Recent Updates on Financial Authorities’ Short Sale Regulations

The Financial Services Commission (the “FSC”) resolved that all short sale transactions be banned from November 6, 2023 to the end of June 2024. In addition, the Financial Supervisory Service (the “FSS”) launched the “Special Short Sale Investigation Team” for its industry-wide investigation on short sale violations.

Strengthened Measures Against Illegal Short Sale Transactions by Financial Regulators

On July 28, 2022, the FSC, the FSS, the Supreme Prosecutors’ Office, and the Korea Exchange (the “KRX”) jointly announced plans to strengthen sanctions against illegal short sales and supplement relevant short sale regulations. The FSS has announced its plans to strengthen surveillance of illegal short sale transactions. Moreover, in March 2023, the Securities and Futures Commission (the “SFC”) imposed administrative penalties for short sale violations for the first time.

Launch of Special Short Sale Investigation Team and Investigation Plans

On October 12, 2023, the FSS, in its press release, announced that (i) a significant amount of administrative penalties will be imposed against two global investment banks for their illegal short sale activities; (ii) it will expand its investigative efforts against global investment banks engaging in similar transactions; and (iii) it will reinforce its audit of Korean securities companies that receive short sale orders from global investment banks. Following this press release from the FSS, the Governor of the FSS, during the National Assembly audit of the FSS held on October 17, 2023, indicated the possibility of imposing criminal penalties against those involved in illegal short selling.

In early November 2023, the FSS announced its plan to expand the existing short sale investigation team and established the Special Short Sale Investigation Team.

The Special Short Sale Investigation Team is expected to carry out comprehensive investigations of global investment banks regarding illegal short sale activities and look into Korean securities companies’ short sale order flows and their capability to identify illegal short sale orders. If necessary, the Special Short Sale Investigation Team may also consider conducting joint investigation with overseas regulators.

Comprehensive Ban on Short Sale Transactions and Plans to Make Systematic Improvements

The FSC, during an interim meeting held on November 5, 2023, resolved to completely ban short sales on all domestic stock market listings from November 6, 2023 until the end of June 2024.

During its meeting, the FSC explained that uncertainties in the Korean economy have grown due to, among others, the sluggish global economic growth and geopolitical risks, and the increased volatility in the Korean market is causing aggravated instability in the market, and also illegal short sale activities have continued despite improvements in existing systems resulting in a heightened concern over the fairness of prices in the Korean market, which all together led to this decision to ban short sale transactions.

The FSC announced that it will consider the following investigations, sanctions, and improvements in the system in order to eradicate illegal short sale activities from the Korean market through the short sale ban period.

(1)

Eliminate Inequality Between Institutional and Retail Investors

Review measures to address differences between institutions and individuals in terms of short sale orders, such as stock borrowing period and collateral ratio.

(2)

Develop Mechanisms to Prevent Naked Short Sale Orders

Review measures to establish a system that preemptively blocks illegal naked short sale orders in real time.
If necessary, engage in public communications and make legislative changes after receiving comments from experts, market participants and other stakeholders.

(3)

Thorough Investigation of Global Investment Banks and Strengthened Investigations of and Sanctions Against Naked Short Sale Transactions

Conduct comprehensive investigations of global investment banks through the Special Short Sale Investigation Team of the FSS.
Impose rigorous sanctions and criminal penalties for illegal short sale activities.
Actively consult with the National Assembly to develop measures to strengthen and diversify sanctions.

In light of the recent investigations and impositions of administrative penalties for illegal short sale transactions and developments of financial regulators’ stance towards this issue, there is a heightened regulatory risk for market participants engaging in short sale activities. In-depth and extensive investigations are expected in the foreseeable future. Since the amendment to the Financial Investment Services and Capital Markets Act in April 2021, which introduced a criminal penal provision for those engaging in illegal short sales, there has been no precedent where criminal sanctions were imposed for short sale violations under such provisions. However, it should be noted that the financial regulatory authorities have been attempting to apply criminal penal provisions for recent illegal short sale violation cases. Taking into account the aforementioned circumstances, companies are advised to consider the relevant short sale investigation cases and developments under the new regulatory scheme and review the adequacy of their internal policies and procedures for short sale orders, taking necessary preventive and corrective measures.

[Korean Version]

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