total amount of profit generated from the transactions that constitute the relevant breach and the total cost incurred for such transactions.”

• Pursuant to Article 3 of the Addendum to the Proposed Amendment, the new standards for calculating unfair profits would also apply to the cases under investigation at the time the Proposed Amendment takes effect.
   

• The Proposed Amendment provides for the cancellation or reduction of criminal sanctions and administrative penalties that may be imposed on a party for market abuse behavior if the party (i) voluntarily reports its own violation or (ii) provides a statement or testimony with respect to a violation committed by another party during the investigation and court proceedings.

• Pursuant to Article 4 of the Addendum to the Proposed Amendment, this new rule would also apply to cases under investigation or pending before the court at the time the Proposed Amendment takes effect.
   

As explained above, the Proposed Amendment newly introduces (i) administrative penalties which could be imposed in addition to the criminal penalties that may be imposed under the current FSCMA with respect to market abuse behavior, (ii) standards for calculating unfair profits (i.e., obtaining the difference between the total profit earned from the transactions that constitute a violation and the total costs relating to such transactions) intended to enable investigators and authorities to clearly prove unfair profit amounts, thereby increasing the probability that such amounts will be broadly recognized, and (iii) a leniency program applicable to those who voluntarily report violations or otherwise provide cooperation, similar to the leniency program for collusion cases under the Monopoly Regulation and Fair Trade Act.

With respect to the leniency program, the Capital Market Investigation Operations Manual issued by the Financial Services Commission (the “FSC”) currently authorizes the FSC to reduce administrative measures to be imposed on a party that is not the main target of the investigation, in the event such party (i) voluntarily reports its own market abuse rule violation and has no prior record of engaging in market abuse behavior or (ii) provides material information or clues leading to the discovery of key allegations. The Proposed Amendment would codify such provisions and (a) expand the scope of persons/entities that may be granted leniency and (b) have such leniency program apply during the investigation and court proceeding stages as well.

The Proposed Amendment provides that (i) the specific methods of calculating profit gained from each type of unfair trading activity and (ii) the extent to which the leniency program would be applicable would be set forth in the Enforcement Decree of the FSCMA. In this regard, the FSC has announced the proposed amendment to the Enforcement Decree of the FSCMA on September 25, 2023, prepared based on its discussions with relevant authorities, including the Ministry of Justice and the Supreme Prosecutors’ Office. In addition, the financial authorities have indicated their intention to carry out rigorous investigations of market abuse behavior in the capital markets sector and take stringent measures upon identifying violations. As such, investors as well as listed companies and financial services companies should closely follow the Proposed Amendment and ensure that adequate internal controls and compliance-related systems are in place.

[Korean Version]