자본시장과 금융투자업에관한 영문 개설서

Final Report
Financial Service and Capital Market

Act in Korea
Soo Hyun Ahn

(Professor, Hankuk University of Foreign Studies)
Financial
Investment
Services
and
Capital Markets Act in Korea
2012. 12.
Soo Hyun Ahn
(Professor, Hankuk University of Foreign Studies)
Table of Contents
Chapter 1 History and Development of Financial

Market Regulation
1
I. Development of Financial Services and Markets
1
1. Introduction
1
2. Early Stage of Modernization (1953-1967)
2
3. Development of the Capital Market(1968-1978)
5
4. Market Liberalization (1979-1985)
11
5. Expansion of the Capital Market (1986-1995)
15
6. The Asian Financial Crisis and Reform Measures (1996-2003) 22
7. Enhanced Competitiveness of the Capital Market (2004-2011)
28
II. Legislative Change and Progress
31
III. Financial Regulatory Organizations
39
1. History
39
2. The Financial Services Commission and the Securities and
Futures Commission
40
3. Financial Supervisory Services
43
4. Self-Regulatory Organizations
44
- iv -
Chapter
Framework
of
Financial
Investment
Services and Capital Markets Act(FSCMA)
47
I. Legislative Background and Process
47
II. Main Features and Framework
50
1. Comprehensive Approach
50
2. Function-based Regulation
52
3. Expanded Scope of Financial Investment Businesses
56
4. Increased Investor Protection
57
III Structure of FSCMA
58
1. Overview
58
2. Regulation of the Financial Investment Businesses
60
3. Regulation of Securities Issuance and Disclosure
61
Chapter 3 Definition and Classification of Financial

Investment Products
63
- v -
I.
Introduction
of
the
New
Definition
of
Financial
Investment Products..................................................................63
1. Definition of Financial Investment Products
63
2. Classification of Financial Investment Products
67
II. Definition and Classification of Securities
68
1. Definition of Securities
68
2. Classification of Securities
69
III. Definition and Classification of Derivatives
71
1. Definition of Derivatives
71
2. Classification of Derivatives
72
IV. Distinction between Securities and Derivatives
73
Chapter 4 Regulation of the Financial Investment

Service Industry
75
I. Classification of Financial Investment Services
75
II. Entry Regulation
76
III. Regulation of Market Conduct
80
1. Generally
80
2. Regulations on Investment Recommendations
84
3. Preventing Conflicts of Interest
88
- vi -
Chapter 5 Corporate Disclosure: Listing and Public Offers

98
I. Corporate Disclosure System
98
1. Public Disclosure Obligations under the CC
98
2. Public Disclosure Obligations under the FSCMA
99
II. Primary Market Disclosure System
100
1. Generally
101
2. Registration Statement
104
3. Prospectus
105
4. Measures for Effective Public Disclosure Regulation
105
III. Disclosure in the Secondary Market
105
1. Generally
110
2. Periodic Disclosure
111
3. Timely Disclosure
113
4. Fair Disclosure
116
5. Voluntary Disclosure
116
6. Special Disclosure
116
7. Submittal of disclosure.................................................................................125
Chapter 6
Unfair Trading:
Statements,
Market
Insider Dealing,
Manipulation,
Unjust
Misleading
Trading
and
Unfair Practices
127
I. Overview
127
II. Prohibition of Insider Trading
128
- vii -
III. Prohibition of Market Manipulation
132
IV. Unjust Trading and Other Types of Unfair Trading
136
Chapter 7 Regulation of OTC Derivatives
139
I. Overview
139
II. Strengthening Investor Protection in OTC Derivative
Trading
144
III. Strengthening Internal Controls in the OTC Derivative
Business
145
IV. Advance Review of OTC Derivative Products
147
V. Introduction of the CCP System
147
Chapter 8 Collective Investment Schemes
151
I. Basic Definition of Fund as Collective Investment
Scheme and Other Fund-related Definitions
151
II. Characteristics of Funds
154
III. Legislative History of Funds and Regulatory Changes
under FSCMA
157
IV. Classification of Funds
158
- viii -
V. AUM by Fund
162
Chapter
Financial
Infrastructure:
Market,
Clearing
Facilities, Deposit and Settlement
167
I. Market: Korea Exchange (KRX)
167
I. Overview
167
2. Businesses
169
II. Clearing Facilities
172
1. Payment and Settlement Systems Overview..........................172
2. Main Payment and Settlement Systems.....................................176
III. Deposit and Settlement
180
1. Korea Securities Depository.....................................................180
Chapter 10 Regulation of Cross-Border Financial Investment

Services
189
I. The Effects Test
189
II. Regulation of Cross Border Dealing/Brokerage
189
III.
Regulation
of
Cross
Border
Investment
Advisory
Businesses and Discretionary Investment Management

Businesses
191
- ix -
[Table]
1. TRADE IN GOVERNMENT BONDS
4
2. NATION-BUILDING GOVERNMENT BONDS TRADING BY TRANSACTION
TYPE
3. STATUS OF THE SECURITIES MARKET: POST-GOVERNMENT OWNERSHIP 5

4. CAPITAL MOBILIZATION OF CORPORATIONS
6
5. PUBLIC OFFERING OF STOCKS AND CORPORATE BONDS
7
6. GROWTH OF INVESTMENT TRUST FUNDS
8
7. SECURITIES SAVINGS
8. EMPLOYEE STOCK OWNERSHIP UNIONS
10
9. GROWTH OF THE SECURITIES MARKET
11
10. CAPITAL MARKET GLOBALIZATION PLAN
13
11. CEILINGS ON STOCK INVESTMENT FOR FOREIGN INVESTORS

12.
TREND
LIBERALIZATION
OF
FOREIGN
INVESTMENT
AFTER
18
COMPLETE
MARKET
19
13. PLAN FOR FINANCIAL LIBERALIZATION AND MARKET OPENING
21
14. POST ASIAN FINANCIAL CRISIS RESTRUCTURING OF MERCHANT BANKS,
24
SECURITIES FIRMS, AND INVESTMENT TRUSTS

15. STRUCTURE OF FSCMA
56
16. TYPES AND DEFINITION OF SECURITIES

17.
TYPES
BUSINESSES
AND
CONCEPTIONS
68
OF
FINANCIAL
INVESTMENT
75
18. LICENSING UNITS OF THE FINANCIAL INVESTMENT BUSINESS
- x -
76
19.
PROHIBITED ACTS OF MARKET PRICE MANIPULATION
122
20. TYPES OF DERIVATIVES

21.
128
COMPARISON BETWEEN EXCHANGE-TRADED AND OTC DERIVATIVES
118
22. FSC's POLICY AENDA REGARDING THE OTC DERIVATIVE MARKETS
23. CLASSIFICATION FUNDS BY INVESTMENT ASSETS
24. AUM BY UNIT TRUST AND MUTUAL FUNDS
131
145
149
25. AUM BY PUBLIC OFFERING FUNDS AND PRIVATE PLACEMENT FUNDS
150
26. AUM BY FUNDS INVESTMENT ASSET TYPE
151
26. AUM AND TOTAL NET ASSETS OF DOMESTIC INVESTMENT FUNDS AND
OVERSEAS INVESTMENT FUNDS
152
[chart]
1. ORGANIZATION OF THE FSC
40
2. ORGANIZATION OF THE FSS
42
[Figure]
1. CLASSIFICATION OF FINANCIAL INVESTMENT PRODUCTS UNDER
FSCMA
51
2. REGULATORY FRAMEWORK OF FINANCIAL INVESTMENT BUSINESS
54
3. CLASSIFICATION OF FINANCIAL INVESTMENT INSTRUMENTS
4. DISCLOSURE PROCESS
5.
METHOD
OF
66
96
DETERMINING
- xi -
ON
PUBLIC
OFFERING/PRIVATE
PLACEMENT
99
6. DERIVATIVES TRADING VOLUME
131
7. TRUST TYPE V. COMPANY TYPE
147
8. PAYMENT AND SETTLEMENT SYSTEMS IN KOREA

9. DEPOSIT AND SETTLEMENT FLOW
10. FUND Net SERVICE FLOW
`164
169
172
[Reference]
- xii -
Chapter 1
History
and
Development
of
Financial
Market
Regulation
I. Development of Financial Services and Markets
1. Introduction
Korea's securities market has developed significantly over the past

54 years. In 1949, the Korean government began to issue
government
bonds.
In
1953,
the
Korea
Securities
Dealers
Association (KSDA) was organized, and in 1956, Korea Stock

Exchange (KSE) was established. Thus a capital market was started
in South Korea. Since then, the Korean capital market has grown
steadily in parallel with the economy.
Its growth can be divided into 6
stages: Early stages
of
modernization (1953-1967), Capital market development (1968-1978),

Market Liberalization (1979-1985), Expansion of the capital market
(1986-1995), Asian financial crisis and reform measures (1996-2003),
and Enhanced competitiveness of the capital market (2004-2011)
Recently, the Financial Investments Services and Capital Markets
Act
(FSCMA) was enacted in South Korea, in order to promote
- 1 -
the further growth of the Korean capital market. As Korea's

economy successfully overcame such international crises as the oil
shocks and the Asian financial crisis to emerge as the world's 11th
largest trading nation, the KSE (now the Korea Exchange, or KRX)
has also shown tremendous achievements, growing from unstable
beginnings into the world's 10th largest stock exchange through
consistent market liberalization.
To further advance its capital market, Korea passed the FSCMA

in 2009. A revolutionary act that introduced a single consolidated
legal framework, FSCMA laid the foundation for the further
development of the financial services industry so that it could
become a key industry driving Korea's economic development. To
realize this goal, the financial industry has been working to
enhance the competitiveness of the capital market by promoting
balanced
development
among
the
banking,
insurance
and
securities sectors.
2. Early Stages of Modernization (1953-1967)
The securities market is where stocks and bonds are traded as a

means to raise long-term funds. In Korea, securities were first
issued in 1899 when Chun-il Bank, a predecessor of Woori Bank,
was incorporated. Bonds were introduced in 1905, when the
Joseon Dynasty issued Korea's first government bonds with the
promulgation of the Government Bond Act.
- 2 -
Korea's capital market was officially organized in March 1956 with

the incorporation of the Korea Stock Exchange (KSE) with joint
contributions from banks, insurance companies and securities
companies. Although there had been previous exchanges before
the KSE, such as the Joseon Exchage
(est. 1931) and the Joseon
Stock Exchange (est. 1943), they were exclusively designed to

create capital for Japanese companies operating in Korea and
both closed in 1946. In 1949, the first Korean securities companies
and the Korea Stock Dealers Association were established in an
attempt to assist Korean companies in raising funds, but their
roles were still limited to arranging over-the-counter (OTC) trading
of certain government bonds.
With the launch of the KSE, 12 corporations, 3 government bonds

and 49 securities firms were listed. Since the fiscal conditions of
the country called for immediate and extensive capital, most of
the securities issued were in the form of government bonds. Both
securities trading and, later, settlements were permitted in the KSE,
which allowed traders to purchase large amounts of securities by
depositing a small margin with a clearing house, making the
market extremely speculative and leading to a series of market
crashes. Government bond crashes in January 1958, together with
the excess accumulation of shares of the KSE, the Korea Electric
Power Corporation (KEPCO) and other securities firms' in May 1962
made the market extremely vulnerable. As a result, it suffered
- 3 -
from settlement failures, causing the long-term suspension of the

KSE, the bankruptcy of certain securities firms and a dampening of
investor confidence in the market.
TABLE 1 TRADE IN GOVERNMENT BONDS

(Unit: million hwan1),%)
Stock
Year
Government Bonds
Total
Amount
Proportion
Amount
Proportion
Amount
Proportion
1956
3,942
56.8
2,994
43.2
6,936
100.0
1957
4,140
17.1
20,007
82.9
24,147
100.0
1958
1,802
10.8
14,820
82.2
16.622
100.0
1959
7,632
26.5
21,164
73.5
28,796
100.0
1960
2,752
17.1
13,302
82.9
16,054
100.0
1961
4,401
32.2
9,109
67.4
13,510
100.0
Total
24,669
23.2
81,396
76.8
106,065
100.0
Table
NATION-BUILDING
TRANSACTION TYPE
GOVERNMENT
BONDS
TRADING
BY
(Unit: 10,000 hwan2),%)
Securities trading
Year
Amount
Proportion
Settlement
Amount
Total
Proportion
Amount
Proportion
1956
1,023
34.2
1,971
66.8
2,994
100.0
1957
3,812
19.1
16,196
80.9
20,007
100.0
1958
3,938
26.6
10,882
73.4
14,820
100.0
1959
5,971
28.2
15,193
71.8
21,164
100.0
1960
4,314
32.4
8,988
67.6
13,302
100.0
1961
4,754
52.2
4,355
47.8
9,109
100.0
1) "Hwan" is an old Korean currency. Hwan=0.001 won

2) Hwan = 0.001 won
- 4 -
In response to these incidents, in January 1962, the Korean

government enacted the Securities and Exchange Act (SEA) and the
Commercial Code, in an attempt to create a legal framework for
the development of securities market, In order to enhance stability,
in 1963, the government converted the KSE from a corporation into
a government-owned entity, promoting the capital adequacy of
securities firms and improving the securities transaction system.
Table 3 STATUS OF THE SECURITIES MARKET: POST-GOVERNMENT

OWNERSHIP
Trading
Volume
(million
won)
Trading
Amount
(million
won)
40
L i s t e d
capital
Stock
(million
won)
16,971
57,654
26,000
17
36
22,228
317
27,039
1965
17
35
23,162
43
9,171
1966
24
26
32,451
49
11,160
1967
24
25
46,083
72
24,917
Number of
listed
companies
Number of
Securities
firms
Year
1963
15
1964
3. Development of the Capital Market
(1968-1978)
Even after such drastic measures were implemented, the Korean

securities market remained in the doldrums. In 1967, Korea
implemented economic development plans designed to modernize
its industrial infrastructure. As international borrowing was no
longer as feasible as it had once been, the securities market and
its role as a means of channeling capital to industry began to be
- 5 -
recognized. At this time, however, the securities market only had a

limited role in channeling capital to corporations, serving primarily
as
secondary
market
that
merely
traded
already
issued
securities.
From the late 1960s, the government began focusing its policies
on promoting Korea's securities market and announced that 1969
would be "the year for fostering the capital market." In addition,
the government also undertook a series of measures to boost the
securities market by enacting relevant laws and improving the
institutional framework.
Table 4 CAPITAL MOBILIZATION OF CORPORATIONS

(Unit: billion won, %)
1966
Equity
capital
External
funds
Total
1967
Amoun
Proporti
Amount
Proportion
Amount
Proportion
t
36.2
on
23.9
46.6
20.8
67.7
18.8
115.2
76.1
178.0
79.2
291.6
81.2
151.4
100.0
224.6
100.0
359.3
100.0
1966
External
funds
Indirect
financing
Direct
financing
International
Borrowing
1968
1967
1968
Amoun Proporti
on
t
115.2
100.0
Amount
Proportion
Amount
Proportion
178.0
100.0
291.6
100.0
43.5
37.8
73.6
41.3
137.5
47.1
22.9
19.8
39.8
22.4
45.4
15.6
48.8
42.4
64.6
36.3
108.7
37.3
- 6 -
* Note: Corporate credit and government loans are excluded.

** Source: Capital Cycle of Korea by the Bank of Korea, 1976
In December 1968, the government enacted the Capital Market

Promotion Act (CMPA), which encouraged corporations to become
publicly listed by providing extensive tax reliefs. At the same time,
the
state-owned
Korea
Investment
Corporation
(KIC)
was
established to take responsibility for issuing securities. Additionally,

in order to boost demand for stock investment, steps to strengthen
the securities market were undertaken. For the primary market, the
dividends
of
one-year
deposits
were
guaranteed,
and
entry
barriers for securities firms to enter the market were lowered,

requiring they simply register rather than receive approval. For the
secondary market, the securities transaction system was improved,
shifting from the later settlement system into the regular-way
system.
The Securities Investment Trust Business Act (SITBA) was introduced

in August 1969 and the regular-way transaction system was
enhanced in June 1971 to root out the deeply entrenched culture
of market speculation and to restore investor confidence.
- 7 -
TABLE 5. PUBLIC OFFERING OF STOCKS AND CORPORATE BONDS

(Unit: million won)
Stock
Offering
Sales
Year
Cases
Amount
1968
160
1969
12
1970
Cases
Total
Corporate bonds
Amount
Cases
Amount
Cases
Amount
180
2,211
12
2,221
2,068
2,068
1971
850
850
1972
955
125
1,080
35
9,928
1973
35
17,756
12
3,719
47
21,475
12
3,450
1974
12
9,227
5,110
19
14,337
59
27,870
* Source: Korea Investment Corporation
TABLE 6. GROWTH OF INVESTMENT TRUST FUNDS
Year
No.
of
issues
No. of
Management
companies
No. of
bene-f
iciarie
s
1968
1969
1970
1971
1972
1973
1974
1
1
1
3
10
17
27
1
1
1
1
2
2
3
96
102
664
1,362
1,316
10,086
74,811
Fund size
Total
Bond
Stock
types
types
(Unit: million won)

Sales balance
Toal
Bond
Stock
types
types
100
100
53
200
200
48
400
400
372
2,100
2,100
1,731
2,100
4,630
6,730
1,461
4,600 14,430 19,030
3,997
48,90 18,880
25,60
23,30
0
0
0
* Source: A Decade of Securities Supervisory Board (SSB) by the SSB
3,868
10,808
23,62
3
53
48
372
1,713
5,329
14,805
42,503
At the same time, in order to mobilize domestic capital, the

government
privatized
state-owned
- 8 -
companies
and
urged
corporations to go public by implementing securities market

promotion policies designed to boost demand for stock investment.
In December 1972, the Public Corporation Inducement Law was
enacted to provide tax incentives for companies that became
publicly listed, and to allow the government to force corporations
to publicly list by prescribing financial and tax restrictions for those
that refused.
In August 1972, the government announced the Emergency Order

for Economic Development and Stability, freezing private loans for
corporations and encouraging debt-equity swaps of private loans.
The government also promulgated the Short-term Finance Business
Act, the Credit Unions Act and the Mutual Savings and Financing
Act with the aim of institutionalizing private financing. In 1973, the
SEA regulations were revised with new stipulations added to
improve the securities registration statement, enhance external
audit
system, increase capital stock of
securities firms and
introduce book-entry clearing.
In May 1974, a Special Presidential Order was announced to

increase the supply of blue chip stocks by encouraging investors
to reduce the proportion of shares in listed companies, as well as
introduce firm commitment underwriting, establish investment trust
companies, improve the securities savings system and expands
employee stock ownership plans.
- 9 -
Table 7. SECURITIES SAVINGS

(Unit: million won)
year
Mandat
e-type
Trusttype
Total
1972
withsavin
draw
gs
als
1973
with
sa v i n
-dra
gs
wals
184
54
1,196
711
184
54
1,196
1974
withsavin
draw
gs
als
7,78 5,70
8
1,172
518
8,96
711
6,221
1975
withsavin
draw
gs
als
3, 57 3,6 0
1976
wit h
savi
-dra
ngs
wals
1 , 6 6 3,96
8
2,781
8
294
147
-
363
0
343,
6
326,
5
65,4
29
53,5
138
344,
257
330,
81
29,8
47
32
798
223
44
1973
183
58,807
147
13,262
10,043
193
1974
281
102,355
217
27,249
16,938
242
The sudden growth of the securities market in the 1970s brought

with it new regulatory concerns. Thus, along with other major
reforms, the government reorganized the regulatory institutional
framework. In 1976, the Securities and Exchange Commission (SEC)
and its executive body, the Securities Supervisory Board (SSB), were
established as Korea's principal financial regulators. Measures to
support and stabilize the managerial rights of listed companies
such as tender offers, regulation of total equity investment, limits
- 10 -
ts
3
49,9
Table 8. EMPLOYEE STOCK OWNERSHIP UNIONS

1972
Asse
2
61,87
Year
No. of unions
No. of members
No. of depositories associations
No. of depository shares (thousand)
Acquisition cost (million won)
Savings amount (million won)
Total
29,4
on proxy statements and the registered corporation system were

introduced. In addition, regulations on disclosure, insider trading
and restrictions on the securities transactions of executives in
securities
companies
were
also
introduced
to
promote
fair
transactions and modernize the securities industry. Additionally, the

Korea Securities Computer Corporation (Koscom) was established to
provide a computer system for the securities market.
Due to these comprehensive policies taken to stimulate demand in

securities and encourage corporations to publicly list, there have
been several significant achievements in the Korean securities
market. The number of companies listed increased from 66 in
1972 to 356 in 1978, and market capitalization during the same
period rose from KRW 246bn to KRW 2,892.5 bn, a growth of
more than 11-fold. The issuance of corporate bonds also increased
more than 30-fold from KRW 9.9bn in 1972 to KRW 326.3bn in
1978.
Table 9. GROWTH OF THE SECURITIES MARKET
Year
No. of
listed
companie
s
No. of
shareholder
s (10k)
Listed
capital stock
(mil won)
1968
1969
1970
1971
1972
1973
1974
34
42
48
50
66
104
128
40
54
76
82
103
200
200
95,585
119,902
2134,292
141,357
174,339
251,620
381,344
- 11 -
Market
Cap of
listed
stocks
(mil won)
64,323
86,569
97,923
108,706
245,981
426,247
532,825
Trading
volume
(mil share)
Stock
financing
(mil
won)
76
98
79
50
84
130
157
9,247
6,099
7,151
2,940
24,741
54,548
74,287
1975
1976
1977
1978
1979
189
274
323
356
355
291
568
395
963
872
643,315
1,153,325
1,492,375
1,913,505
2,202,262
916,054
1,436,074
2,350,835
2,892,512
2,609,414
310
591
1,272
1,368
1.561
156,255
262,255
362,452
653,062
841,432
4. Market Liberalization (1979-1985)
In the early 1980s, Korea's capital market suffered significant

upheavals. At the outset, the market was bullish with the nation's
economic
policies
focusing
on
stable
growth
and
surging
construction stock prices, thanks to the industry's performance in

overseas markets. In 1982, however, the market plunged due to
negative growth resulting from the second oil shock and the large
amount of corporate fraud discovered in April of that year.
To overcome such hardships and to revive the ailing economy,

measures were undertaken to fortify the capital market and
globalize the securities market. A new system to ensure market
pricing was introduced, entry barriers into the bond market were
eased and the market management system was improved.
In 1980, repurchase agreements, which previously had only been

utilized by the Korea Securities Finance Co. to finance securities
firms, became available to all market participants in order to
facilitate growth in the securities market and to restore investor
confidence.
The Act on the External Audit of Stock Companies
- 12 -
was also enacted, requiring stock companies valued above a

certain level to implement an external audit system.
The
government
announced
four-phased
Capital
Market
Globalization Plan in 1981. Accordingly, the Korea International Trust

(KIT) and Korea Trust (KT) were established as investment vehicles
for foreign portfolio investors. In May 1984, the Korea Fund was
listed on the New York Stock Exchange (NYSE), the first example of
indirect foreign participation in the Korean market. In addition, the
first
issuance
of
convertible
bonds
overseas
provided
an
opportunity for Korean companies to directly raise funds from

overseas capital markets.
Furthermore, a series of new measures to ease regulations were

undertaken to allow foreign investors into the domestic market
and,
reciprocally,
local
investment
in
overseas
markets.
In
December 1980, Nomura Securities established the first foreign

representative office in Seoul, followed by Merrill Lynch in 1985
and other foreign securities companies. Large Korean securities
companies were also permitted to establish overseas offices:
Daewoo, Daishin, Ssang-yong
Investment
and
LG
established
branch offices in Tokyo and New York, while Dong-seo Securities

established branch offices in Tokyo and London.
- 13 -
TABLE 10. CAPITAL MARKET GLOBALIZATION PLAN

Year
Phase 1
(1981-1984)
Phase 2
(1985-1987)
Phase 3
(1988-1989)
Contents
- Limited permission for international investment trusts
- Establishment of the Korea Fund
- Issuance of beneficiary certificates for foreign investors
- Allow foreign securities firms to open representative offices
in Korea
- Nurture financial professional in securities related institutions
- Improve legal/institutional framework for globalization
- Limited permission for foreign direct investment
- Gradual relaxation of limits on international investment trust
- Full permission on foreign investment
- Allow companies to issue and list stocks on foreign
securities markets
- Permit foreign securities firms to establish subsidiaries in
Korea, and domestic firms overseas
- Allow Korean investors to make investments in foreign
securities markets
Phase 4
(1990 - )
- Permit foreign stocks to be issued and listed on domestic

securities market
In 1982, the SEA was further revised to promote fair trading by

strengthening its regulations on insider trading and market price
manipulation,
expanding
its
disclosure
requirements
and
introducing an investment advisory system. The Act also stipulated

improved
measures
to
limit
stock
ownership,
and
improved
minority shareholder protection by introducing appraisal rights for

dissenting shareholders. In order to respond to the liberalized
securities market, limits on foreign ownership of stock were also
prescribed.
- 14 -
Meanwhile, the securities trading system was also improved by

adopting a market capitalization weighted stock price index,
providing online securities services and allowing securities to be
issued
at
market
price.
The
securities
deposit
system
was
established to circumvent outflows of investor' deposits form the

securities market, prevent any mishaps while holding securities and
enhance the effectiveness of the book entry clearing system. In
order to facilitate the money market and liberalize the bond
market, ceilings on CP issuance and corporate bond payment
guarantees were expanded in 1984, and the requirements for
issuing non-guaranteed bonds and convertible bonds were also
relaxed.
New regulations were established to institutionalize the OTC bond

market. The government revised the Commercial Code to facilitate
capital increases by setting the limits on authorized capital stock
to four times over the amount of paid-in capital, and limits on the
issuance of corporate bonds to no more than two times the
amount of equity. Tax exemptions for income resulting from capital
increases, temporarily granted under the Regulation Law on Tax
Reduction and Exemption, were restated under the corporate
Income Tax Law of 1985, with the exemption limits and duration
relaxed.
- 15 -
5. Expansion of the Capital Market (1986-1995)
From 1986 to 1995, the Korean securities market was full of hope
and vigor. Since the 1980s, market mechanisms had worked to
focus the country's economic drive toward the private sector, with
the
Korean
economy
beginning to
open
and interest
rates
beginning to liberalize. In addition, the so-called three lows - low

oil prices, low international interest rates and a low dollar
exchange rate - spurred the Korean securities market out of its
long-term bearish trend. Thanks to stable growth in the real
economy, the KOSPI recorded 1007 basis points on April 1, 1989,
the first time it had reached above 1000, and marked a dramatic
climb from its 180 points at the end of 1985. During the same
period, the market's trading volume increased from KRW 12bn to
KRW 280bn.
The vibrant growth of the securities market had a significant

impact on Korea's financial market structure. In the second half of
1980, companies began to voluntarily go public and rushed to
increase their capital through public offerings, resulting in 670
companies being listed on the market, with additional national
stocks also provided. Due to these market movements, direct
financing surpassed private credit as a means of supplying capital,
leading to a tremendous structural change in the financial market.
As the public began to increasingly invest in stocks, securities
firms began to flourish with the average amount of capital per
- 16 -
company reaching about KRW 100bn by the end of 1989. Financial

institutions
also
began
to
modernize,
adopting
advanced
computerized business processes.
In November 1987, the SEA was revised to allow investment

advisors and introduce a membership system for the KSE. The
public Corporation Inducement Law was integrated into the Law on
Fostering the Capital Market, stipulating provisions recommending
IPOs and paid-in capital increases for companies. In addition, a
series
of
measures
was
undertaken
to
encourage
venture
companies and small and medium-sized enterprises (SME) to

partake in the securities market. The OTC stock trading system
and
the
computerized
trading
settlement
system
were
both
introduced in March 1988, brokerage commissions were liberalized

and autonomy in securities companies' business was permitted
from June 1988. Plans to globalize the securities market were also
presented in December 1988, and the KSDA Investor Protection
Center was launched in January 1989.
In the second half of 1989, the international stock market bubble

burst, taking a significant toll on the Korean securities market. In
response, the government introduced measures to stabilize the
stock market by controlling its supply and demand. To reduce
supply, it established the securities issuance notice system, the
capital
increase
coordination
committee
and
the
issuance
coordination council. It also suspended the distribution of national
- 17 -
stocks, enhanced requirements for IPOs and discouraged capital

increases through public offerings.
On the other hand, the government also took measures to

stimulate market demand. For example, it encouraged securities
firms to borrow money for stock purchases, encouraged banks to
provide
loans
to
investment
trust
companies,
established
investment trust companies in rural areas and created stock

market
stabilization
funds.
Additionally,
it
encouraged
listed
companies and institutional investors to sell less and purchase

more, established the Matching Fund to create overseas demand,
created the Korea Asia Fund, and required account receivables or
outstanding loans to be repaid.
The securities market liberalization plan, which began in the early

1980s, was fully implemented in 1991 with the opening of the KSE
to
all
certified
securities
companies
in
June,
the
further
liberalization of brokerage commissions in August, and foreign

securities firms being permitted to enter the Korean market in
September. Although a Japanese securities firm had already
opened an office in Seoul during the 1980s, foreign branch offices
and joint-venture companies only became widespread after the
British securities firm Jardine Fleming established a branch in
Korea, in October 1991.
With the SEA revised again in December 1996, the ceiling on
- 18 -
foreign share holdings in local securities firms was lifted, and

foreign securities companies were allowed to establish joint-venture
companies in Korea. In March 1998, foreign investors were
permitted to establish local subsidiaries that were 100% owned by
foreign
securities firms. In
addition, domestic investors were
encouraged to invest in overseas market pursuant to the Overseas

Securities Investment Promotion Plan, announced in June 1988. In
line with the first phase of foreign currency reforms, investment
ceilings on institutional investors were completely lifted, while the
ceiling
on
individual
investors was gradually
lifted
until
full
liberalization was obtained in 1996. Foreign investment trusts and

investment advisors were permitted to hold shares in existing
domestic companies and establish representative offices in Korea
in January 1993. Foreign investment advisors were permitted to
establish branch offices in December 1995 and foreign investment
trust companies in December 1996.
In order to promote stability in the securities market, measures

were undertaken in 1992 to control supply and boost the demand
for stocks. The Bank of Korea provided special support for three
major investment trust
companies, and pension
funds were
encouraged to invest in the stock market. Additionally, financial

institutions were encouraged to purchase more and sell fewer
stocks in order to raise additional funds for the Securities Market
Stabilization Fund, and to establish a treasury fund for the three
major investment trust companies.
- 19 -
TABLE 11. CEILINGS ON STOCK INVESTMENT FOR FOREIGN INVESTORS

(Unit: %)
Year/
Month
1992.01
1994.12
1995.07
1996.04
1996.10
1997.05
1997.11
1997.12
1998.04
1998.05
2000.11
Securities listed corporations

Private companies
Public companies
All
Per
All
Per
investor
3
3
3
4
5
6
7
50
50
100
100
investor
10
12
15
18
20
23
26
55
55
100
100
investor
1
1
1
1
1
1
1
1
1
3
3
investor
8
8
10
12
15
18
21
25
25
30
40
KOSDAQ listed
corporations
All
Per
investor
5
50
100
100
investor
15
55
100
100
TABLE 12. TREND OF FOREIGN INVESTMENT AFTER COMPLETE

MARKET LIBERALIZATION
(Unit: million dollars, %)
Stocks
Bonds
Total
2001
1,300.5(16.6)
6,512.9(83.4)
7,813.4(100)
2002
1,793.7(15.6)
9,698.0(84.4)
11,491.7(100)
2003
3,415.8(19.7)
13,926.9(80.3)
17,342.7(100)
2004
9,009.0(31.8)
19,357.7(68.2)
28,367.7(100)
* Note: Figures in () refer to the proportion of stock/bond investments.

** Source: The Bank of Korea
The Korean securities market achieved significant progress in 1993,

thanks to stable growth in the real economy and capital market
liberalization. To live up to such quantitative growth, the relevant
rules and regulations were revised to meet international standards
and drive further growth. In 1993, a comprehensive revision of the
- 20 -
six laws governing securities was conducted to advance the

framework of the securities system. The Acts revised were the SEA,
the Law on Fostering the Capital Market (LFCM), the Securities
Investment Trust Business Act, the Act on External Audit of Stock
Companies, and the Certified Public Accountant Act.
To further boost the autonomy and transparency of the market,

the SEA was revised, lifting the ceiling on listed stock ownership.
In addition, listed companies were allowed to own treasury stock,
the tender offer system was improved, the securities dispute
settlement system was revised to enhance investor protection, and
the legal grounds for creating a Stock Index Futures Market (SIFM)
were established. The LFCM and other revised laws governing the
securities trust business were revised to relax limits on the
issuance of non-voting stock by listed companies. Additionally,
paid-in capital increases were no longer recommended, and CPs
and CDs were included as trusted assets.
In order to achieve balanced development between the stock and

bond markets, the method for issuing government bonds shifted
from underwriting to a competitive bidding system in January 1994.
The settlement of bonds traded between institutional investors was
required to be carried out through wire transfer via the Korea
Securities Depository in order to avoid risks and inefficiency in the
settlement process.
- 21 -
Meanwhile, in September 1993 and February 1994, respectively,

comprehensive measures were taken to further develop the bond
market and improve the CB market with the intention of balancing
development in the stock and bond markets.
The Future Trading Act was enacted in December 1995 in order to

regulate the stock index future market (SIFM, est. May 1995) and
the finance and commodity futures trading market. In addition, in
order to meet international standards, the Securities Investment
Trust Business Act was revised in December 1995, allowing
securities firms and securities investment trust companies to share
services by establishing subsidiaries, and permitting investment
advisors to shift their service into investment trust management
companies. Regulatory jurisdiction over securities investment trust
companies moved from the Ministry of Finance and Economy
(MOFE) to the Securities and Exchange Commission (SEC).
TABLE 13. PLAN FOR FINANCIAL LIBERALIZATION AND MARKET

OPENING
Year
Stock
market
Phase 1(1993)
- Lifting
investment
restrictions on
companies that
have 50% or
greater foreign
ownership
through direct
investment
Phase 2(1994-95)
Phase 3(1996-97)
- lifting the ceiling on foreign

investment
- Foreign investors living in
Korea viewed as residents
(1994)
- Further lifting
the ceiling on
foreign
investors stock
investment
- 22 -
(Aug. 1993)
- Allowing direct investment
into CBs issued by SMEs
(1994)
- Allowing the underwriting of
government bonds which
have interest rates similar to
international rates in the
primary market (1994)
- Operation of bond funds
(1995)
- Allowing international
organizations to issue
won-denominated bonds
(1995)
Bond
market
6.
THE
ASIAN
FINANCIAL
CRISIS
AND
- Allowing direct
investment in
non-guaranteed
long-term
bonds of SMEs
(1997)
REFORM
MEASURES
(1996-2003)
Due to the Asian financial crisis, 1997-2003 marked the Korean

capital market's longest recession. However, a series of drastic
reforms
and
restructuring
measures
allowed
the
market
to
successfully overcome this period of hardship, and set the stage

for it to develop on par with advanced capital markets.
In 1996, as the global financial market became smaller and

increasingly globalized, the Korean government pursued further
financial reforms and attempted to boost the capital market's
competitiveness by introducing new securities systems; the dividend
distribution system was improved in January 1996, ceilings on
treasury bond ownership were raised from 5% to 10% in February
- 23 -
1996 and the KOSDAQ market was established in July 1996 to

help venture companies and SMEs better utilize direct financing
based on the OTC Market Promotion Plan. Securities lending and
borrowing
was
permitted
from
September
1996
and
price
fluctuation limits were increased from 6% to 8%. In addition, in

order
to
encourage
domestic
companies
to
become
more
competitive in the global market, overseas investment by both

institutional and individual investors was fully liberalized without
any restrictions on the amount. In July 1997, the Stock Index
Option trading system was introduced with the Korea Futures
Exchange (KFX) established in April 1999.
At the end of 1997, as Korea received an IMF bailout package

and underwent significant corporate and financial restructuring, the
capital market faced a devastating downturn. KOSPI plunged from
653 basis points to 376 basis points in early 1997 - its lowest
level since 1980 - and 11 listed companies were forced to liquidate
or merge. In response, the government implemented the Securities
Markets Revitalization Plan, enacting the Depositor Protection Act
and introducing the Stock Option and Investor Protection Fund.
Additional measures to boost the market were also undertaken,
including raising the limits on stock investment by foreign investors,
tax exemptions for income from stocks, as well as permitting stock
splits and interim dividends.
In January 1997, the Foreign Investment and Foreign Capital
- 24 -
Inducement
Act
was
amended
to
attract
foreign
financial
institutions. The revised act eliminated the existing ceiling on equity

holdings by foreign portfolio investments in domestic securities
companies (less than 10%), and permitted foreign securities firms
to establish representative offices in Korea by simply registering.
Furthermore, in April 1998, all seven types of financial businesses,
including
securities
businesses,
were
fully
liberalized
and
investment restrictions on foreign investors were removed, thus

allowing them to establish subsidiaries.
TABLE 14. POST ASIAN FINANCIAL CRISIS RESTRUCTURING OF

MERCHANT BANKS, SECURITIES FIRMS, AND INVESTMENT
TRUSTS
Restructuring
Financial
sector
No. of
entities
at the
end of
1997(A)
MB
SF
IT
Revocation
of
authori
-zation
Merge
r
22
5
6
7
4
1
30
36
30
Bankrup
tcy/
busines
s
suspens
i-on
2
-
Total
(B)
Weight
(B/A)
29
11
7
96.7
30.6
23.3
New
entities
No. of
entities
in Jul.
2004
1
18
22
2
43
45
* Note: MB- Merchant Banks, SF - Securities Firms, IT - Investment Trusts

** Source: Changes in Competitive Structure through Financial Restructuring after the
Asian Financial Crisis by SERI in July, 2004.
Ceilings on equity holdings by domestic investment trust companies

were
relaxed
for
foreign
investment advisory services,
investment
trust
companies
and
which were permitted to set up
- 25 -
branch offices and joint-venture companies with equity holdings of

less than 50%, all of which were completely liberalized in
December
1998.
Securities
investment
by
foreign
portfolio
investments was also liberalized. In December 1997, immediately

after the Asian financial crisis, foreign portfolio investments were
permitted to make stock investments of up to 50% in a single
issue, and up to 55% of the total amount allocated for foreign
investors.
Beginning in 1997, foreign investors were permitted to purchase

equity-type beneficiary certificates for indirect investment. Later, in
September of that year, the ceiling on investment amount for
purchasing foreign beneficiary certificates in the OTC stock market
was lifted, and indirect investments in stock index options and
futures were also permitted.
The Stock Index Future (SIF) market opened in May 1996, allowing
foreign direct investment (FDI), though with some restrictions which
were later eased in July 1997. The Stock Index Options (SIO)
market also permitted FDI, imposing the same level of restrictions
as the SIF market. In May 1998, foreign investment restrictions in
the stock market (excluding public corporations), SIF and SIO
markets,
and
beneficiary
certificates
were
all
lifted,
and
investments in unlisted stocks and primary market securities were

also permitted.
- 26 -
Direct
investment
in
the
bond
market
by
foreign
portfolio
investments was allowed through bond-type country funds from

October 1996. Non-guaranteed foreign corporate bonds of SMEs
were permitted, and all investment restrictions for listed bonds
including SME bonds, government bonds and specific law bonds
were lifted. In February 1998, foreign investors were permitted to
invest in corporate-issued money market funds (MMF) such as
commercial papers, commercial bills and trade bills and other
MMFs issued by financial institutions including CDs, cover bills,
merchant bank bills and repurchase agreements.
Government efforts to relax entry barriers into the securities market

continued
to
enhanced
market
liberalization
and
boost
competitiveness. In April 1999, the SEA was again revised to ease

the requirements for engaging in securities business. The realm of
entities eligible to engage in the securities business was expanded
from
authorized
corporations.
banks
and
Additionally,
trust
the
companies
requirements
to
authorized
for
registering
investment advisory services were also relaxed: registrations, not

government
approval,
was
required
to
provide
discretionary
investment advisory services.
In consideration of the drastic changes taking place in the global

financial
environment
government
revisited
due
the
to
the
licensing
Asian
and
financial
approval
crisis,
the
system
for
financial institutions in order to meet international standards. In
- 27 -
this context, in January 2000, the institutional criteria for securities

business were laid out in detail and reasonable grounds for
nullifying approval were established, enhancing transparency within
the industry.
The business scope of securities firms was also expanded. In

1996, securities companies could purchase and preserve foreign
currency valued up to 1% of their equity, and borrow foreign
currency up to the amount needed to underwrite foreign securities.
In December 1997, the business scope was further expanded to
deal with currency exchange issues relating to bonds, stock index
futures and option investments, as well as short-term forward
exchanges.
In September 1998, the Securities Investment Company Act was

enacted,
allowing
both
company-type
investment
trusts
and
contract-type investment trust. In March 2001, wrap accounts were

introduced to meet the needs of customers in an aging society by
providing low interest rates and comprehensive asset management
services.
Later
in
December,
the
Indirect
Investment
Asset
Management Business Act was enacted in an attempt to shift

savings into investment.
Moreover, in order to live up to a more liberalized financial

environment, the financial supervision system was also reshuffled
along with the accounting and disclosure systems for corporations
- 28 -
and financial institutions were strengthened. In April 1998, the

Financial Supervisory Commission (FSC) was established. As a
consolidated supervisory organization encompassing the formerly
separate securities, banking and insurance regulators and the
Korea Non-Bank Deposit Insurance Corporation, the FSC took
responsibility for oversight over the entire financial sector with the
goal of enhancing the effectiveness of the regulatory system.
To promote transparency in accounting systems, in December 1999

the Korea Accounting Standards Board was established under the
Korea Accounting Institute to meet international standards in
accounting. In addition, to prevent fraudulent accounting, the 30
largest chaebols (a form of conglomerate) were required to
prepare consolidated financial statements, and companies whose
assets were valued at KRW 7bn or more were required to set up
an internal accounting system. In 1999 and 2003, quarterly reports
were introduced to enhance the disclosure system, and business
reports were required to be certified by both the CEO and CFO. To
enhance the credibility of accounting information, consolidated
financial
statements
were
required,
with
certified
public
accountant signing an audit opinion. Additionally, the function of

accounting supervision in the Securities and Futures Committee
was enhanced.
- 29 -
7. Enhanced Competitiveness of the Capital Market (2004-2011)
Since 2004, the capital market has undergone a revolution in

terms
of
shifting
its
function
from
merely
supporting
other
industries into a high value-adding industry in itself. Since the

Asian financial crisis, foreign portfolio investments in the domestic
securities market have surged dramatically, which in turn has
made domestic institutional investors suffer from reduced profits,
spurring the creation of short-term investments with lowered
trading commissions. Therefore, measures to stabilize the securities
market were required.
In December 2004, the Framework Act of Fund Management was

enacted, which allowed the National Pension Fund and Pension
Funds to invest in the stock market. In July 2005, the Trust
Business Act was revised to permit securities companies to
engage in the trust business, and retirement pension plans (similar
to 401(k) plans in the U.S.) were introduced with pension funds
permitted to invest in the stock market pursuant to the Employee
Retirement Benefit Security Act.
A series of efforts to improve market infrastructure and financial

laws were introduced to make the securities business a high
value-adding industry. In January 2005, the KRX, a consolidated
exchange that integrated the operations of the KSE, KOSDAQ, and
KOFEX markets, was launched pursuant to the Korea Securities
- 30 -
and Future Exchange Act of January 2004. Later in July, the

FreeBoard, a third market for non-listed stocks, was established to
support
promising
venture
companies
and
SMEs.
Finally,
in
December 2007, the Bond Quotation System (BQS) was introduced

to enhance transparency and liquidity in the OTC bond market.
In February 2009, the infrastructure for disclosing bankruptcy and

collection rates was established to facilitate a high-yield bond
market. In June, the government real-time bond index was
launched to introduce new bond instruments.
In January 2005, the SEA was revised to improve the tender offer
system and require substantial shareholding of stocks to be
reported as the number of hostile M&A increased. Later in July,
controlling shareholders of securities companies were required to
receive authorization in advance from the FSC.
In August 2007, the government enacted the FSCMA, with the Act
coming into effect in February 2009. FSCMA integrated the six
previously separate statutes governing Korea's capital market
including the SEA, the Futures Trading Act and the Indirect
Investment Asset Management Business Act in an attempt to
enhance competitiveness and promote investor confidence through
stronger
investor
protection
measures.
This
was
the
most
significant and comprehensive reform of the financial market's

legal framework, and it created a foundation for the Korean
- 31 -
capital market to develop on par with the global markets.
In 2011, the government announced its intention to revise FSCMA

in order to further innovate and improve the capital market by
nurturing advanced investment banks and introducing hedge funds.
These revisions aim to fulfill the original purpose of the Act deregulation - which had not been fully satisfied at this early
stage of its enforcement due to the global financial crisis. As a
result, the partial revision of the Enforcement Decree of FSCMA led
to the launch of Korean hedge funds. In line with this change, the
government also modified relevant regulations, enforcing more
reasonable Chinese Wall policies in the prime brokerage business
and relaxing credit extension limits for hedge funds.
- 32 -
II. Legislative Change and Progress

Since the establishment of the Korea Exchange in 1956, Korea has
introduced series of financial market related Acts including the
Securities and Exchange Act, the Futures Trading Act, the Indirect
Investment Asset Management Business Act - at every step of its
financial development, with each
Act
pivotal for
creating
regulatory framework that is fair and transparent.
The 1964 Securities and Exchange Act defined the scope of

securities issued and circulated in the Korean securities market. It
contained a series of measures against unfair securities trading
including the duty
of listed companies to report and disclose on
the issuance and circulation of securities. This duty required

companies to disclose registration statements and annual business
reports. The Act also prohibited unfair trading practices such as
market manipulation and the use of nonpublic information. The act
defined securities business as any business that buys and
sells securities or buys and sells securities on consignment,
stipulating the terms and procedures for licensing and standards
for corporate governance and financial soundness to ensure the
sufficient operation of securities companies.
The 1995 Futures Trading Act provided a legal basis for the
establishment of the Futures Exchange and introduced measures
- 33 -
that prohibited unfair trading practices such as futures market

manipulation and price manipulation, for example, by connection
spots and futures which abuse the unique trading characteristics
of futures. The law defined futures business as any business
in which a company executes futures trading for its own account
or for its clients account, drawing a distinction between the
securities
introduced
business
and
regulatory
the
futures
requirements
for
business.
The
establishing
Act
a
also
futures
business, such as the terms and procedures for licenses and the
scope of business activities.
Based on the Act, the Futures Exchange was established in 1998

but was later merged with the Korea Stock Exchange creating
the Korea Securities and Futures Exchange, a stock company
based on the 2005 Korea Securities and Futures Exchange Act.
The 2004 Indirect Investment Asset Management Act defined

indirect investment as a business that collects funds from
investors to manage assets and distribute profits accrued from the
management of assets to investors. It clearly limited the scope of
the
asset
management
business
by
defining
an
asset
management company as a financial firm operating in the

business of managing indirect investment property. The Act was
created through
consolidating the Investment Trust Act and
Securities Investment Companies Act to coherently manage the

securities investment trust system and the securities investment
- 34 -
companies system. The Act dealt with the discretionary investment

business
and
the
investment
advisory
business
that
were
previously governed by the Securities and Exchange Act, improving

the regulatory system for the asset management business as a
whole.
In February 2009, Koreas financial regulatory structure witnessed

a fundamental change in this landscape with the enforcement of
the Financial Investment Services and Capital Markets Act (FSCMA).
Enacted in 2007 to promote fair market competition, financial
innovation
and
stricter
investor
protection,
FSCMA
drastically
revamped the regulatory framework of the Korean capital market.

FSCMA abolished and replaced the previous major capital market
laws such as the Securities and Exchange Act, Futures Trading Act,
Korea Securities and Futures Exchange Act, Indirect Investment
Asset Management Act, Trust Business Act and Merchant Banks
Act.
On July 27, 2011, the Financial Services Commission (FSC)
issued
a press release announcing a proposed amendment to FSCMA.

The purpose
of
this amendment
is to
create a regulatory
foundation for the development of the Korean capital markets in

the wake of the global financial crisis by improving the financial
market infrastructure
and direct financing capability of listed
companies to maintain the market's integrity while reinforcing the

regulation of domestic investment banking and asset management
- 35 -
businesses.
The FSCMA revision bill mainly covers the following

regulations intended to promote
Korean
investment
banks,
(ii)
fives areas: (i)
the development of major

deregulation
of
Korea's
fund
management industry to meet the challenges presented by the

country's declining birth rate and aging population, (iii) reform of
Korea's capital market infrastructure, (iv) diversification of direct
financing channels, and (iv) stricter regulation of unfair trading
practices. The key provisions of the amendment to the FSCMA are
summarized below.
First
of
all, to
promote
the
development
of
major
Korean
investment banks, the bill permits securities companies meeting

certain qualifications (e.g., shareholder's equity of KRW 3 trillion) to
act as investment banks (a new category denoting comprehensive
financial
investment
comprehensive
service
providers).
financial investment
service
Such
qualified
providers shall be
allowed to engage in (i) prime brokerage services such as

securities lending and borrowing, custody service of hedge funds
assets and the provision of credit to hedge funds (subject to
execution
of
standard
prime
brokerage
contract)
and
(ii)
comprehensive corporate financing services such as corporate

lending and internalization of order executions for listed company
stock.
With such expanded business scope,
comprehensive
financial investment service providers will be subject to the BIS
- 36 -
capital adequacy requirements in addition to he net capital ratio

regulations.
The
revision
bill
also
creates
investment
service
provider
alternative
trading
system
new
category
multilateral
(ATS).
This
of
trading
will
enable
financial
facility
or
securities
companies and other financial investment service providers that

have the minimum required capital of KRW 50 billion and are
approved by the FSC to operate an alternative trading system.
Furthermore, if the transaction volume on an alternative trading
system is more than a certain amount, the operator will be able
to apply to become a stock exchange.
In such cases, the stock
exchange is additionally required to carry out self-regulatory

functions in listing and market supervision.
The proposed revision
creates also a new category of clearing business for financial

investment transactions. By introducing a licensing system for a
clearing business provider, it aims to provide clearing services for
a variety of products. The revision also lays the legal foundation
for establishing a central counterparty (CCP). All over-the-counter
derivatives which may have a significant impact on the Korean
capital markets upon default will be required to be cleared
through clearing services providers.
In order to enable fund management companies to meet the

investment needs of a client base that is becoming increasingly
diverse and to offer their clients customized investment products
- 37 -
that will be profitable and generate a steady return, the bill

makes a clear distinction between collective investments and
discretionary accounts.
As for the diversification of direct financing channels, contingent

capital will be allowed to listed companies, subject to certain
restrictions on the issue price and reasons for the issuance.
In addition, the investor protection mechanism will be reinforced.

To prevent price manipulations using unlisted securities and OTC
derivatives,
excessive
scalping
and
secondary recipients, the regulations
use
of
information
by
on unfair trading practices
will be reinforced. Specifically, unlawful acts that are currently

subject to fines such as a violation of disclosure requirements will
be subject to criminal charges, and acts causing disruptions to the
market will be punished in a more effective manner.
- 38 -
. FINANCIAL REGULATORY ORGANIZATIONS

1. History
The financial supervision system of Korea was diversified for a

long time, during which licensing, authorization, supervision and
inspection rights were scattered across institutions such as the
Ministry of Finance and Economy (MOFE), the Bank Inspection
Board, the Securities Supervisory Board, the Insurance Supervisory
Board and the Korea Non-Bank Deposit Insurance Corporation. In
the
case
of
the
capital
market,
MOFE
had
licensing
and
authorization rights for securities companies, while the FSC and

Securities Supervisory Board were the authorities for approval,
consent, order and inspection.
However, the Asian financial crisis in 1997 caused the Korean

government to reorganize its financial supervisory institutions. Right
after the outbreak of the crisis, the Korean government and the
International Monetary Fund (IMF) agreed to create an integrated
financial supervisory Body, enacting the Act on the Establishment,
Etc. of Financial Supervisory Organizations (AEFSO) in December
1997.
AEFSO
reshuffled
Koreas
existing
divided
supervision
structure and offered a legal basis for the establishment of the

Financial Supervisory Commission and Financial Supervisory Service
as an integrated financial supervisory institution. Based on AEFSO,
- 39 -
the Commission was launched in April 1998 and the Bank

Inspection Board, the Securities Supervisory Board, the Insurance
Supervisory Board and the Korea Non-Bank Deposit Insurance
Corporation were incorporated into the FSS in January 1999.
However, to address the specific aspects of the capital market, the
Securities and Futures Commission was established separately
under the Financial Supervisory Commission.
The new regulatory system, launched in 2008, reorganized the

Financial
Supervisory
Commission
into
the
Financial
Services
Commission (FSC) to maintain operational coherence between

financial policy and supervision. The FSC took over the function of
financial policy formulation form the MOFE, conducting financial
supervision, policy formulation and implementation. To support the
financial policy function of the FSC, a secretariat was created. To
ensure the independence of the financial supervision, directorship
of the FSS, which was simultaneously held by the Chairman of the
FSC, was appointed separately.
2. The Financial Services Commission and the Securities and

Futures Commission
As
government
organization,
the
FSC
is
board-style
administrative organization under the Prime Ministers Office. But

unlike other governmental organizations whose authorities are
- 40 -
designated by the Government Organization Act, the FSCs

authority is designated by AEFSO, the Presidential Decree of
Financial Services Commission and affiliated institutions, and other
Acts on financial supervision.
The FSC regulates financial policies and institutions; inspection of

and
restrictions
on
financial
organizations;
licensing
and
authorization of financial organizations; management, supervision

and surveillance of the capital market; and legal and regulatory
enactment and revision of financial policies and systems. The
commission
also
manages
the
business,
operation
and
management of the FSS, and reviews and determines the FSSs

budget and account settlement, along with the revision of the FSS
rules and regulations.
The nine commissioners of the FSC include the Chairman and Vice
Chairman of the FSC, the Vice Minister of Finance and Planning,
the Senior Deputy Governor of The Bank of Korea, the President of
Korea Deposit Insurance Corporation, the Governor of the FSS, two
persons nominated by the Prime Minister and appointed by the
President of Korea. The Vice Chair is nominated by the Chair of
the FSC and appointed by the President of Korea. The Chair and
Vice Chair each has a three-year tenure with a limit of two terms.
The Securities and Futures Commission (SFC) is responsible for

investigation of unfair business activities in the capital market,
- 41 -
establishment
and
implementation
of
corporate
accounting
standards and accounting audits, and pre-deliberation of major

issues related to capital market management, surveillance, and
inspection, as well as other matters entrusted by the FSC for
management, surveillance, and inspection of the Korean capital
market. The commissioners of SFC consist of five people, including
a Chairman who is nominated by the Vice Chairman of the FSC,
and four financial experts nominated by the Chair of the FSC.
- 42 -
3. Financial Supervisory Service
The Financial Supervisory Service (FSS) is a special legal entity that

has no capital base. It is independent from the central and local
governments, conducting public affairs as a public corporation. By
law, the FSS is not a government institution but an independent
public corporation as it aims to carry out politically neutral and
financially
specialized
supervisory
functions
over
the
Korean
financial market, free from any political or administrative pressure.
Under the guidance from the FSC and SFC, the FSS conducts
inspections of and supervision over financial institutions. It reports
the results to the FSC, as well as any follow-up recommendations
relating to the inspections, the FSC and SFC can guidance over the
FSS and the FSC can also enact general or partial suspension
orders to actions taken by the FSS or SFC when those actions are
deemed to be legally inappropriate or to go against the public
benefit, such as investor or depositor protection.
The executive body of the FSS consists of the Governor a

maximum of four Senior Deputy Governors among a maximum of
nine
Deputy
Governors,
and
one
auditor.
The
governor
is
nominated by the chairman of the FSC and appointed by the

President
of
Korea,
and
the
Senior
Deputy
Governors
are
nominated by the Governor of the FSS and appointed b the FSC.

Deputy Governors are appointed by the Governor of the FSS.
- 43 -
4. Self-Regulatory Organizations
(1) KOREA EXCHANGE
The Korea Exchange is a stock company, which aims to fix and

stabilize fair prices in the transactions of securities and exchangetraded derivatives, and facilitate the stability and efficiency of other
transactions. It established and operates the Stock Market, the
KOSDAQ Market, and the Futures Market. Under FSCMA, the Stock
Market is a market established for the trading of securities such
- 44 -
as
debt
securities,
equity
securities,
beneficiary
securities,
investment contract securities, derivative-combined securities and

securities depositary receipts. The KOSDAQ market was established
for the trading of specific securities, designated by FSCMA, such
as corporate bonds and stocks. Therefore the Stock Market and
KOSDAQ Market have clear differences in terms of the kinds of
stocks they deal in. The Futures Market is a market established by
the Korea Exchange for the trading of exchange-traded derivatives.
The
responsibilities
of
the
Korea
Exchange
include
the
establishment and operation of the Stock Market, the KOSDAQ

Market, and the Futures Market; enabling transactions of securities
and exchange-traded derivatives; transaction confirmation; debt
acquisition;
deduction;
settlement items
guarantees;
confirmation
of
settlement
securities;
and settlement amount; settlement execution
follow-up
measurers
on
settlement
failure
and
settlement instructions as a result of transactions on the securities

market and the derivatives market; reports and disclosures on
listed
corporations;
and
resolution
of
disputes
arising
from
transactions in the Stock Market, the KOSDAQ Market and the

Futures Market.
(2) KOREA FINANCIAL INVESTMENT ASSOCIATION
The
Korea
incorporated
Financial
Investment
membership
Association
organization
- 45 -
for
(KOFIA)
the
is
an
purpose
of
maintaining business order between members, assuring fair trade

protecting investors and promoting the sound development of
financial investment services. Members of the Association are
financial
investment
collective
firms,
investment
assessment
general
scheme
companies
and
administration
assessment
members
companies,
companies,
under
the
bond
conditions
prescribed by the articles of the Association.
KOFIA aims to promote fair business practices among member

companies, create a fair business culture in the securities trading
market and maximize the function of investor protection. As such,
KOFIA undertakes such activities as self-regulation to protect
investors and maintain market order among member companies;
dispute mediation between members regarding their business
activities; registration management of investment advisers and
managers; OTC trading management for non-listed stocks; and
establishment
of
dispute
mediation
self-mediation of conflicts.
- 46 -
rules
for
industrys
Chapter 2
Framework of Financial Investment Services and
Capital Markets Act (FSCMA)
I. Legislative Background and Process
FSCMA is the result of Koreas previous financial reforms, and
aims to enhance investorsconfidence in the Korean capital
market while boosting the vigor and competitiveness of the capital
market and market-related financial industries. At the time of
enactment,
the
Korean
capital
market
displayed
lopsided
structure with an anemic financial brokerage function and a strong

indirect financial market. The capital market itself was also still
very nascent compared to the highly developed real economy. The
capital markets were not fully performing its capital intermediation
function as indicated by the lack of corporations raising funds
through the capital markets.
Worse still, the lack of sound growth and improvement of capital

marketrelated financial industries served to further aggravate the
imbalance between the banking and indirect financial investment
industries. In addition, the governing laws at the time were not
able to support innovative developments of the capital market and
- 47 -
related financial markets, because the direct regulatory systems

that
separately
governed
the
securities,
futures
and
asset
management businesses created additional impediments to the

pursuit of product and service innovation in the capital market.
Regarding this aspect in particular, the Ministry of Finance and

Economy noted the following:
(i) Separate laws applied to each different financial industry within

the capital market. Securities firms, future trading companies, asset
management companies, and trust companies were regulated by
different laws. As the regulation applying to each sector were
different, there were opportunities for regulatory arbitrage and
loopholes in investor protection.
(ii) The limited enumeration of the
types of securities and
derivatives that financial companies can handle operated as a

restriction on designing, selling or brokering diverse and creative
financial investment products.
(iii)
Because
concurrently
operating
various
financial
services
(securities business, asset management business, futures trading,

and trust business) was strictly restricted, there were barriers to
improving competitiveness through integration, as compared to
investment banks in an advanced economy that provide various
financial investment services and activities (Investment banking,
- 48 -
wealth management, securities brokerage and dealing, proprietary

trading, etc.).
(iv) Because an advanced and systematic investor protection

system was not well established, it was difficult to properly cope
with misselling and unfair transactions, which undermined investor
confidence in the capital market. Restoring investors confidence
was
urgent issue to ensure the sustainable development of the
Korean capital market.
Therefore,
after
thorough
reviews
and
analyses
of
overseas
examples of financial legislative integration including the UK and

Australia, the Korean government finally decided to integrate
capital market-related laws with some necessary modifications,
considering the unique features of the Korean legal system and
structure.
In February 2006, the Korean government announced its plan for

the
integrated
consultation
capital
with
the
market
law,
drafting
industry
and
academia.
bill
in
close
The
bill
was
promulgated in August 2007 after passage through the National

Assembly in July 2007. Given that the Act would bring seismic
change in the Korean capital market by integrating various law
and regulation all at once, the government decided upon a one
and a half year phase-in period, with the law becoming effective
on February 4, 2009.
- 49 -
Legislative History of FSCMA

Feb. 17, 2006
Announcement of the enactment plan for
the Financial Investment Services and Capital Markets Act

(tentative) (Government)
Dec. 29, 2006
Submission of proposed bill to the National
Assembly (Government)
Jul. 2, 2007
Committee
Alternative bill from the Finance and Economy
(FEC)
of
the
National
Assembly
(National
Assembly)
Jul. 3, 2007
Passage of the alternative bill by FEC of the
National Assembly at the plenary session of the National

Assembly (National Assembly)
Aug. 3, 2007 Promulgation of FSCMA
Jul. 29, 2008
Enactment and promulgation of the
Enforcement Decree of FSCMA

Aug. 4, 2008
Enactment and promulgation of the
Enforcement Rule of FSCMA

Feb. 4, 2009 Effectuation
. Main Features and Framework

In
order
to
resolve
the
above-mentioned
problems
through
reforming the regulation of capital market and enhancing investor

protection, the FSCMA pursues the following four basic objectives.
1. Comprehensive Approach
- 50 -
First of all, FSCMA has a comprehensive definition of financial

investment
instrument,significantly
broadening
the
scope
of
financial instruments dealt in by financial firms. By defining

financial investment products broadly and abstractly and embracing
all financial investment products that may appear in the future as
being subject to regulation, the scope of financial products that
are available to financial investment services companies, and
which are correspondingly subject to investor protection regulation,
was expanded.
FSCMA
defines
financial
Investment
instruments
as
right,
acquired by an arrangement to pay money or any other asset at

a specific time in the present or in the future with an intention to
earn profit or avoid loss where there is a risk that the total
amount of such money or assets, paid or payable for the purpose
of acquiring such a right, may exceed the total amount of money
or assets already recovered or recoverable from the right (in this
context, this means investment risk). Any financial product with
investment risks is considered a financial investment instrument
regardless of its form or type. For instance, if bank account or
insurance policy carries investment risk, it is considered to be a
financial investment instrument. However, if there is any loss of
principal because the opposite trading partner is unable to pay
the pre-contracted amount of money or any other asset due to
bankruptcy, debt restructuring etc., the FSCMA postulates that a
- 51 -
non-investment risk exists. This encourages the market to consider

risks from the structure of financial instruments and the market
itself, rather than from credit alone, when identifying investment
risks of financial instruments.
With the introduction of FSCMA, the Korean financial market

divided every type of financial instrument developed and sold on
the financial market into those with investment risks and those
without investment risks (bank deposits and insurance policies that
guarantee the principal). This has significant meaning for the
Korean
financial
market
as
it
implies
that
certain
financial
investment instruments investment contracts, atypical indirect

investment, etc. that previously were not governed by any law and
thus contained no investor protection measures now fall under
the financial regulatory framework and controlled by FSCMA.
2. Function-based Regulation
FSCMA adopted a functional regulation system based on the

principle that each activity that has the same economic substance
should be regulated equally, no matter which financial institution is
handling
the
matter.
It
did
so
by
re-classifying
financial
investment services, financial investment products and categories of

investors based on economic substances.
For example, FSCMA integrated the previously separate regulatory
- 52 -
regimes for financial investment business areas, securities business,

futures business, asset management business, trust business, etc.
into a single regulatory regime.
The financial investment business is now classified into six areas

dealing
business,
brokerage
business,
investment
advisory
business, discretionary investment business, trust business and

collective investment business depending on their economic
functions and based on the transactions of the financial investment
instruments. Dealing and brokerage businesses offer financial
investment instruments trading and trading brokerage functions.
Investment advisory businesses provide investors with financial
advice on the value of financial investment instruments and
investment decisions.
- 53 -
Trusts take charge of the custody, disposition and management of

trusted assets as a trustee.
Collective investment businesses
manage collected money or assets from investors and distributes

the outcome of the management to the investors. Both trusts and
collective investment businesses mainly invest trusted and collective
investment assets into financial investment instruments.
FSCMA defines financial functions in terms of financial investment

instruments, financial investment business and investors.
Based on
such as understanding, FSCMA applies different market entry

requirements
(authorization,
registration),
corporate
soundness
standards, and business activities regulations to each type of

financial investment firm, based on their level of risks and their
financial functions.
FSCMA significantly strengthened investor protection measures to

bolster investor confidence in the Korean capital market. In
particular,
FSCMA takes different approaches to the professional
and ordinary investors given their different risk-taking abilities,

based on such factors as their financial proficiency and the size of
their assets. As such, FSCMA focuses on delivering effective
investor protection to the ordinary investors who are much more
vulnerable to investment risks.
FSCMA defines professional investors as those who have the ability

to take the risks accompanying their investment in light of the
- 54 -
expertise
they
possesses
in
connection
with
the
financial
investment instruments, the scale of their assets, etc. and who fall
within the categories set forth in FSCMA, such as the State, The
Bank of Korea, financial institutions, etc. However, FSCMA also
states that if a professional investor notifies a financial investment
business entity in writing of its willingness to be treated as an
ordinary investor, then such investor should be treated as an
ordinary investor.
Meanwhile, if ordinary investors wish to be treated as professional

investors,
FSCMA requires that financial investment institutions
treat them as professional investors only if they possess minimum

amount of balance in financial investment instruments (KRW 10bn
for corporations, KRW 5bn for individuals) as this ensures financial
investment institutions cannot shirk their responsibility for investor
protection.
Investors who are not professional investors are defined as

ordinary investors and when financial investment companies offer
investment recommendations to such investors, stricter regulations
on investment recommendation are applied. Based on FSCMA,
investment
recommendation
means
recommending
financial
investment services such as the trading of financial investment

instruments, or making contracts for investment advisory service,
discretionary investment, and trust service for specific investors.
FSCMA demands financial investment firms give enough product
- 55 -
information (product guidance) to investors to recommend fitting

investment instruments that suit the objectives (suitability) and to
understand the needs and purpose of the investment (Know
your customer rule), so that investors can make wise and
informed
investment
decisions.
Additionally,
when
financial
investment firms sell high-risk investment instruments such as

derivatives, derivatives combined securities and derivatives funds to
ordinary investors, they should conduct a thorough analysis of the
investors-investment
purpose,
financial
status
and
previous
investment records through interviews and other methods. If the

instruments recommended are deemed inappropriate, the financial
investment firms should report that fact to the investor and make
a record of the notification and investors confirmation in the
form the investors seal, signature, etc.
3. Expanded Scope of Financial Investment Businesses
FSCMA expands the scope of businesses that financial investment

service
business
companies
may
engage
in.
All
financial
investment service business companies are able to engage in all

or some of financial investment services as well as all incidental
businesses.
- 56 -
4. Increased Investor Protection
FSCMA
expressly
upgrades
the
investor
protection
system.
This
is
to
fulfill the suitability principle and the duty of risk
disclosure set out in the statute, to set up
a system to prevent
the conflicts of interest which may arise from expanding the

business scope of financial investment service companies, and to
reinforce public disclosure in the primary market.
- 57 -
. Structure of FSCMA
1. Overview
FSCMA is comprised of 41 Chapters in 10 Parts with many

subordinate regulations. The Enforcement Decree of FSCMA, which
is a Presidential Decree, enumerates matters addressed by FSCMA
and the regulations required to implement the stated obligations.
The Enforcement Rules of FSCMA (Ordinance of the Prime Minister)
stipulate the powers ensured by the Decree and the regulations
required
to
implement
the
stated
obligations.
Regulations
promulgated by the FSC contain articles that explain the duties

created by the Decree and the regulations required to implement
the
stated
Regulation
obligations.
on
Financial
The
FSCMA
Investment
regulations
Business,
contain
the
Regulation
on
Issuance and Disclosure of Securities, Regulation on the Return of

Short-Swing Profits and the Investigation and Reporting of Unfair
Trading Practices, Regulation on Capital Market Survey, Regulations
on Inspection and Sanction on Financial Institutions, etc. In its
regulatory
enforcement
rules,
the
FSS
defines
the
authority
entrusted to its Governor by FCMA, its decrees and enforcement

rules, the FSC Regulations and the other relevant laws and
regulations, along with requirements and documents needed for
the concrete implementation of the above-mentioned laws and
regulations.
- 58 -
TABLE 15 STRUCTURE OF FSCMA
- 59 -
2. Regulation of the Financial Investment Businesses
The Regulation on the Financial Investment Business (RFIB) is an

FSC regulation enacted in August 2008, to improve and integrate
the existing regulations on the Supervision of the Securities
Business, the Indirect Investment Asset Management Business, the
Trust Business, the Merchant Bank Industry, and Guidelines for the
Licensing of
Trust Businesses, Merchant Banks and Financial
Brokerage Companies.
RFIB defines matters that are required for the regulation and
supervision of governance, soundness, and business activities of
licensed or registered financial investment firms. However, among
the various financial investment business areas, concurrently-run
financial investment business entities such as banks and insurance
companies, which are partially licensed or registered, are not
subject to the regulations on the governance, accounting, financial
soundness, and restriction on trading with major shareholders.
RFB
also
stipulates
over-the-counter
issues regarding
(OTC)
trading
of
the
supervision
non-listed
stocks,
of
the
bonds,
commercial notes and fractional shares, OTC trading through bond

brokerage
firms
and
professional
bond
dealers,
RP
trading,
securities lending transaction, OTC trading of derivatives, trading on

the overseas securities markets and derivatives transactions on
- 60 -
exchange along with matters such as investment registration,

account opening, and the trading and deposit of securities and
derivatives of foreigners.
3. Regulation of Securities Issuance and Disclosure
The
Regulation
of
Securities
Issuance
and
Disclosure
(RSID),
enacted in February 2009, is an FSC regulation that overhauled

the former Regulation on the Issuance and Disclosure of the
Securities by adding regulatory improvements and additional
powers granted by FSCMA.
To
ensure
the
fairness
of
securities
issuance
and
investor
protection, RSID specifically defines items which investors should be

notified of in the form of descriptions in the registration statement
and investment prospectus, along with accompanying forms and
other documents.
In particular, when it comes to the registration statements of

collective investment securities and asset-backed securities and the
registration statement on mergers, business transfers and split-offs,
split-and-mergers, comprehensive exchanges or transfer of stocks,
RSID requires different documents and details to be disclosed.
RSID
defines
matters
that
are
needed
for
the
concrete
implementation of the registration of tender offers, report on
- 61 -
stocks, held in bulk, and restrictions on the solicitation to exercise

voting right by proxy. It also contains specifics regarding the types
of corporations that
should submit regular reports such
as
business reports, and the information that should be stated in

those reports.
For example, reports
acquisition
disposition
and
of
treasury
are
required
stocks
of
for any
stock-listed
corporations; any decision on the issue value of capital increase

with consideration; and any issuance of convertible bonds and
bonds with warrant.
- 62 -
Chapter 3
Definition and Classification of Financial Investment
Products
I. Introduction of the New Definition of Financial Investment
Products
1. Definition of Financial Investment Products
The FSCMA introduced a new concept of "financial investment

products". If a particular product falls under the category of
"financial investment product", it becomes subject to regulation
under the FSCMA, which determines the business scope of the
financial investment service companies dealing in such financial
investment product.
Under Article 3(1) of the FSCMA, "financial investment product" is

defined as a right acquired by an agreement to pay, at the
present time or a specific time in the future, money or any other
valuable thing, for the purpose of earning a profit or avoiding a
loss, where there is a risk that the total amount of such money
or similar, paid or payable, to acquire such right(excluding any
sums
specified
in
the
Presidential
Decree,
such
as
sales
commissions) may exceed the total amount of money or similar
- 63 -
recovered or recoverable from the right (including any sums

specified in Presidential Decree, such as termination fees).
(1) Investment Risk Requirement
The
most
important
characteristic
of
any
covered
financial
investment product is its investment risk, which is the risk that the
total
amount
recovered
or
recoverable
under
the
financial
investment product is less than the total account payed or payable

to acquire it. In other words, investment risk means the risk of
loss on the principal of the investment.
recovered
by
the
investors
due
The amounts that are not
to
bankruptcy
or
debt
restructuring of the issuer or the counterparty are not considered

an unrecovered amount in calculating amounts recovered or
recoverable. This is because credit risk is not considered as an
investment the under the definition of the financial investment
products. For example, even in case of deposits with a bank or
insurance contracts with insurance companies, there can be a
possibility
of
failure
in
collecting
the
deposits
or
insurance
proceeds due to their bankruptcy. However, traditional deposit or

insurance contracts do not fall within the concept of financial
investment products. This definition reflects the belief that it is not
reasonable to regulate financial investment products based on
credit risk, because the credit risk exists in every transaction that
has a
counterparty.
The
traditional
deposit
and
insurance
products sold by banks or insurance companies are regulated by
- 64 -
Banking Act and Insurance Business Act. Also, when an insurance

policy is terminated early, the amount that the insured may
receive is often less than the insurance premiums paid, even if
the insurance is a savings type insurance policy. However, the
FSCMA clearly provides that this type of early termination does not
turn an insurance contract to a financial investment product.
The investment risk in the context of the definition of financial

investment products means market risk. Government bonds are
issued by the government and therefore it is hard to predict the
default or the risk of lass on investment principal from the
perspective of credit risk. An investor in government bonds is,
however, exposed to the risk of loss on his/her investment
amount depending on the market interest rate], particularly when
they are traded in the secondary market.
(2) Profit Purpose Requirement
In order to qualify as a financial investment product, the product

must have "the purpose of gaining profits or avoiding losses." A
product which is acquired for the
purpose of consumption or use
is not a financial investment product. Would real estate or

commodities purchased for the purpose of investment and not for
consumption
be regarded as a financial investment product?
Some might argue that this should be the case because both
tests (i.e. the risk of loss on investment and the purpose of profit)
- 65 -
are satisfied. However, there is no necessity to regulate real estate

or commodities as financial investment products on the ground
that there is a purpose for profit. It must be determined whether
it qualifies as one of the two subcategories of financial investment
products, securities or derivatives. In determining the scope of
financial
investment
products,
the
legislative
purpose
of
"contributing to the development of the national economy by

increasing the capital market's fairness, reliability and efficiency by
promoting financial innovations and fair competition in the capital
market,
protecting
investors
and
cultivating
sound
finance
investment businesses" should also be taken into consideration.
(3) Sub-categories of Financial Investment Products
The definition of financial investment product is intended to

determine, using a functional approach, the basic characteristics of
the instruments which need to be governed by the FSCMA.
However, there is a risk of legal uncertainty if the concept of
financial investment product is prescribed only by an abstract
definition.
Therefore,
the
definitions
of
two
subcategories
of
financial
investment products, "securities" and "derivatives", and the types of

securities and derivatives are provided in the FSCMA to minimize
such uncertainty. That is, it is clearly indicated that only if the
product qualifies, as a security as a
- 66 -
derivative, would it be a
financial investment product governed by the FSCMA.
Conversely,
a product that does not need to be regulated by the FSCMA is

clearly
excluded
form
the
definition
of
financial
investment
products. A typical example of such exclusion is negotiable

certificates of deposits. if the investment risk test and profit
purpose test under Article 3(1) were the sole determinants of
whether a product is a Financial Investment Product, some
products which the FSCMA was not intended to regulate could be
included in financial investment products(for example, investment in
real estate as discussed above). This issue is resolved by
reviewing whether a product falls under the category of securities
or
derivative,
products.
the
two
Applying
allowances
or
subcategories
this
loan
method,
receivables
of
financial
greenhouse
are
not
investment
gas
emission
considered
financial
investment products. Of course, derivatives based on emission

allowances
or
sub-category
loan
and
receivables
would
be
fall
under
considered
the
derivatives
financial
investment
products.
2. Classification of Financial Investment Products
Under FSCMA, financial investment instruments are classified into

securities
and
derivatives,
over-the
counter
derivatives
and
exchange-traded derivative, based on their characteristics the

possibility of the loss being larger that the value of the principal
and the obligation of overpayment.
- 67 -
FSCMA uses
a comprehensive
definition for
the
concept
of
securities and derivatives.
Figure 3. CLASSIFICATION OF FINANCIAL INVESTMENT INSTRUMENTS
II. Definition and Classification of Securities
1. Definition of Securities
According to FSCMA, securities are defined as financial investment
instruments for which investors do not owe any obligation to pay
anything in addition to the money or asset paid at the time of
acquiring such instruments (excluding obligations to pay where an
- 68 -
investor assumes such an obligation by exercising a right to

effectuate the purchase and sale of an underlying asset).
2. Classification of Securities
Along with this comprehensive definition of securities,
FSCMA also
stipulates six types and concepts of securities: equity securities,

debt securities, beneficial certificates, securities depositary receipts
and clearly states that new types of securities such as investment
contract securities, derivative-combined securities, are included in
the category of securities.
The concept of investment contract securities did not exist in the

previous Securities and Exchange Act. Investment contract securities
means "those representing rights under a contract where a
particular investor invest money into a joint enterprised between
the investor and another person(s) (including other investors) and
is entitled to profit earned, or liable for losses sustained, based
on the outcome of joint enterprise mainly managed by the other
person(s)." The concept of the investment contract is included in
the definition of securities under the U.S. Securities Act of 1933
Section 2(a)(1) and the Securities and Exchange Act of 1934 Section
3(10). In SEC v. W. J. Howey Co. the U.S. Supreme Court ruled
that the criteria of determining whether a contract is an investment
contract that falls under the definition of securities are: (i)
investment of money due to, (ii) an expectation of profits arising
- 69 -
from, (iii) a common enterprise, and (iv) with depends solely on

the efforts of a promoter or third party. The criteria from SEC v.
W. J. Howey were reflected in the definition of investment contract
securities of the FSCMA.
Derivatives-embedded securities contain a derivatives factor in that

payment amounts can vary according to changes in value of
underlying assets or changes in underlying index. In this regard, it
can be said that derivatives-embedded securities are similar to
derivatives.
However,
the
investor
who
purchase
derivatives-embedded securities by paying full price at the time of

purchase will not suffer from losses over their initial investment
amount. Therefore, this type of product is considered a security,
not a derivatives. For example, typical credit default swaps are
derivatives,
but
derivatives-embedded
fully-funded
securities.
credit-linked
notes
Derivatives-embedded
are
securities
are classified as securities under the classification principles of

securities and derivatives, but they are treated in a similar manner
as derivatives for purpose of investor protection.
- 70 -
TABLE 16. TYPES AND DEFINITION OF SECURITIES
pe
III. Definition and Classification of Derivatives

1. Definition of Derivatives
In the FSCMA, "derivatives" means forward, option, swap contracts

with regard to underlying asset, underlying asset's price, interest
rate, index, unit or the index based on them. Qualifying underlying
assets
under
the
FSCMA
are
financial
investment
products,
currencies, commodities, credit risk and other risks inherent in

natural, environmental or economic phenomena, the price or index
or unit
of
which
can
be
calculated
- 71 -
or
assessed
in
such
reasonable
or
appropriate
manner
necessary
to
protect
the
investor.
Since derivatives determine the payment amount in the future

based on uncertainty, the question of whether it falls under
gambling can arise. The FSCMA clearly provides that it does not
constitute a crime of gambling (illegal in Korea) if a financial
investment service company conducts its business pursuant to
FSCMA. Although the FSCMA is silent on whether the validity of
derivatives can be challenged based on the gambling issue,
derivatives that meet the FSCMA requirement should be shielded
from such challenges.
Derivatives are contractual rights falling under the categories of

forwards, options and swaps. The scope of the underlying assets
are financial investment instruments, currencies (including any
foreign currency), ordinary commodities credit risks and other risk
inherent in natural, environmental or economic phenomena, which
can be computed or assessed by price, interest indicator or unit in
a reasonable and appropriate way.
2. Classification of Derivatives
Derivatives can be clsssified into two categories: exchange-traded

derivatives and over-the counter(OTC) derivatives. Exchange-traded
derivatives are traded through intermediaries, such as exchanges,
- 72 -
based on standardized exchange contracts and regulation with the

intermediary as the counterparty to the contract.
OTC derivatives are privately negotiated bilateral contracts entered

into between the contracting parties directly (typically based on
standardized agreements and contractual terms, such as those
developed by the International Swaps and Derivatives Association,
Inc.).
OTC
sophisticated
derivatives
parties (such
are
largely
entered
into
between
as financial institutions or similar
entities) for the purposes of hedging financial or portfolio risks or

for diversifying portfolios of assets.
IV. Distinction between Securities and Derivatives

The criterion distinguishing securities from derivatives is whether
there is a possibility of suffering losses exceeding the investment
principal, that is, whether an investor a financial investment
product can be obligated to make additional payment after his/her
investment in the product.
"Securities" means "those financial investment products that are

issued by a Korean national foreigner and that do not have the
obligation of making payment, for any reasons, in addition to the
money paid by the investors upon acquisition of the product
(except for the payment obligation owed by the investor upon
- 73 -
exercising his/her right to enter into a sale and purchase of the

underlying asset.)". Investors who purchase typical shares or bonds
would not be obligated to make additional payment other than
the purchase price paid upon acquisition.
On the other hand, for example, in case of stock price index

futures, the amount paid on investment is a margin, and the
investor may be obligated to make payments calculated according
to the fluctuation of stock price index; therefore, such financial
investment falls under the category of derivatives. Such criterion
distinguishing securities from derivatives is the more developed
version of what was reflected in the definition of equity linked
securities and equity-linked
warrants under the previous Securities
and Exchanges Act.
- 74 -
Chapter 4
Regulation
of
the
Financial
Investment
Service
Industry
I. Classification of Financial Investment Services
Under Article 6(1) of the FSCMA, "financial investment services" are
defined as activities conducted continuously or repeatedly for the
purpose of earning a profit, falling under one of the six categories
of businesses: dealing businesses, brokerage/arranging businesses,
collective
investment
businesses,
non-discretionary
investment
advisory businesses, and trust businesses. The classification of

financial investment service into six categories is based on the
functions of each.
A financial investment service, however, must obtain a license to

engage in each financial investment
business,
brokerage/arranging
business,
and
trust),
or
business (in case of dealing
business,
complete
collective
registration
(in
investment
case
of
non-discretionary investment advisory business or discretionary

investment management business).
- 75 -
TABLE 17. TYPES AND CONCEPTIONS OF FINANCIAL INVESTMENT

BUSINESSES
II. Entry Regulation

In Korea, there are currently 42 types of financial functions and
each function is considered the basic authorization and registration
- 76 -
unit
of
financial
investment
business.
Depending
on
the
functional regulation of a financial investment business, financial

firms willing to carry on a financial investment business can apply
for authorization for registration by selecting the entire or partial
set of authorization or registration units. Financial investment firms
that
are
already
authorization
on
or
the
market
registration
by
can
apply
selecting
for
the
additional
necessary
authorization or registration units. Dealing businesses, brokerage

businesses, trust businesses and collective investment businesses
need authorization from the FSC, while investment advisory and
discretionary investment businesses need to register with the FSC.
License and registration of a financial investment business is

granted or accepted on the basis of a business unit which can be
made by reference to: (i) six types of financial investment services,
(ii) the type of financial investment product in which the line of
business
intends
to
brokerage/arranging,
transact
which
(in
of
the
case
securities,
of
dealing
and
exchange-traded
derivatives and OTC derivatives will be dealt with; in the case of

collectives investment business and trust business where to invest
among securities, real estate, special property, short-term financial
product), (iii) the scope of business (whether the contemplated
customers are non-professional investors or professional investors).
Different entry requirements apply to each business unit. The basic
policy of entry requirement for each business unit is as follows:
- 77 -
(i) As compared to registration, the entry requirements for a

financial investment business that requires authorization are stricter.
However,
the regulators may use their discretion in applying such
requirements.
(ii) Stricter requirements apply to a business that has direct

claim-obligation relationships (dealing business), a business that is
entrusted
with
investors'
asset
(brokerage/arranging
business,
collective investment business, trust business), and a business that

is not entrusted with assets (discretionary and non-discretionary
investment advisory business).
(iii)
In
the
realm
of
financial
investment
products,
stricter
requirements apply to OTC derivatives, exchange-traded derivatives

and securities.
(iv) In the realm of investors, stricter requirements apply to

dealings
with
non-discretionary
investors
than
those
with
professional investors.
For
instance, the
strictest
requirement
applies
to
businesses
dealing in OTC derivatives to non-professional investors, whereas

the least strict requirement applies to non-discretionary investment
advisory businesses dealing in bonds with professional investors. In
order to expand its business scope, a financial investment service
company may apply for license or registration for the business
unit it plans to "add-on" to its existing business.
- 78 -
TABLE 18. LICENSING UNITS OF THE FINANCIAL INVESTMENT

BUSINESS
- 79 -
III. Regulation of Market Conduct

1. Generally
The main purpose of FSCMA in integrating the financial regulations

is to enhance the investor protection regime in order to respond
to the increasing number of complex financial products such as
those in the derivatives market. Also notable is the increased
regulation and awareness about conflicts of interest that may arise
from the integration of various capital market activities, especially
those of asset management and securities business.
Originally, the laws related to investor protection were dispersed

throughout 16 separate laws according to the types of financial
activities, such as banking, asset management, insurance, and
futures, etc. These laws were established due to the inherent
nature of the finance industry, where the basic elements of
contract formation such as the principle of private autonomy,
level playing field (equal procedural guarantees), and freedom of

contract do not
fully apply. This is substantiated by two
arguments: (1) the market failure theory notes the failure of the
market; and (2) the theory recognizes asymmetric information consumer protection is necessary due to asymmetric information in
the market. Thus the duty to explain and the principle of suitability
are the specific embodiments of the principle of good faith, which
- 80 -
eliminates information asymmetry between the solicitor and the

investor and allows the investor to make an appropriate decision
for herself and to have full responsibility for her decision.
The duty to explain and the principle of suitability are the

prerequisites for financial institutions to claim the principle of
liability with fault. The responsibility falls on the investor if the
financial investment advisor had fully explained and fulfilled the
obligation of duty to explain, whereas it falls on the financial
investment advisor
if he engaged in unsuitable investment
activities.
The original laws regarding investor protection as stated in the

Securities and Exchange Act enforce the principle of liability with
fault through the duty to explain and the principle of suitability.
For instance, Article 43, Paragraph 1 of the Futures Trading Act
states that the futures advisor must inform the investor in writing
prior to any transaction of the potential losses that can be caused
by the sales and purchases of the futures. Similar wordings exist
in Article 56, Paragraph 2 of the Asset Management Business Act
and Article 10, Paragraph 2 of the Real Estate Investment
Company Act.
These articles may in part incorporate the duty to explain and the
principle of suitability; however, they also differ. For example, the
Enforcement Decree of the Securities and Exchange Act prohibits
- 81 -
undue recommendations such as scalping under Article 36-3.

However, it does not specifically mention the duty to explain.
To summarize, FSCMA was enacted in order to prevent regulatory

arbitration and non-existence of regulation as well as to prevent
the probable conflicts of interest that can arise from allowing the
management of more than one kind of business activity. FSCMA
incorporates
the
original laws
and
newly
organizes
investor
protection regulations into regulations on investment advisement,

investment advertisement, conflicts of interest, and disclosure after
issuing of securities.
The financial businesses were originally regulated in terms of

institutional regulations, as witnessed by the regulations dispersed
over more than 16 acts. However, FSCMA takes on functional
regulations, where the specific boundaries are set in terms of
investor advisement activities, not in terms of institutions by which
the activities are carried out. Investment recommendation was
formerly defined by the Financial Supervisory Service merely as a
business rule, but in
FSCMA it has been incorporated into the
law itself.
FSCMA also differentiates ordinary investors from professional

investors, making the duty to explain obligatory towards only the
ordinary investor. The differentiation is made based on standards
such as level of expertise and scale of assets owned. Such
- 82 -
differentiation allows financial activities to take place effectively

while enforcing protection towards unacknowledged investors.
The principle of suitability is also applied in this way. Functional

regulation allows investor protection to be enforced in institutions
involved in multiple business. Although banking and insurance
activities were formerly enforced respectively by the Banking Act
and writing. the Insurance Business Act, now banking duties and
insurance activities are obligated to follow the duty to explain
under Article 47 when they are related to investment advisement
activities, such as contracting investment related deposits or
insurance contracts. Also, it is further applied to all financial
activities including futures trading businesses, indirect investment
securities businesses, and real estate investment businesses which
were formerly enforced loosely in terms of duty to explain.
Furthermore, security companies and trust companies must observe
this duty as well. This is also true in the case of investor advisory
businesses
and
discretionary
investment
businesses,
which
originally had only the duty to inform investors in
The principle of suitability mentioned in Article 46 underscores that

the advisor must recommend financial products that suit the
objectives, experience, knowledge, and wealth of the investor. Thus
the investor must not only have resonable grounds to advise a
product, but it should also suit the individual background of the
investor being advised. Before the enactment of FSCMA, such a
- 83 -
rule had not been incorporated into law but was enforced by the
Financial Supervisory Service in practice. FSCMA made this rule into
law. Furthermore, the "Principle of Appropriateness" was added in
Article 46-2 in 2009, stretching the principle of suitability into the
field of derivatives.
2. Regulations on Investment Recommendations
(1) "Know Your Customer" and the Suitability Principle
A financial investment service company must confirm whether an

investor is a professional investor or a non-professional investor.
Also, it must understand the non-professional investor's investment
purpose, financial conditions, or investment experience through
interviews
or
questions
and
confirm
these
facts
with
the
non-professional investor before recommending any investments. It

must not recommend an investment that is not suitable for a
non-professional investors in light of such investor's investment
purpose, financial conditions, or investment experience.
(2) Duty to Warn of and to Explain Risks
When a financial investment service company recommends an

investment to a non-professional investors, it must explain in a
clear manner the contents of the financial investment products, the
risks of making the investment, the structure and characteristics of
- 84 -
such investment risks, fees, early redemption conditions (if any),

and the conditions of termination/cancellation of the contract, and
must receive a confirmation from the investor that the investor
understands these factors.
In providing such explanations, the financial investment service

company shall not misrepresent or omit material facts, that is,
facts
that
can
reasonably
influence
an
investor's investment
decision or facts that can substantially influence the value of a

financial investment product).
The previous Securities and Exchange Act was silent on this duty.
The
Financial
Supervisory
Commission's
Securities
Business
Supervisory Regulations provided that when an ordinary customer

is willing to open an account to trade in derivatives, margin
transactions,
foreign
currency
securities
or
other
equivalent
transactions involving high risk, a securities company had the duty

of explanation before opening the account. Now, this duty is
reflected in FSCMA.
A financial investment service company which violated this duty of

explanation must compensate the investor for his or her losses.
The amount of losses is estimated as follows: [the total amount
the investor paid or shall pay to acquire the financial investment
product] minus [the total amount the investor recovered or shall
recover through disposing of the financial product]. The burden of
- 85 -
proof that the losses are less than estimated amount is on the
financial investment service company. FSCMA is silent on who
bears the burden of proof as to the compliance or breach of the
duty to warn of and to explain risks.
(3) Duty of Appropriateness
Even if a financial investment service company does not make an

investment recommendation to its customers, it still needs to
evaluate information about a non-professional investor, such as
purpose of investment, level of wealth and investment experience
in order to sell derivatives, derivatives-embedded securities and
collective investment securities (that invest in derivatives and the
derivatives-embedded securities) to such an investors. Furthermore,
if the product that the non-professional investor wants to purchase
is not appropriate to
the investor of (i)
such investor, the company must inform
the details about the product, (ii) the risks of
investing in the product, (iii) reasons why the product is not

appropriate to the investor in light of his/her investment purpose,
level
of
wealth]
and
investment
experience,
and
obtain
confirmation from the investor that the investor has been so

informed.
(4) Prohibition of Certain Investment Solicitation Practices
The previous Securities and Exchange Act also banned various
- 86 -
unjust solicitation practices, such as profit-guaranteed solicitation

and solicitation based on conclusive judgment. Article 49 of the
FSCMA
expanded
Notably,
FSCMA
the
range
prohibits
of
unjust
'unsolicited
solicitation
calls'
and
practices.
'continuing
solicitation against a customer's will.
For sales of OTC derivatives, visits and phone calls not made at
the investor's request are prohibited. This prohibition is not
applicable to the solicitation of securities and exchange-traded
derivatives, as the regulators and legislators believed that such
activities posed no potential threat to customer protection and
sound orderly trading in this area.
Also, if the investor receiving an investment recommendation

expresses his/her intention to decline it, then the investment
advisor must cease recommending the investment. However, in the
case of recommending investment in an insurance contract with
investment risk, recommending re-investment, after a month has
passed is permissible.
(5) Establishment of Investment Solicitation Standards
A financial investment service company is required to prepare

detailed standards and procedures with which its employees shall
comply in making investment recommendations. It is also required
to prepare differentiated standards and procedures for derivative
- 87 -
products by reference to the types of investors, taking into

consideration the investment purpose, level of wealth, experience
in investment, etc., and announce it on its internet homepage.
The Korea Financial Investment Association drafted the model form

of investment recommendation standards, which were adopted by
most financial investment service companies.
3. Preventing Conflicts of Interest
A conflict of interest is "a situation in which the self-interest of a

person may conflict with a fiduciary duty that he owes to another,
or in which a person has potentially conflicting fiduciary duties to
two or more persons."
One example is where the firm's self-interests conflict with the

interests of its client, or alternatively, where the interests of two of
the firm's clients are at odds with each other. Under the FSCMA,
the likelihood of conflicts of interest is substantially high, because
a financial investment business entity is not prohibited by the law
to concurrently run the businesses through in-house operations,
and such an entity can perform multiple functions and engage in
numerous financial activities.
While permitting concurrently-run financial investment businesses

has provided opportunities for the business to strengthen its
- 88 -
competitiveness
through
the
advantages
generated
by
the
economies of scale and scope, there has been an increasing

need for strict rules on the business conduct that could give rise
to conflicts of interest. Unless effective tools for preventing conflicts
of interest are
provided, advancing investor protections, which is
one of the main objectives of the legislation of the FSCMA, will

not be achieved. Thus, upon the integration of the separate Acts
into the FSCMA, legislators expanded the scope of regulations in
the
pre-existing
law,
such
as
Article
43
of
the
Securities
Transaction Act and Article 134 of the Indirect Investment Asset

Management Business Act, and adopted new regulations to
prevent the increased possibility of conflicts of interest expected
under the new system. Specifically, FSCMA deals with the conflicts
of interest through:
(i) the duty of good faith as a general principle;

(ii) the specific prohibition on unsound business conduct;
(iii) the establishment of internal controls; and
(iv) the cut-off of exchange of information.
The above four categories of regulatory tools are designed to

prevent conflicts of interest by regulating the business conduct of
financial
investment
business
entities.
The
following
describes the elements in each category in detail.
(1) The Duty of Good Faith as a General Principle
- 89 -
section
The Article 37, Paragraph 1 of FSCMA imposes the duty of good

faith on a financial investment business entity. The duty of good
faith not only serves as a basis for regulating the specific
business conduct mentioned in the FSCMA, but also provides a
solid ground for regulating the business conduct that is not
specifically prohibited by the provisions.
In addition to the duty of good faith stated in this general

provision,
collective
investment
business
entities,
investment
advisory business entities and discretionary investment business

entities, and trust business entities owe the fiduciary duty of due
care as well.
Article 37, Paragraph 2 prohibits self-dealing, or representation on

one's own behalf and representation of both parties, because such
conduct is highly likely to lead to a conflict of interest. This
provision is significant because it recognizes the likelihood of
conflicting interest in the financial investment business arising from
self-dealing and representation of both parties. The structure of the
provision is comparable with that of the relevant provisions such
as Article 124 of the Civil Act or Article 398 of the Commercial
Act. Prior to the legislation of FSCMA, however, there were no
provisions that stated the conditions under which a financial
investment business entity is permitted as an exception to do
self-dealing and representation of both parties. Also, it was
- 90 -
unclear whether the Supreme Court's broad interpretation of the

Article 124 of the Civil Act can be applied to the financial
investment business. Thanks to the provision, it is now clear that
self-dealing and representation of both parties that undermine the
interests of its investors cannot be allowed unless there is a
justifiable reason.
(2) The Specific Prohibition on Unsound Business Conduct
With regard to the rules on business conduct by financial

investment business entities, the entities are classified into (1)
investment traders and investment brokers, (2) collective investment
business entities, (3) investment business entities and discretionary
investment business entities, and (4) trust business entities. The
provisions in each sub-section illustrate specific examples of
unsound business conduct that cause conflicts of interest, and
prohibit such
effectively
business conduct
protect
the
interest
by the
of
entities in order to
investors.
The
following
paragraphs explain some of the unsound business conducts that

especially lead to conflict of interest and how they are ruled under
the FSCMA.
A. Self-dealing and Representation of Both Parties
A conflict of interest commonly occurs from self-dealing, which is

the conduct of a fiduciary that consists of taking advantage of his
- 91 -
position in a transaction and acting for his own interests rather

than for the interests of the beneficiaries. Article 67 forbids
investment traders and investment brokers from simultaneously
acting on their own behalf and as the investment broker for
another
party
in
single
transaction
involving
financial
investment instrument. Also, pursuing its own or a third party's

interest
by
undermining
the
interest
of
specific
collective
investment scheme, a specific investor, or a specific trust property

is listed in the respective sub-sections as unsound business
conduct, and is thus prohibited.
Representation of both parties (so-called dumping) is the conduct

of an agent representing both one party of its principals and
another party of its principals at the same time in making a
contract with each other. This conduct is highly likely to result in
sacrificing the interest of one party to benefit the other party. The
problem of dumping is not a new phenomenon in the financial
investment business. As the possibility of dumping has certainly
increased since a financial investment
business entity is now
allowed to engage in various financial investment services, FSCMA

recognizes the need to regulate the representation of both parties.
Unless there is no possibility of undermining the protection of
beneficiaries
or
sound
trade
practice,
a financial investment
business entity is prohibited to trade its investment property for

another investment property managed by itself as well as for the
proprietary property of itself or its interested party.
- 92 -
B. Front-running
When a financial investment business entity is in the superior

position of being able to acquire business-related information
before it is disclosed to the public, the entity has a motive for
using the information to accommodate its own interest. Specifically,
front-running is the conduct of a financial investment business
entity "buying or selling any financial investment instrument on its
own account, or recommending a third party to buy or sell any
financial investment instrument, before closing a trade for an order
from an investor for buying or selling such instrument that my
produce a significant impact on the price of the instrument, where
it has received such order or there is a great possibility of
receiving such order."
Article 54 regulates front-running in such an inclusive manner that

no financial investment business entity shall use information known
to it in the course of its business and undisclosed to the public,
for its own or a third party's interest without a justifiable ground.
Also, any financial investment business entity is prohibited from
buying or selling financial investment instruments on its own
account or to solicit a third party to buy or sell such instruments
before putting the trade decision into action, because the decision
itself may produce a significant impact on the price of the
financial investment instruments.
- 93 -
C. Churning
Another unsound business conduct is churning. Churning occurs

when a broker or investment advisor exercises control over an
investor's account and frequently executes trades for the purpose
of generating commission.
For churning to occur, according to the jurisprudence in the United

States, the three elements must exist: (i) the broker must exercise
control over the account; (ii) the trading must be excessive
considering the investment objectives of the customer; and (iii) the
broker must act with intent to defraud the customer or with willful
and reckless disregard for the interests of the customer. In Korea,
the rulings of Supreme Court are understood to require the first
two elements in deciding whether conduct qualifies as churning.
The FSCMA extends the scope of unsound business conduct by

providing that financial investment business entities shall not
commit "[o]ther acts specified by Presidential Decree as likely to
undermine the protection of investors or sound trade practice."
Churning is specified and prohibited by the relevant provisions of
the Enforcement Decree of the FSCMA. According to the provisions,
financial investment business entities are not allowed to solicit
ordinary investors to invest too often without considering ordinary
investors' purpose of investment, level of wealth, experience in
- 94 -
investment, etc, or to trade financial investment instruments with

the investment property too frequently, disregard the extent of the
discretion in investment, the purpose of investment, or other
factors.
D. The Establishment of Internal Controls
A system of effective internal controls addressing conflicts of

interest is an essential element in protecting the interests of
investors. The FSCMA provides mechanisms to prevent conflicts of
interest by obligating financial investment business entities to set
up internal control systems.
Article 44, Paragraph 1 requires that a financial investment

business entity shall probe and assess the likelihood of conflicts of
interest,
and
such
conflicts
shall
be
properly
controlled
in
compliance with the method and procedure prescribed by internal

control guidelines. The internal control guidelines refer to the
appropriate guidelines and procedures that shall be complied with
when its executives or employees perform their duties so as to
abide by the FSCMA and the subordinate statues, manage its
assets in a sound manner, prevent conflicts of interest, and
protect investors in every aspect.
Moreover, a financial investment business entity must appoint

compliance
officers
who
shall
be
- 95 -
responsible
for monitoring
compliance
with
the
internal
control
guidelines,
investigating
violations of the internal control guidelines, and reporting to the

audit committee or the auditors.
Preparing the
internal
control guidelines, however, does not
necessarily eliminate all the possibilities of conflicts of interest.

Thus, if it is anticipated as a result of its probe and assessment
that there is a likelihood of conflicts of interest, a financial
investment business entity is required to notify the relevant
investors thereof in advance. This provision may be interpreted to
require a notification of the likelihood of conflicts of interest in
advance, but not an informed consent of the investors.
Lastly, the Article 44, Paragraph 3 requires that a financial

investment business entity shall abstain from commencing trading
or any other transaction if it is found difficult to reduce the
likelihood of a conflict of interest.
E. The Cut-off of Exchanges of Information
The cut-off of exchanges of information, commonly referred to as

the "Chinese Wall" is a useful means of avoiding conflicts of
interest. The Chinese wall can take several forms: a formal
separation
of
powers
between
management
and
business
decision makers on the one hand and administrative functions on

the other hand; a physical separation and limited contacts
- 96 -
between personnel from different parts of the institution where

there are potential conflicts of interest. Under Article 45 of the
FSCMA, if there is a great possibility of conflicts of interest
between financial investment business run by a single financial
investment business entity, or between a financial investment
business entity and its affiliated company, the entity shall not
furnish information related to trading of financial investment
instruments,
assign
any
of
its
executives
or
employees
to
concurrently-run offices, use an office space or an electronic

computer system in common and commit other acts specified by
Presidential Decree as an act likely to cause a conflict of interest.
The Chinese wall attempts to prevent conflicts of interest by

preventing
the
flow
of
material,
nonpublic
information,
thus
allowing other departments to act freely without the influence

arising from organizational ties.
- 97 -
Chapter 5
Corporate Disclosure: Listing and Public Offers
I. Corporate Disclosure System
The corporate disclosure is a system designed to protect investors
by allowing them to make informed investment decisions and to
enhance fair trading and the overall stock market's operational
efficiency by making stock issuers and listed companies to disclose
their
major
management-related
information.
The
provisions
regarding disclosure in the Commercial Code (CC) and the FSCMA

are different in that the disclosure obligations under the CC are
mainly for the shareholders on the corporate shareholder registry
(Article 302, 474) while those under the FSCMA are for the benefit
of
general investors. The investors under the FSCMA are the
investors on the financial investors products, which is broader than

the shareholders under the corporate shareholder registry.
addition,
the
disclosure
regulations
under
the
FSCMA
In
cover
government bonds, municipal bonds, private bonds, beneficiary

certificate, depository receipt, foreign securities and etc.
1. Public Disclosure Obligations under the CC
- 98 -
It is aimed for protecting shareholders and creditors :
- Disclosure obligations on AOI, BOD Minutes

- Obligations on sending or disclosing Business Report, B/S, P/L,
CPA audit report
- Minority shareholders rights to inspect accounting books
2. Public Disclosure Obligations under the FSCMA
It is aimed for protecting present and future investors ;

Primary Market disclosure (Public offer)
- Registration Statement
- Registration Statement on Corporate Bond
- Prospectus
- Report on record of securities issuance
Secondary Market disclosure
- Periodic disclosure: Business report, Semi-annual report, quarterly
report. consolidated financial statement
- Timely disclosure: major material facts that might affect the
business management of a company
Special Disclosure:
- Public Tender Offer (Article 133(1))
- Disclosure of substantial share holding (5% Rule) (Article 147(1))
- Proxy Solicitation (Article 152(2))
- 99 -
Figure 4. DISCLOSURE PROCESS
* Note Market measures - Trading suspension, designation as administrative stock,

designation as unfaithful disclosure corporation, etc.
* source: KRX website
II. Primary Market Disclosure System
- 100 -
1. Generally
The stock markets can be divided into the primary market where
the investors first takes the issued stock by a company, and the
secondary market where the trading of already issued stock occurs
among investors. To ensure the accurate and timely disclosure of
business information regarding assets and management conditions,
etc. or security matters by listed corporations, FSCMA stipulates
certain disclosure obligations. The disclosure system under FSCMA
is divided into disclosure in the primary market and disclosure in
the secondary market.
The disclosure system under the primary market creates an
environment where investors make informed investment decisions
based on comprehensive information. Corporations that issue
securities are required to disclose public securities registration
statements, business prospectuses, records of securities issuances,
etc.
The essence of primary market regulation consists of the filing of
registration statement and the delivery of prospectus. In principle,
a public offering can only be made after filing a registration
statement with the FSC and the acceptance thereof. Entering into a
contract with an investor can be made only after the registration
statement becomes effective. After the filing of the registration
statement, the issuer in a public offering shall submit a prospectus
to the FSC, and a financial investment company cannot sell
securities or cause them to be sold to investors before delivering
- 101 -
the prospectus to the investors.

Public offering covers the mojip, i.e. the soliciting of an offer for
newly issued securities towards 50 or more investors as calculated
pursuant to the method set forth in the Presidential Decree, and
maechool, i.e. offering for sale of, or soliciting of an offer for

purchase of outstanding securities with 50 or more investors as
calculated pursuant to the method set forth in the Presidential
Decree.
Whether a public offering is at issue determines whether the
public
disclosure
obligation
exists.
Therefore,
the
offering
or
solicitation for sale of outstanding securities for investors of less

than 50 are not deemed to be a public placement and it is a
private placement such that the public disclosure rules do not
apply.
In calculating 50 persons, there is 6 month integration
rule whereby, with respect to the securities of the same kind,
the number of persons who have received a solicitation by a
method other than public offering within 6 months preceding the
date when solicitation of an offer is made are added together.
Also, the
investors with special relationship with the
issuer
(Yeon-Go-Ja) or some expert investors(Jeon-Moon-Ga) or (in case

of a public offering for sale of outstanding securities) the person
who acquired the securities at the exchange are excluded form
the calculation of 50 persons(Article 11(1), Presidential Decree of
FSCMA).
However, if there is the number of investors who
- 102 -
received solicitation of an offer is less than 50, but there is a

possibility that the securities can be transferred to 50 or more
persons within 1 year after the issuance of stocks, then the
solicitation of an offer shall be deemed as a public offering
(Article 11(2), Presidential Decree of FSCMA).
Figure 5. METHOD OF DETERMINING ON PUBLIC OFFERING/PRIVATE
PLACEMENT
There are securities exempted from filing registration statements,

such as Government Bonds (Korea Treasury Bonds, KTB) and
municipal bonds, bonds issued by public institutions or special
entities under special laws, and other securities specified in the
Presidential Decree as securities in which investors are sufficiently
- 103 -
protected
by
public
disclosure
such
as
the
debt
securities
guaranteed by Government or local government or the public

offering for sale of securities held by Government or a local
government.
The issuer is exempt from the registration filing obligation for a
small-sized offering, if neither the following conditions is met.
(i) [In the case where the proposed offering, by itself, would
become public offering based on the number of person who
received the solicitation or the application of a deemed public
offering], if the aggregate of (a) the amount of proposed public
offering and (b) the total amount of the public offering made
within 1 year prior to the proposed public offering, for which a
registration statement was not filed, is one billion won or more
(provided that if within such 1 year a registration statement was
filed, the period commencing after the filing of such registration
statement).
(ii) [In the case where the proposed offering, by itself, constitutes
a private placement, but would ultimately constitute a public
offering due to the application of the 6 month rule] if the
aggregate of (a) the amount of the proposed public offering and
(b) the total amount of the private placements made within the
preceding 6 months is one billion KRW or more.
Even if the above-mentioned exemption for a small-sized offering
is applicable, the issuer may, depending on the issue amount, be
obligated to make certain minimum disclosure (other than filing of
a registration statement).
- 104 -
2. Registration Statement
No securities shall be publicly offered or sold, unless and until a
registration statement filed by the issuer in connection with the
public offering or sale of the securities with the FSC is accepted
by the FSC (limited to cases where the total amount securities by
Presidential Decree, reaches or exceeds the amount prescribed by
10 billion KRW (Article 119(1)).
The Registration Statement is a key document in public disclosure
system in the offer and sales of securities for guaranteeing the
truthfulness of the issuer and the issued securities, thereby
preventing the securities fraud.
An issuer of securities is responsible for the filing of registration
statements
in case of (i) a public offering for a new issuance
and (ii) a secondary public offering for outstanding securities.

As for the contents of the registration statement, the summary of
the
company, matters regarding the
public offering, matters
regarding the issuer, and the documents attached including the

AOI, BOD and Shareholders meeting minutes, and etc shall be
included (Article 125(1) Presidential Decree). The representative
directors and directors who are responsible for filing have to
confirm and review as to the absence of false statement on
material information or the omission of the material information
and sign this registration statement(Article 119(5)). This was added
to
strengthen
the
management
responsibility
accounting and management policies.
- 105 -
for
transparent
As for forward-looking information, or so-called soft information,

the forecasts or prospects concerning the issuers future financial
status or results of operation may be included in a registration
statement (Article 119(3)). However, the disclosure of forward-looking
statement must meet the following conditions (Safe Harbor Rule,
Article 125(2) i, ii, iv): i) there must be an indication that the
relevant information is forward-looking information, ii) the basis for
assumptions or judgements must be specified, iii) a warning that
the forecasts may differ from the actual result must be included.
There is a Shelf-Registration statement that can be used by
well-known seasoned investors (WKSI, Article 121(6) of Presidential
Decree) and certain issuers (Article 119(2)).
If an issuer files the shelf-registration statement and it is accepted
by the FSC, the issuer is not required to separately file a
registration statement for any subsequent public offering specified
in the shelf-registration statement during the scheduled period of
the
issuance
in
the
shelf-registration
statement.
For
each
subsequent public offering, a supplement to the shelf-registration

statement shall be submitted to the FSC.
Under FSCMA,
in the case that documents, including reports, are
filed with FSC, SFC, FSS, KRX, KOFOIA or KSD, filing can be made
by an electronic document using an electronic communication
network (Article 436).
The
FSC
shall not
refuse
the
acceptance
- 106 -
of
registration
statement unless the registration statement falls in ether or of the

followings:
(i)
if
the
registration
statement
fails
to
meet
the
required
formalities; or
(ii) if the registration statement contains a false statement of
material information or omits material information
Prior to the FSC/s acceptance of the registration statement,
investment solicitation of an offer is prohibited.
3. Prospectus
The FSCMA does not provide the definition of prospectus, but it is
a document (including electronic document) prepared for the
purpose of soliciting an offer toward investors in a public offering
(Article 123, 124).
There are 3 types of prospectus: (i) prospectus, (ii) preliminary
prospectus, (iii) summary prospectus.
(i) Prospectus can be used after the effectiveness of filing the
registration statement and must be delivered to the investor before
executing a contract except where the investor is a professional
investor or certain other investor prescribed under the Presidential
Decree or investors who expressed its refusal to receive the
prospects or the investor who intends to acquire the same type of
collective investment securities that it has already acquired.
(ii) Preliminary prospectus is used during the period after the
- 107 -
acceptance of filing and before the effectiveness of the filing(Article

124(2)).
(iii) Summary prospectus is used to after the acceptance of the
filing
when
solicitation
of
an
offer
is
made
through
(a)
advertisement through newspaper, broadcasting or magazine, (b)

guide or advertisement
leaflets or (c) electronic transmission
means.
The prospectus must be submitted to the FSC on the date when
the registration statement is effective and it must be kept at the
head office of the issuer, the FSC, the KRX and the places where
the solicitation business occurs. The preliminary prospectus and the
summary prospectus must be submitted to the SFC when the filing
of the registration statement with the FSC.
4. Measures for Effective Public Disclosure Regulations

(1) Administrative Sanctions
The FSC can request for the filing of a Corrected Registration
Statement
by the
issuer (Article
122(1))
and can
impose
correction order or administrative sanctions such as the suspension

or prohibition of issuance, public offering or sales or any other
trading
of
securities
(Article
132).
An
Administrative
penalty(kwa-jing-keum) can be made up to the lesser of 3% of

the offering amount and 2 billion KRW (Article 429).
(2) Criminal Sanctions
- 108 -
The person who proceed with a public offering without filing

registration statement or violated regulation regarding prospectus,
made a false statement in registration statement or prospectus, or
representative directors who signed the registration statement with
knowledge of a false statement of material information included
therein, or the CPAs, appraisers or credit rating agencies who
certified the accuracy of the statement with knowledge of a false
statement of material information included therin or omission of
material facts, shall be sentenced to imprisonment
or to a fine
(Article 444, 446).

(3) Civil Liabilities
There is a civil liabilities provision for damages incurred by the
false statements in material facts or omission of statement of
material facts in a registration statement or prospectus. The
material facts
are
matters
which
may
materially
affect
the
investment decision by a investor or the value of the relevant

financial investment products (Article 47(3)).
The responsible persons are the issuer; directors of the issuer at
the time of filing(Article 125); persons under the Article 401-2 of
the Commercial Code who instructed or implemented the filing;
CPA, appraiser, credit rating agencies; a person who consented
the inclusion of its opinions and confirmed the content of this
opinion; a person who entered the underwriting agreement; a
person who prepared or delivered the prospectus; and the owner
of the securities offered for the public sale(Mae-chool).
- 109 -
The burden of proof regarding the willful misconduct/negligence is

shifted to the issuer and other responsible persons. There is a
rebuttable presumption of the amount of damages under the
Article 126.
III. Disclosure in the Secondary Market

1. Generally
The
system requires listed corporations
to
disclose
business
management activities related to the trading of securities among

investors
in
the
secondary
market.
Such
disclosures
include
periodic, timely, and special disclosures.

(i) Periodic disclosures : the business reports after the end of a
fiscal year, semiannual reports, and quarterly reports, etc.
(ii) Timely disclosures : major business details as outlined in the
FSCMA and the Disclosure Regulations of the KRX-Stock Market
(iii) Special disclosures : merger, spin-off, reports of business
takeover & transfer, reports of acquisition & disposal of treasury
stocks, etc.
Listed
companies
submitting
information,
in
case
disclosure and fair disclosure, must submit the following:

- The KRX accepting and examining the information
- 110 -
of
timely
- If necessary, implementing appropriate market measures

- Transmitting the information to FSC
In case of periodical report and report on material facts, etc, listed
companies must submit the following:
- The FSC accepting the information
- Transmitting the information to KRX
- Disclosing the information via;
KIND distribution system (internet website)
DART distribution system (internet website)
KOSCOM network
Others
2. Periodic Disclosure
Periodic disclosure includes annual, semi-annual and quarterly
reports.
Periodic disclosure is required for the stock-listed companies and
other companies prescribed under the Presidential Decree(a listed
company with more than 500 shareholders and etc).
Periodic
disclosure
business
details.
means
When
periodically
the
disclosing
number of
to
investors
shareholders of
the
registered corporation falls below 300 or when the submission of

business reports is impossible or ineffective due to circumstances
such as bankruptcy, etc. results and financial conditions within
fixed periods, the submission of periodic disclosure is not required
(Article 159(1))
- 111 -
As for the Business Report submission, the business results, etc.

from
the
preceding
business
year
must
be
disclosed
and
submitted to the FSC and KRX within 90 days after the end of
that business year. As for the Semi-annual Report, the business
results, etc. from the first six months of the business year must
be disclosed and submitted to the FSC and KRX within 45 days
after the end of the semi-annual period. As for the Quarterly
Report, the business results, etc. from the first three months and
nine months must be disclosed and submitted within 45 days
after the end of each quarterly term. As for the Main Statements,
matters related to the companys purpose, trade name, business
details,
officer
compensation,
finances,
and
other
matters
determined by executive orders (Article 168 Presidential Decree of

the FSCMA).
In case of a foreign company primarily listed on an overseas
exchange, it should publish the annual business report and
semi-annual/quarterly reports within 10 days from date of reporting
to the overseas exchange.
In case of the violation of periodic disclosure obligation, there are
(i) administrative penalty (kwa-jing kum)(Article 429), (ii) Civil liability
(Article 162), (iii) Criminal liability (Article 444).
(i) Administrative penalty: The FSC may impose the administrative
penalty within the limit of the 10/100 of the average daily trading
amount(no more than 2 billion KRW, if not traded or it is more
than 2 billion KRW) in case of not submitting periodic disclosure
documents or submitting false statement or omission in material
- 112 -
facts in the disclosure materials.

(ii) Civil Penalty: In case of the damages incurred by the person
who acquired or disposed of the securities issued by a company
obligated to submit the business report due to the false statement
in material facts or omission of the material facts in the annual
business report, semi-annual or quarterly report or the documents
attached thereto, the following persons shall be liable: the person
who submitted the
relevant report; the directors obligated to
submit the business report at the time of its submission; the

person falling under the Article 401-2 under the Commercial Code;
the CPAs, appraiser, credit rating agencies who certified with their
signature thereon the descriptions made in the relevant report
were true and correct; a person who consented to the inclusion of
his/her opinion on evaluation, analysis or confirmation in the
descriptions in the relevant report and the documents attached
thereto and confirmed the contents as described therein.
(iii) Criminal Liability: In case of the false descriptions in the
material facts or the ommission of material facts in the relevant
report, the person who
made the false description or omitted the
material facts or who signed the reports with knowledge of the

fact and the CPA, appraiser, credit agencies who certified the
truthfulness or accuracy of the business report with knowledge
shall be punished pursuant to the Article 444. The violation of
business report submission obligations, the violators shall also be
punished pursuant to the Article 446.
3. Timely Disclosure
- 113 -
Timely disclosure is one of the key self-regulatory measures that

the KRX instituted to facilitate the equal access to information
within the securities market on an on-going basis. FSCMA requires
important corporate information be disclosed as it occurs without
delay by implementing the Reports on Material Facts (Article 161).
The Material facts prescribed by the Article 161 include: a full or
partial
suspension
of
company,
application
of
business
rehabilitation plan under the Debtor Rehabilitation and Bankruptcy

Act, transfer of essential business or assets, among others.
Specific corporate matters to be disclosed are stated in the
disclosure regulations promulgated by the KRX. The KRX provides
the disclosure requirements for the Stock Exchange and KOSDAQ
respectively. The listed companies must report the details of
important corporate matters or management decisions to KRX
without
delay.
As
for
the
submission
deadline,
same
day
disclosure must be executed on the day it occurred, while next

day disclosure must be executed within one day.
When there are rumors or news about important corporate
matters and its equivalent, or sudden drastic changes in stock
prices or trading volumes, the KRX stock market can request the
listed corporation concerned to inquire into such rumors/news and
clarify the situation for the fair trading of securities and protection
of investors. The concerned listed corporation must comply with
such requests.
- 114 -
Matters subject to the requirement to inquire and disclose are as

follows.
-
Important
corporate
matters
(Article
of
the
Disclosure
Regulation of KRX-Stock Market)

- Important corporate matters of subsidiaries (Article 8 of the
Disclosure Regulation of KRX-Stock Market)
- Important corporate matters of REITs (Article 9 of the Disclosure
Regulation of KRX-Stock Market )
- Important corporate matters of shipping investment companies
(Article 10 of the Disclosure Regulation of KRX-Stock Market)
- Important corporate matters of SPAC (Article 11 of the Disclosure
Regulation of KRX-Stock Market)
- Matters subject to the fair disclosure (Article 12 &13 of the
- Matters subject to the voluntary disclosure (Article 28 of the
- Matters corresponding to the requested subjects as mentioned
above
As for compliance with the request to inquire and disclose, if a
business receives a request to inquire in the morning, then it must
reply by the afternoon of the same day. If it is received in the
afternoon, then the business must reply by the morning of the
day after. However, if a business receives an inquired disclosure
related to market conditions, then it must reply within a day of
the request.
With regard to matters apart from key management issues (a
- 115 -
portion of which is determined by bylaws), the system allows for

the disclosure of key management information or future plans
based on the self-regulated judgment of the listed corporation.
4. Fair Disclosure
Fair Disclosure rule was introduced in November 2002. The rule

requires
that
if
company
deliberately
discloses
certain
information to selective investors, the same information should also

be disclosed to the general public
in the market before the
information is provided to the selective investors. If the information

is disclosed to selective investors by accident or error, the
company
should
also
provide
such
information
to
ordinary
investors on the same day.
5. Voluntary disclosure
The listed company may disclose in its discretion the information

that might have impact on its business or the investors' investment
decision.
6. Special disclosure
(1) Disclosure of Substantial Shareholding - 5% Rule
A substantial shareholder must make a report to the FSC and KRX
- 116 -
if it holds equity securities totaling 5% or more of the total

number of issued voting shares of a company whose securities
are listed on the KRX (Article 147(1)).
As for its's application, the term "hold" means as follows;

(i) where the equity securities are owned for its own account in
the name of whomever;
(ii) where any claim for the delivery of the equity securities is held
in accordance with the provisions of law or contract (i.e., a legal
or contractual right to acquire)'
(iii) where voting rights (including the rights to instruct the exercise
of the voting rights) of the equity securities are held in accordance
with the provisions of law or contract including money trust or
collateral contract (e.g., security agreements where the collateral
taker holds the voting right);
(iv) where the power to decide on acquisition or disposition of the
equity securities is held in accordance with the provisions of the
laws or contracts including money trust or collateral contracts (i.e.,
dispositive power over the voting rights);
(v) where any right to unilaterally complete the purchase and sale
contract of the equity securities and become the purchaser to the
contract is held (i.e., a legal right to acquire where the conditions
to the contract are within the potential shareholder's control);
(vi) where any call option right whose underlying assets are the
equity securities is held; or
(vii) where employee stock options are held
- 117 -
Equity securities include any of the following issued by the issuer'

:
(i) voting shares;
(ii) warrants for new voting shares;
(iii) convertible bonds which are convertible into voting shares;
(iv) bonds with warrants for new voting shares; or
(v) exchangeable bonds which are exchangeable for any of the
securities set out in (i)- (iv) above.
In addition, any of the following issued by a person other than

the issuer are included in equity securities in applying 5% rules.
(i) securities depository receipts where the underlying securities are
any of those listed (i)- (v) above;
(ii) exchangeable bonds which are exchangeable for depositary
receipts or any or the securities issued by the issuer above; or
(iii) derivative-linked securities whose underlying assets are any of
the securities set out in (i) or (ii) or paragraph above (i) - (v);
provided the person is entitled to acquire the title to the securities
by exercising rights.
Shares that are beneficially owned by the substantial shareholder

but held in a third party's name or held by the substantial
shareholder in any of the other capacities
must be aggregated
with the substantial shareholder's other holdings (Article 147(1) and
- 118 -
133(3)). In addition, the holdings of specially related persons must

be aggregated with whose of the substantial shareholder.
As for the timing of report, if the shareholder's purpose is

participation in the management, it must make either an initial or
subsequent material change report by close of business on the
fifth business day after the disclosable event (Articles 147 (a) and
147 (4)).
If the shareholder's purpose is not participation in management, it

must make an initial report by close of business on the fifth
business day after disclosable event. When there is a change in
the holding of 1% or more of the total shares of the issuer, the
shareholder must make a subsequent report on or before the
tenth day of the month following the month in which such change
took place (Article 154(3)). In addition, a change in the purpose of
the
holding
(from
simple
investment
to
participation
in
management) must be made within 5th business days of the

change.
(2) Disclosure of Proxy Solicitation
A person who intends to solicit the exercise of a voting right by

proxy shall, prior to or simultaneously with the soliciting, deliver a
proxy form and reference materials to the shareholder. Such
person shall also submit copies of the proxy form and reference
- 119 -
materials to the FSC and the KRX no later than 5 business days
prior to the scheduled date for the delivery of such documents to
the shareholder and procured that such documents kept and the
head office, branch and other business offices, etc. during the
period of 5 business days prior to the delivery of such documents
to the shareholder until the date when the shareholder's
meeting
is finished (Article 152 and 153).
The proxy form shall be prepared in such a manner as to allow

each solicited shareholder to express whether it approves or
disapproves each item on the agenda to be resolved at the
shareholders' meeting.
Voting in violation of the above disclosure
rule would constitutes a
cause for the
cancellation of the
resolution at the shareholder's meeting. A person who suffered

damages due to the violation of the disclosure rules may exercise
a tort claim under the Civil Code.
(3) Public Tender Offer/Take-over

Public tender offer means (1) making an offer to a multiple number
of unspecified persons to purchase(including an exchange with other
securities)
voting
stocks
or
any
other
securities
specified
by
Presidential Decree(the Stocks, Etc.) or soliciting them to make an

offer to sell(including an exchange with other securities) the Stocks,
Etc.,
and
(2)
purchasing
them
outside
the
securities
exchange(including a market in a foreign country similar to it).

public
tender
offer
regulations
are
- 120 -
necessary
for
The
protecting
shareholders who may make a hasty decision to purchase the shares

without having sufficient information and providing fair treatment to
the shareholders.
The disclosure obligations for public tender offer prescribed under the
Article 133 (3) are as follows: A person who intends to make
apurchase, etcof the Stocks, etc from 10 or more shareholders
within 6 months, outside the securities exchange shall make a public
tender
offer,
if
the
aggregate
of
the
number
of
stocks,
etc
held(including those owned and similarly possessed, as prescribed

further by Presidential Decree; hereafter the same shall apply in this
Section and Section 2) by him and herself and his/her specially
related persons(referring to those who have a special relationship as
determined by Presidential Decree) or exceeds 5/100 of the total
number of the stocks, etc(including cases in which a person whose
aggregate of the number of stocks, etc. held by the person and
his/her specially related persons reaches or exceeds 5/100 of the
total number of stocks, etc. makes a public tender offer for purchase,
etc of such stocks, etc) : Provided, That stocks, etc. may be
purchased by any means other than public tender offer, in the case
of purchasing, etc. prescribed by Presidential Decree, considering the
purpose and form of purchasing, etc., and the possibility of causing
a detriment to other shareholdersinterests.
The securities eligible for public tender offer which is the term
voting stocks or any other securities specified by Presidential
Decreein Article 133(1) is by the Article 139 of the Presidential
Decree
of the Act means any of the following securities related to
voting stocks: 1. Securities issued by a stock-listed corporation, which

falls under any of the following items: (a) stocks; (b) instruments
- 121 -
representing preemptive rights to new stocks ; (c) convertible bonds;

(d) bonds with warrant; (e) exchangeable bonds with a right to claim
to exchange them with stocks under any provision of items (a)
through (d); (f) derivative-combined securities based on, as the
underlying asset, the securities under any provision of items (a)
through (e)(limited to those with rights to acquire the underlying asset
by exercising such rights); 2. Securities issued by any person other
than a stock listed corporation under subparagraph 1 and falling
under any of the following items: (a) securities depositary receipts
related to securities under subparagraph 1; (b) exchangeable bonds
with a right to claim to exchange them with securities under
subparagraph 1 or securities under item (a); (c) derivative-combined
securities
based
on,
as
the
underlying asset,
securities
under
subparagraph 1 or securities under item (a) or (b).

As for the scope of the specially related person, the term those
who have a special relationship as determined by Presidential
Decreein the Article 133(3) of the Act means specially related
persons and joint holders(Article 141 of the Presidential Decree).
The
possession similar to ownership prescribed under the Article 142 of

the Presidential Decree are as follows: 1. Where stocks, etc are
owned on a personsown account, regardless of in whose name
they are held; 2. Where a person holds rights to claim delivery of
stocks, etc. in accordance with a provision of an Act, as a result of
a transaction, or under any other contract; 3. where a person holds
voting rights(including the power to instruct to exercise voting rights)
of stocks, etc in accordance with a provision of an Act or under a
money trust deed, security agreement, or any other contract; 4.
where a person holds rights to acquire or dispose of the relevant
stocks, etc under a provision of an Act or under a money trust deed,
a security contract, a discretionary investment contract, or any other
- 122 -
contract; 5. Where a person holds rights to complete a trade by

unilateral reservation for trading stocks, etc and acquires the status
of purchaser by exercising such rights; 6. Where a person holds
contractual rights under Article 5(1) 2 of the Act to a contract for an
underlying asset of stocks, etc and acquires the status of purchaser
by exercising such rights: 7. Where a person holds stock options and
acquires the status of purchaser by exercising such option.
As for the exemption for public tender offer regulations, the Article
133 (3) of the Act and the Article 143 of the Presidential Decree
allows some exceptions for public tender offer rules. The stocks, etc
may be purchased by any means other than public tender offer, in
the case of purchasing, considering the purpose and form of
purchasing, etc and the possibility of causing a detriment to other
shareholdersinterests and these are as follows: 1. Purchase etc of
stocks, etc for the purpose of retirement; 2. purchase of stocks in
response to the exercise of appraisal rights; 3. purchase etc of
stocks, etc by exercising rights to instruments representing preemptive
rights to a new issue of stocks, convertible bonds, bonds with
warrant, or exchangeable bonds; 4. purchase, etc of stocks, etc by
exercising rights to derivative-combined securities; 5. purchase, etc of
stocks, etc from a specially related person; 6. purchase of stocks by
intermediating a trade of securities in accordance with Article 78(1) of
the Act, 7. Purchase, etc of stocks, etc specified and publicly notified
otherwise by the Financial Service Commission as cases unlikely to
undermined other investorsinterests.
As for the procedure for public tender offer, the public tender offer
usually starts with the public notice of public tender offer(Article 13)
and filing of the public tender offer statement to the FSC and the
- 123 -
Korea stock exchange(Article 134).
Then, the public tender offerer
need to send the copy of public tender offer statement to the issuing
corporations after submitting it to the Korea stock exchange(Article
135).
After preparing the public tender offer prospectus and keeping
it for public inspection, the public tender offer starts. Accepting offers
are made during the public tender period(more than 20 days after
the public tender offer period starts)(Article 137). Then pro rata
allocation(in case of the over limit offers are made) or purchase for
stocks are made. The public tender offerer send the public tender
offer notice to the tendering shareholders and file the public tender
offer result report to the FSC.
In case of violating the tender offer regulations, the person who
violates Article 133(3) or 134(1) or (2) in purchasing stocks and etc,
may not exercise voting rights for the stocks(including the stocks
acquired by exercising any right related to the stocks, etc) from the
day of such violation, and the FSC may issue an order to dispose of
such stocks, etc(including the stocks, etc acquired by exercising any
right related to the stocks etc) within a given period of time, not
exceeding 6 months(Article 145). The Financial Supervisory Service
have several measures for investor protection including the inspection
of the accounting books, documents, and other materials of tender
offerers and his/her specially related persons or tender offer agent,
and other related persons(Article 146(1)) or ordering the tender offerers
and his/her specially related person or tender offer agent to disclose
relevant facts to the public and making a correction and suspending
or prohibiting purchasing through the tender offer or taking any
measures
in
case
of
violating
the
tender
offer
public
notice
requirement under Article 136(5) or false description or omission of

material fact in the tender offer public notice(Article 146(2)).
- 124 -
The FSC also can impose penalty surcharge on violation in tender

offer public disclosure within limit of 3/100 the total amount of
contemplated
purchase
written
on
the
relevant
tender
offer
statement(or 2 billion won if the amount exceeds 2 billion won)

pursuant to Article 429(2).
The tender offerors liability for damage is prescribed under Article
142. As for the criminal sanction, the person who made a false
description or representation of a material fact in a public notice or
document such as public notice of tender offer or tender offer
statement, corrective registration statement or public notice, tender
offer
prospectus(Article
444
item
15)
shall
be
sentenced
to
imprisonment fro not more than 5 years or to fine not exceeding

200 million won.
7. Submittal of disclosures
A listed company shall submit its disclosure via the FSS's electronic
disclosure system DART (Data Analysis, Retrieval and Transfer
System)
or the
KRX's
KIND
Korea
Investor's Network for
Disclsoure System), depending on the type of disclosures.
When a report is made to the FSS via its DART System, it shall be
regarded as having also been made to the KRX.
webpage
Disclosure
submittal
FSS' s DARY System

http://dart.fss.or.kr
http://filer.fss.or.kr
- 125 -
KRX's KIND System

htp"//kind.krx.co.kr
http://kind-filing.krx.co.kr
system
- 126 -
Chapter 6
Unfair
Trading:
Insider
Dealing,
Misleading
Statements, Market Manipulation, Unjust Trading

and Unfair Practices
I. Overview
The FSCMA aims at the creation of an effective market for, and
the fair trading of, financial investment products.
on
The prohibitions
unfair trading, as well as the public disclosure system and
the regulations on the financial investment companies, contribute

to
realize
its
goal.
The
principle
underlying
the
regulations
governing the financial investment business (including expanding

the scope of financial investment products and finance investment
business area) is sufficient investor protection. FSCMA improved the
regulation
investment
of
fraudulent
products
and
transactions
introduced
with
multiple
comprehensive
financial
anti-fraud
provisions to regulate fraudulent transactions that are difficult to

regulate through traditional insider trading regulations and price
manipulation regulations.
The regulations on unfair trading under FSCMA are divided into
- 127 -
the following three types:
(i) Insider Trading (Article 174), (ii)
Market Price Manipulations (Article 176), (iii) Unjust Trading-general

fraudulent activities (Article 178).
The previous Securities and
Exchange Act prohibited 2 types of unlawful transactions: insider

trading and price manipulations.
FSCMA introduced a new
provision prohibiting the general fraudulent transactions.
FSCMA
maintains the basic structure of the regulations under the SEA, but
expands the scope of insiders, financial investment products and
trading subject to the regulations.
The securities subject to unfair trading regulations are (i) securities
(excluding the ordinary corporate bonds and beneficial securities)
issued by that corporation; (ii) securities depositary receipt related
to the securities (i) above; (iii) exchangeable bonds issued by a
company other than that corporation which can be exchanged
with (i) or (ii,; and (iv) a financial investment product whose
underlying assets are only the (i), (ii), or (iii), which are derivatives
linked securities, exchange traded derivatives and OTC derivatives.
Under the previous SEA, only the securities issued by that
corporation was regulated, but FSCMA covers the securities whose
underlying assets are the securities related to that corporation.
II. Prohibiton of Insider Trading

The stock trading by insiders itself is not unfair trading, but if an
insider takes advantage of non-public material information, then it
falls under unfair trading. The insider trading regulations are
necessary for fairness and market integrity since (i) insider trading
undermines the integrity of the markets and (ii) the delay in timely
- 128 -
disclosure of information leads the investors to discount the

securities prices of companies and will therefore increase costs of
funding on the part of the issuer.
The FSCMA expanded the scope of insiders and quasi-insiders
who are subject to the insider regulations provisions by adding
persons such as companies affiliated to the issuer, their officers
and employees, and persons who are negotiating with the issuer
(Article 178(1)). The insider in insider trading encompasses corporate
insiders, quasi-insiders, and tippees.
"Insider" refers to (i) the corporation3) (including its affiliated
company4)) or its officer, employee or agent who becomes aware
of the material nonpublic information in the course of performing
its business, (ii) a major shareholder5) of the corporation (including
an affiliate of the corporation) who becomes aware of the material
non public information in the course of exercising ones right, (iii)
an agent, officer or employee of such major shareholder who
becomes
aware
of
the
material
nonpublic
information
in
connection with its business.

"Quasi-insider" refers to (i) a person who has the legal authority to
grant approval or license, give instruction, or supervise the
corporation (including its affiliate company) or has any other power
pursuant to the relevant laws and regulation, and becomes aware
3) includes a corporations which will be listed within 6 months
4) affiliated companies under the Fair Trade Act
5) a shareholder whose shareholding ratio is 10% of more, or who exercises de
facto impact on the material non public information in connection with its
business
- 129 -
of the material nonpublic information in the course of exercising

such authority or power, or (ii) a person who has entered into a
contract with the corporation (including its affiliate company) or is
under contract negotiation with the corporation (including its
affiliate company) and who becomes aware of the material
nonpublic information in the course of entering into, negotiating or
performing such contract.
"Tippee" refers to a person who deliberately received material
nonpublic information from an insider or quasi-insider (including a
person in whose case one year has not passed from the day
when such person no longer fall under any of the insiders and
quasi
insiders)
with
knowledge
of
the
importance
of
such
information. However, the third person that receives information

from a tippee and then trades using that information(2nd or 3rd
tippees) is not regarded as an insider.
"Material nonpublic information" refers to any information that has
not been yet disclosed to the general public and may have
significant impact on the investment decision by investor. The
material non public information that is related to the business. etc
of a listed company(including a company which will be a listed
company within 6 months) does not include market information
such as change of securities policy or interest rate policy. Article
174(1) of FSCMA prescribes that no person shall use any
material nonpublic information in trading or any other transaction
involving specific securities, etc, nor allow any another person to
use it. Whether the material information is nonpublic or not
depends on the time of disclosure of such information to the
- 130 -
general public and it is defined the disclosure time of information

in the Presidential Decree as follows:
(i) Information reported to the FSC or the KRX or described in a
document reported; one day after the document is made available
for inspection as decided by the FSC or the KRX;
(ii) Information disclosed through an electronic communication
medium established and run by the FSC or the KRX: 3 hours after
disclosure
(ii) Information published through 2 or more newspapers circulated
nationwide
among
ordinary
daily
newspapers
and
daily
newspapers specializing in the economy: 6 hours after 0:00 of the

day after publishing;
(iv)
Information
broadcast
through
television
or
radio
with
nationwide coverage: 6 hours after broadcast; and

(v) Information provided through Yonhap news: 6 hours after
provision.
Therefore, any person who uses the material information before
the disclosing deadline is in violation of the prohibition of use of
material nonpublic information.
An executive or significant shareholder of a listed company shall
report to the SFC and KRX the status of specific securities held in
their own account within 5 days from the day they became an
- 131 -
executive or a significant shareholder respectively or within 5 days

from the day any change occurred (Article 173). The FSC and KRX
shall then disclose the information on their web sites, and it
enables the market participants to watch the trading of insiders of
company and inspect whether an executive or a significant
shareholder of a company is conducting insider trading using
nonpublic information.
As for the short-swing profit by a insider, FSCMA stipulates the
return of the short-swing profit. If an executive, employee or a
significant shareholder of a listed company profits by purchasing
financial investment instruments and then selling them or vice
versa within 6 months, the company may require the executive,
employee, or the significant shareholder to return the profits to the
company (Article 172). A shareholder may demand that the
corporation make a claim against the insider concerned and or
shareholder may make such a claim on behalf of the company if
the company does not file a suit against the person concerned
within 2 months of receiving the demand. This obligation to return
the short-swing profit is not related
to the willful use of non
public information by a corporate insider, but it is nonetheless a

preventive measure for insider trading.
III. Market Manipulation

Market price manipulation is the act of artificially changing market
prices or trading volume in order to mislead person about the
price of listed securities or exchange-traded derivatives for the
- 132 -
purpose of making profit from it.

Types of market price manipulations are (i) matched sales/wash
sales (Article 176(1)), (ii) manipulation through real transactions
(Article
176(2)(i)),
(iii)
manipulation
by
false
representations,
etc(Article 176(2) (ii) and (iii), (iv) manipulation through price fixing
or stabilization(Article 176(3)).
It not only covers artificial market
price change through actual dealings, but also acting with the
purpose to cause any person to misunderstand that the trading of
listed
stocks
or
exchange-traded
derivatives
is
booming,
or
misleading any person into making an incorrect assessment.

For example:
- Selling (purchasing) securities or exchange-traded derivatives in a
conspiracy
with
another
person
to
sell
the
securities
or
exchange-traded derivatives at the same price as theirs, or at

an agreed value at the same time as they sell(purchase) them;
- Appearing to trade securities or exchange-traded derivatives
without the intention of transferring the interest or rights therein;
and
- Entrusting or being entrusted with an act set forth below.
Also, the selling or purchasing with purpose to fix or stabilize the
market price is also prohibited, except for transactions in the stock
market or KOSDAQ market for the purpose of pegging or
stabilizing the price of securities as part of lawful stabilization and
market-making during the specified period of time not exceeding
30 days prior to the end of subscription period, or not exceeding
6 months from the day on which the securities were listed. The
- 133 -
investment trader shall prepare a report on manipulation for

stabilization describing the trading name of the investment trader,
the issue of securities describing the trading name of the
investment trader, the issue of securities subject to manipulation,
trading price, details of trade, day, time and the period of
manipulation for stabilization to the FSC and KRX.
Table
19
PROHIBITED
ACTS
OF
MARKET
PRICE
MANIPULATION
Act of manipulation
Detail
acts resulting
committing
in
any
person misunderstanding that the

trading
false trading
of
listed
stocks
are
booming; or to mislead any person

into making a wrong judgement
selling, purchasing, entrusting or
being entrusted with the sale or
purchase
actual trading
of
such
securities
or
derivatives to cause fluctuation in

the market price in order to attract
any person
Disseminating
rumor
that
fluctuation in the market price for

such securities or derivatives are
being caused by his/her or another
false or misleading representation
persons market manipulation; and

making
false
or
misleading
representation concerning a material

fact in trading such securities or
fixing or stabilizing market price
exchange-traded derivatives
selling or purchasing listed securities
or exchange-traded derivatives to fix
- 134 -
or
stabilize
the
market
price;
entrusting or being entrusted with

such an act
As
for
the
manipulation
introduction
(Article
of
176(4)
regulations
on
of
Article
FSCMA,
the
cross-market
207
of
the
Presidential Decree), the FSCMA prohibits (i) the price manipulations

in either the securities or futures market to earn profit from the
other market, (ii) price manipulation in either derivatives-embedded
securities or the underlying securities for the purpose of making
profit under the other securities.
According to the Article 176(4), no one shall commit any of the
following acts in connection with trading listed securities or
exchange-traded derivatives:
(i) Causing a fluctuation in, or fixing, the market price of
underlying assets of certain exchange-traded derivatives for the
purpose of earning, or causing a third party to earn unjust profits
from trading such exchange-traded derivatives;
(ii) Causing a fluctuation in, or fixing, the market price of
exchange-traded derivatives for the purpose of earning, or causing
a third party to earn, unjust profits from trading the underlying
assets of such exchange-traded derivatives; and
(iii) Causing a fluctuation in, or fixing, th market price of securities
which are linked to certain securities and specified by Presidential
Decree for the purpose of earning, or causing a third party to
earn, unjust profits from trading the securities.
- 135 -
The recent
issue related with potential manipulation of the
securities as the underlying assets of an ELS reflects this sort of

concern. Whether and under what circumstance trading of shares
as underlying assets of an ELS would constitute price manipulation
is not only related to the scope of hedging activities of ELS but
also related to the interpretation of specific text of the provision of
the FSCMA.6)
IV. Unjust Trading and other Types of Unfair Trading

The general provision prohibiting unfair trading was first introduced
in the FSCMA.
Unjust (unfair) trading refers to using unfair
means, schemes or tricks; attempting to earn money or any

interest in property by using a document containing
false
description or false representation of a material fact necessary for

preventing others from being misled; using inaccurate market
prices with the intention to attract others to trade or make any
other
transactions
in
financial
investment
instruments;
or
disseminating a rumor, using a deceptive scheme or making a

threat with the intention to trade or make any other transaction in
financial investment securities or attempt to cause a fluctuation in
the market price (Article 178).
A person who incurs damages inflicted by unfair trading has the
right to a claim for damages. The right to a claim for damages
6) Joon Park, p. 125, Consolidation and Reform of Financial Market Regulation in
Korea, Vol 6:1 National Taiwan University Law Review, 2011
- 136 -
ceases by prescription if the claimant does not exercise the right

within one year form the time he or she becomes aware of the
fact, or within three years form the time such an act was
committed.
A Person who committed unfair trading is subject to punishment
by imprisonment for up to 10 years, or a fine for up to KRW
500m.
However, when three times the amount of the profit or
loss derived from unfair trading exceeds KRW 500 mn, the fine is
three times the amount of the profit or loss derived from such
unfair trading.
There are other types of unfair trading regulations stipulated under
FSCMA as follows. (i) The discretionary sale by an officer and
employee of a financial investment service company(Article 70); (ii)
Illegal sales by an officer and employee of an financial investment
service company (Article 63) and etc.
Discretionary trading and excessive trading are the most common
disputed issues between the investors and brokers. Discretionary
trading is prohibited under the FSCMA as prescribed by Article 70,
no investment trader or investment broker shall trade financial
investment instruments with property deposited by an investor in
the absence of an order for the trading of such financial
investment instruments from the investor or his or her agent.
Excessive trading is the practice where a broker purchases and
sells stocks excessively in its size and frequency in view of the
financial resources of such customer in order to get more
commission, not in the best interest of the customer. Discretionary
- 137 -
trading and excessive trading commonly occurs since the practice

of getting commission based on the frequent trading is based on
the conflict of interests between the customer and broker. Even
though when an investor has entered into discretionary investment
contract with a broker, if the broker practices excessive trading in
view of the scope and purpose of the investment, it can be
deemed as excessive trading and regulated by the FSCMA.
- 138 -
Chapter 7
Regulation of OTC Derivatives
I. Overview
The FSCMA defines financial investment products by adopting an
inclusive approach for the different types of financial products
(Article 3) and there are 4 elements for the financial products: the
intention of investment, investment risk, transfer of money and
rights stipulated in an agreement. Specifically, investment risk
refers to the possibility that the total amount of money paid or
payable for acquiring the financial instrument may exceed the total
amount of money recovered or recoverable from the financial
investment products, and the possibility exists of losing principal
subject to the FSCMA.
A derivative is a financial investment product that is derived from
other assets, which are called the underlying assets (Article 5).
There are 3 types of basic forms of derivatives: forwards (futures),
options, swaps. A forwards contract is an agreement to buy or
sell an asset on or before a future date at a price specified at
the time of the agreement. An option is a contractual rights given
to an individual allowing him or her to buy or sell an underlying
asset at an agreed price on or before a certain date.
Derivatives
can also be classified into exchange-traded derivatives and OTC
- 139 -
derivatives.
Table 20 TYPES OF DERIVATIVES
Types
Forwards/future
Options
Swap
Interest
rates
Interest
futures/ FRA
c u r r e n c y
options
Foreign currency
futures/forward
currency options
Stock/Stock
exchange
Stock(Stock index)
Stock(Stock index)
index swap
futures
options
Credit
CDS, TRS, CLN, Syndicated CDO, etc
Others
ELW, ELS, DLS, etc
Underlying
assets
Interest rates
rate
Interest
rate
swaps
c u r r e n c y
swaps/FX swaps
Equity swaps
Table 21 COMPARISON BETWEEN EXCHANGE-TRADED AND OTC

DERIVATIVES
Category
types
Exchange-traded
derivatives
futures, options
trades in an exchange
transaction method
forwards,
options,
swaps
negotiated
between
where open trades or parties

an
electronic
standardized
- 140 -
in
trading transaction
system creates prices

transaction terms
OTC derivatives
the
privately
and individually
with customized according to
specified
underlying
assets, transaction units

and settlement months
for
trading
on
exchange
transparent
price transparency
disclosed real time

not specified
price
changes frequently
transactions
of
clearing house
daily settlement
credit risk
non-transparent
must be specified
agreed once contract is
made
clearing houses
counterparty
available to the general

public
involved
done at an exchange
does not exist as the
available
indiviuals or small and

medium
sized
enterprises with
lower
credit rating
not involved
not done
always exists
the
house
as
act
on
a is
all
are
closed
the
before
through
cash
settlements,
and
dependent
reliability
only
most
settled
contracts
by
as
are
physical
delivery at expiration
bid-ask spread
agreed
specified as a particular not specified
- 141 -
the
of
are held to expiration

for physical delivery
brokerage
fee
on
counterparties
contracts
most
contracts
some of the contracts
settlement date
as
clearing execution of a contract
contract expiration date
transaction fee
to
exchanges
counterparty
margin
by
transaction parties
not
market participants
made
and relatively
counter party
guarantee
an
decisions
date in the month of

expiration
regulated
by
the
government, association freely
regulation
and the exchange
While Koreas listed derivatives trading volume, with 3.9 billion

transactions annually, accounts for approximately 20% of the world
total, this is in stark contrast to the nations OTC derivatives
market, which accounts for just 0.2% of the world total.
The
trading volume of the Korean derivatives market has shown steady

growth in major derivatives products, increasing by 4.8%, and the
Korean market now makes up 15.7% of all derivatives traded
globally.
In
terms
of
the
total
balance
accounted
for
by
derivative
transactions, derivative transactions developed as follows.

(unit: billion KRW)
the end of 2006
the end of 2008
the end of 2010
2590000
6010000
7022000
* Source FSC press release 2011
In 2008, the FSC announced its policy statement to improve the

monitoring system in the derivatives market, reinforce investor
protection systems that
fit
for the products characteristics,
prevent the insolvency of financial institutions and the systemic
- 142 -
risks which may arise from derivative transactions, and re-establish

supervisory functions over the derivatives markets. Reflecting the
global financial crisis arising from the non-performing loans from
securitized mortgage backed securities
and credit derivative
transactions, as well as the domestic disputes related with the

KIKO transaction and other derivative investment funds, the FSC
viewed the
introduction
of
a proper
supervision system
derivatives market in Korea as essential.

Figure 6. DERIVATIVES TRADING VOLUME
- 143 -
for
According to a 2010 press release of the FSC, its policy agenda

regarding the OTC derivative markets is as follows.
Table 22 FSC's POLICY AENDA REGARDING THE OTC DERIVATIVE

MARKETS
future plans
specific description
creating trading infrastructure
legal implementation
standardizing OTC derivatives
other OTC derivatives infrastructure
TF will conduct a through research to

find the best suitable infrastructure for
OTC derivatives trading in the Korean
derivatives market
revision of the FSCMA to provide legal
ground for a CCP which specify a
definition of clearing, conditioning
for establishing CCP and measure to
secure public interest
For CCP clearing purpose, the OTC
derivatives such as IRS, CRS, CDS will
be standardized
further efforts to be made for
enhancing existing system or to create
a new trading info depository, trading
platform, and other OTC infrastructure,
considering global trend
II. Strengthening Investor Protection in OTC Derivatives

Trading
There are several provisions in the FSCMA for strengthening
investor protection.
- 144 -
(1) A listed company is treated as a non-professional investors for

the purpose of OTC derivatives transactions unless it agrees
otherwise (Article 9(5)(iv)).
(2) When selling derivative products to non-professional investors, a
financial investment service company is required to comply with
the appropriateness principle without making any recommendation
or solicitation to make an investment. If the product
is not
appropriate to the non-professional investor, the company must

inform the investor of (i) information on the product, (ii) the risks
of investing in
the product, (iii) the fact that the product is not
appropriate to the investor on the light of his/her purpose of

investment, the level of wealth and investment experience, and
obtain a confirmation from the investor that the investor was so
informed (Article 46(2)).
(3) A financial investment service company may enter into OTC
derivatives with a non-professional investor only for hedging
purposes as prescribed by the Presidential Decree of the FSCMA,
and is required to confirm such purpose and retain related
documents (Article 166(2)).
(4) The investment recommendation on derivatives cannot be
entrusted to an agent (Article 55(1)).
(5) A financial investment service company is required to prepare
differentiated standards and procedures for derivative products by
reference to the types of investors, taking into consideration the
- 145 -
investment purpose, level of wealth, experience in investment,

etc(Article 50(1)).
III. Strengthening the Internal Control on the OTC Derivative

Business
The internal control system which a financial investment service
company must establish was also reinforced. (i) A company which
is engaged in a dealing or brokerage/arranging business with
respect to OTC derivatives, and (ii) a company which is engaged
in a dealing or brokerage/arranging business with respect to
exchange-traded derivatives and has total assets of not less than
100 billion won must have one or more executive officer in charge
of derivatives business (Article 28(2)) of the FSCMA, Article 32-2(1)
of the Presidential Decree).
Each OTC transaction must be approved by said officer unless the
transaction satisfies certain requirements prescribed by the FSC
(Article 166-2(1)(iv)).
In addition, the "Model Guidelines on dealing in Derivatives" has
been amended to reflect the current changes in the derivatives
markets and its institutional developments in June 2011. Since the
size of derivatives market has been rapidly growing and the
structures of the derivatives have become more complex and
diversified, it has
become necessary to
management systems.
- 146 -
improve the risk
Since the execution of the FSCMA, the regulations on the business

activities related to financial derivatives products have been more
strict than those related to average financial products, and the
investor protections relating to derivative transactions became more
important than ever. Accordingly, the FSS revised the Model
guideline for derivatives.
The model guidelines have been commonly adopted for setting the
target levels for conducting business properly, and the FSS and
financial institutions including banks, securities firms and insurance
companies participated in preparing the model guidelines, which
were created in December 2006. The model guidelines cover
various kinds of businesses, risk management of derivatives,
valuation of the derivatives, key points in dealing with derivatives,
and the investor protections among others.
IV. Advance Review of OTC Derivatives Products

The OTC Derivatives Product Review Committee was established by
the Korea Financial Investment Association, and must review in
advance (i) the underlying assets of OTC derivatives for their credit
risk (a change in credit owing to a change in credit rating,
bankruptcy, or debt restructuring of a party or a third party) or
their risk linked to natural environmental or economic phenomena
and (ii) the OTC derivatives to be sold to non-professional investors
(Article 166-2(1)(vi)). During the advance review period, the OTC
Derivative Product Committee must take into consideration the
- 147 -
possibility of providing information about price changes of the

underlying asset in case of OTC derivatives classified as (i) above.
In case of OTC derivatives targeting non-institutional investors as
classified as risk hedging, its risk hedging structure, the adequacy
of explanatory materials to be distributed to the investors, the
appropriateness of the marketing plan (including qualification and
education of marketing personnel)
shall be reviewed (Article
288-2(4)). Other investor protection matters are also considered.
V. Introduction of the CCP system

At the G20 Pittsburgh Summit on Sep. 25th 2009, the G20 made
its statement on OTC derivatives markets. It urged the Financial
Stability Board (FSB) and members to enforce a system for
improving the transparency of market, decreasing systemic risk,
and preventing unfair transactions. The details are as follows.
By the end of 2012 at the latest, all standardized OTC derivatives
deals such as IRS, CRS, and DRS should be concluded on
exchange or on an electronic trading platform and should be
cleared through the CCP (central counterparty) clearing house. All
OTC derivatives should also be reported to trade repository. The
derivative commodities which are not reported should be rigorously
subject to the capital requirement law.
Korea is lagging behind in the area of OTC derivatives markets
compared to developed countries both in quantity and in quality.
Owing to an under-developed dealer market led by domestic
financial companies, the role of agent is restricted to an end user
- 148 -
or just selling and distributing, not developing and supplying.

Furthermore, the main financial infrastructure which is debated
internationally is still not propagated. OTC derivatives CCP clearing
houses and electronic trading platforms do not yet exist.
However, the financial authorities operate a separate financial
derivatives reporting system. The Bank of Korea manages the
foreign exchange system and the Financial Supervisory Service (FSS)
collects and compiles the reports on derivatives transactions. The
financial investment companies in Korea
must file a derivative
business report to the FSS (Article 34 of the CMA, the Article 36 of

the Presidential Decree), which is different from other supervisory
tools that finance companies use to submit raw data. In addition,
the FX reporting system
under the Article 25 of the Foreign
Exchange Transactions Act requires the financial institutions to

report FX related information to the BOK, as the central agency for
FX related information. Almost all financial institutions engage in
OTC derivative business are included in this category and thus
obligated to report to the BOK.
To further expand the OTC market, the Korean government is
supposed to introduce a central counterparty (CCP) clearing house
by end of 2012 under KRX. This will be a major step in taking
the OTC derivatives market to a level on par with other markets
around the world. After the implementation of the CCP, the market
is expected to offer increased security and transparency. The FSC
has announced that the KRX will serve as the CCP for OTC
derivatives.
The KRX has launched to develop trade data
management and reporting system for OTC derivatives, and will
- 149 -
perform a role of Trade Repository of trades to be cleared by CCP

mandatory clearing transactions. According to the plan, after
trades are cleared by the CCP, then the CCP will report the
trading details to the FSC.
- 150 -
Chapter 8 Collective Investment Schemes

I. Basic Definition of Fund as Collective Investment Scheme
and other Fund related
definitions
The FSCMA defines a fund as a collective investment scheme, that

is a vehicle for collective indirect investment where a pool of
money
sourced
from
various
investors
is
collected
into
an
investment fund that is managed by professional fund managers

or
asset
management
companies.
The
returns
from
the
investment are then shared among the investors.

The Article 6 defines the term collective investment business
as a business making collective investment (Article 6(4)). Then the
Article 6(5) defines collective investments as the activities of
acquiring, disposing of, and managing in any way such assets as
ate valuable for investment with money or similar pooled by
inviting 2 or more persons for such investment, or with a surplus
fund under Article 81 of State Finance Act, without being bound by
management instructions given from time to time by investors or
by any fund management entity, and distributing the yields
therefrom to vest in investors or any fund management entity,
provided
that
case
falling
under
any
of
the
following
subparagraphs shall be excluded:

(1) Money or similar is pooled through private placement for
management and distribution in accordance with the Acts
- 151 -
specified by Presidential Decree and the total number of

investors specified by Presidential Decree does not exceed the
number prescribed by Presidential Decree;
(2) Money or similar is pooled for management and distribution in
accordance with an asset-backed securitization plan under
Article 3 of the Asset-backed Securitization Act:
The case falls within any case prescribed by Presidential Decree,
taking into consideration the nature of the activities, the need to
protect investors, etc.
The Article 9(18) defines the term collective investment scheme
as any of the following schemes established for making collective
investment:
(1) A collective investment scheme in the form of a trust, in which
trustors, who are collective investment business entities, require
a trust business entity to invest and manage the property
entrusted to the trust business entity in compliance with
instructions
provided by the
collective
investment business
entities(investment trust)
(2) A collective investment scheme in the form of a stock company
under the Commercial Act(investment company)
(3) A collective investment scheme in the form of a limited liability
company under the Commercial Act(investment limited liability
company)
- 152 -
(4) A collective investment scheme in the form of a limited

partnership company under the Commercial Act(investment
limited partnership company)
(5) A collective investment scheme in the form of an associate
under the Civil Act(investment association)
(6) A collective investment scheme in the form of an undisclosed
association under the Commercial Act(undislcosed investment
association)
(7) A collective investment scheme in the form of a limited
partnership company that invests and manages its fund in
equity
securities,
etc.
for
participation
in
management,
improvement of business structure, corporate governance, etc,

by
issuing
equity
securities
only
through
private
placement(private equity fund)

"Privately placed fund means a collective investment scheme that
issues
collective
investment
securities
only
through
private
placement, in which the total number of the investors specified by

Presidential Decree shall not exceed the number prescribed by the
Presidential Decree (Article 6(19)).
"Collective investment property means that the property of a
collective investment scheme, the property of an investment trust,
an
investment
company,
an
investment
limited
partnership
company, an investment association, or an undisclosed investment

association (Article 6(20)).
- 153 -
"Collective investment securities means instruments by which the

equity shares in collective investment scheme(referring to the
beneficial interest in the case of an investment trust) are indicated
(Article 6(21)).
"Collective investment agreement means an agreement that
provides for the organization and management of a collective
investment scheme and the rights and duties of investors therein,
which means the trust contract of an investment trust, the articles
of incorporation of an investment company, an investment limited
liability company, or an investment limited partnership company, or
the association agreement of an investment association or an
undisclosed investment association (Article 6(22)).
"General meeting of collective investors
means a decision
making body composed of all investors in a collective investment

scheme, that is the general meeting of beneficiaries, the general
meeting of shareholders, the general meeting of partners, or the
general meeting of undisclosed members (Article 6(23)).
II. Characteristics of Funds

The outstanding characteristic of a fund is that the provider of the
investment asset is separate from the manager of the asset. As a
result, the role of the investor is limited while the investment is
being conducted. This kind of separate structure can be found
when an individual, the provider of assets, entrust his/her own
assets to a professional asset manager. However, funds are
- 154 -
different from this type of investment in that investments from

many different investors, not a single investor, are combined into
a pool that is managed by a professional asset investment
manager. Funds also different from investment arrangements made
by a group of investors combining their assets, as funds are
managed by professional managers.
Another characteristic of funds is that the investment assets are to
be
clearly
separated
from
management
company.
separation,
funds
any
Depending
are
other
assets
on
classified
the
as
of
legal
an
asset
method
either
of
trust-type
(contractual)funds that use trusts as the method of separation or

mutual funds that are established by selling shares of a fund to
investors. A mutual fund is given a corporate entity while a
trust-type fund is not.
The rationale for fund investment can be understood from both
legal
and
economic
perspectives.
From
legal
perspective,
acquiring stocks of a corporation through fund investment is

regarded as a legal act, since it concerns the obtaining of a
companys shares by providing capital. From an economic
perspective, fund investment is an act of purchasing an investment
product by investors seeking to achieve profits from investment in
indirect
investment products,
rather than participation
in the
companys management.
From a financing perspective, funds lie somewhere between
traditional indirect financing and direct financing. Like banks, the
funds act as the indirect financing institution, pool capital from
investors and act as an intermediary in the flow of money. But
- 155 -
the funds issue securities unlike banks, and due to this character,
the funds are categorized as a type of financial product. The
funds can make limited investments on a limited range of assets
such as securities and real estate to meet their fundamental
purpose of achieving a specific investment goal, which is different
compared with banks. Also, the bank loans are given back to
customers in an undisclosed market, while the fund investment is
performed in an open market. So the funds have the certain
characteristics of direct financing.
Based on several characteristics of collective investment schemes,
legal standards
applicable to the collective investment schemes
are as follows.
(1) Since it is a vehicle for managing and operating assets of
investors, the protection and the management of trusted assets
and the separation between the
custody and the management
shall be essential (Article 184, 244, 246(3) of the FSCMA, Article 21,
22, 23, 19 of the Trust Act). In this regards, the registration of the
collective investment schemes is required (Article 119, 76(3)) and
the supervision on the collective investment business are very
important. Also, for protecting investors, it is necessary to ensure
for investors to exercise their individual rights and collective rights
through the general meeting of collective investors (Article 87, 184).
(2) Since funds are dealing with lots of customers, the supervision
of investment business, the disclosure obligation of the collective
investment business (Article 89, 90), the obligations to provide
information to investors are required (Article 46-52, 59, 60, 71, 88).
- 156 -
(3) Since funds are regarded as a major market participant, it is

very important to prevent the possibility of engaging in unfair
trading of by the funds
in order to maintain market order. Also
the exercising voting rights by funds can have a great effect on

the corporate governance structures.
III. Legislative History of Funds and Regulatory Changes

under FSCMA
The history of funds in Korea started in 1969 with the enactment
of the Securities Investment Trust Business Act and the regulation
of the asset management industry by the Indirect Investment and
Asset Management Act (IIAMBA-2004). The introduction of FSCMA
brought many key changes to the asset management industry by
adopting a comprehensive definition of financial products, and
permitting
financial
companies
to
operate
different
financial
investment services concurrently in previously separate business

areas.
First of all, the legal forms of collective investments have been
expanded to include any form of investment scheme permitted
under the Civil Act or the Commercial Act, such as limited
partnership companies, limited liability companies, associations
under the Civil Act, and undisclosed associations under the
Commercial Act. The scope of the assets used in a collective
investment scheme was also expanded to include any assets with
- 157 -
monetary value. The restrictions on the types of assets allowed for

investment by each collective investment scheme have also been
eased.
In addition, as the FSCMA broke the barriers between the 6 major
areas of financial business, the funds can offer multiple forms of
investment services concurrently.
As for the strengthened investor protection perspective, the FSCMA
stipulates that a financial investment entity shall confirm the
investors suitability for the investment instrument in question and
set forth measures for preventing conflicts of interests that might
arise among various participants involved in investments.
IV. Classification of Funds

Funds can be classified into different types by a diverse range of
standards including a funds legal entity, possibility of an
additional purchase of securities, availability of early redemption,
offering method, investment region and Investment assets.
As for the legal entity, funds can take the form as an investment
trust, a corporation and an association. Depending on whether the
additional purchase of stock is allowed, funds can be classified
into open-type funds and unit-type funds.
Open-ended funds allow investors to trade their shares at anytime,
while the close-ended funds do not. As for inviting investors,
publicly offered funds are established by offering securities to the
- 158 -
general public, while private equity funds are only offered to select
investors with no more than 49 individuals (Article 268-279). There
are also domestic funds and overseas instruments, depending on
the investment region.
Table 23 CLASSIFICATION FUNDS BY INVESTMENT ASSETS
type
investment assets
b o n d
type
equity
type
hybrid
equity
securitie s
type
hybrid
fund
b o n d
type
investme
n
contract
securitie
s
fund of funds
60% or more of total assets invested in bonds

60% or more of total assets invested in equity
securities
maximum equity portion of total assets is 50%
or more
maximum equity portion of total asset is 50% or
less
60%
or
more
of
total
assets
invested
in
collective investment contract securities. If the

figure stands lower than 60%, the fund is
categorized as a hybrid equity type
40%
or
more
of
total
assets
invested
in
collective investment securities

free to include any ratio of securities in its
s h o r t - t e r m
investment assets that are mostly composed of
finance(MMF)
short-term financial instruments such as call

loans, CPs and CDs
50% of more of total assets in the collective
investment scheme invested in real estate in the
Real-estate fund
form of loans to corporations related with real

estate development and investment in other real
estate-related securities as prescribed by the
- 159 -
Presidential Decree of FSCMA

50% or more of total assets invested in special
assets that refer to investment assets other than
Special Asset Fund
securities and real estate

collective investment schemes
are
not
subject to restrictions imposed on securities, real
mixed asset fund
estate, and special
Funds can also
that
be
divided
into
CIS
contractual-type
funds and
corporation-type funds, based on the form of their legal entity.

A contractual-type of fund, known as unit trust in Korea, is a
financial arrangement where the funds pooled together from
investors are entrusted to a trustee that is required to invest and
manage
the
funds according to
instructions
from
an
asset
management company. Any beneficiary interest from the funds

management are shared among the investors. By contrast, a
corporation-type fund is a company in itself that invests its assets
and pays returns to its shareholders. The corporation-type fund is
also referred to as a mutual fund.
Figure 7. TRUST TYPE V. COMPANY TYPE
- 160 -
From a tax perspective, collective investment vehicles can operate

as a trust type, a company type, or a partnership type.
Trust type: Income earned by trust type entities are classified

into interest or dividend income based on the portfolio composition
of managed assets for income tax purposes. Taxes are not
assessed at the trust level, but are assessed on each investor.
Company type: Company type entities are assessed corporate
income tax on investment profits from investment operations. After
taxes are paid at the corporate level, net profits are distributed to
- 161 -
each investor in the form of dividend income or investment

income. This income is then taxed again at the investor level
(such as, as corporate tax for corporate investors, or individual
income tax for individual investors). To provide relief from the
double taxation on the investment profits, the Corporate Income
Tax Law (CITL) prescribes specific cases in which taxes at the
corporate level are exempted if at least 90 percent of the total
income available for distribution is paid out as a dividend
(corporate investors). For individual investors, the gross-up method
is available.
Partnership type: Partnership type entities may elect to be taxed
as a partnership from the taxable year beginning 1 January 2009.
The partnership taxation treats the partnership as a flow through
entity and not be subject to CIT. Instead, each partner would be
subject to CIT or individual income tax (IIT) based on the pro rata
shares of the profit earned by the entity.
V. AUM by Fund
At the end of 2011, the aggregate asset under management
(AUM) of unit trust stood at KRW 286.2899tn, marking an increase
of 58.8% from the 2004 figure of KRW 180.3049tn. The total AUM
of mutual funds has also seen an increase of 80.8%, from KRW
6.6878tn at the end of 2004 to KRW 12.0903tn. Unit trusts
accounts for over 96% of the total AUM in the domestic asset
management market.
- 162 -
Table 24 AUM BY UNIT TRUST AND MUTUAL FUNDS

(unit: billion won, %)
unit trust
mutual funds
total AUM
2004
180,305(96.4)
6,688(3.6)
186,993(100)
2005
193,264(94.6)
11,081(5.4)
204,346(100)
2006
222,264(94.7)
12,466(5.3)
234,615(100)
2007
283,146(95.5)
13,315(4.5)
296,460(100)
2008
346,300(96.3)
13,187(3.7)
359,487(100)
2009
319,078(96.1)
12,802(3.9)
331,880(100)
2010
302,781(96.1)
12,401(3.9)
315,183(100)
2011
286,390(95.9)
12,090(4.1)
298,480(100)
* Source: Korea Financial Investment Association
As of the end of 2011, the total AUM held by funds for public
offering was KRW 188.1458 tn, an increase of 74.4% from the
2004 figure of KRW 108.88tn. The total AUM held by private
placement funds also got a boost of 39.5% from the 2004 figure
of KRW 79.10tn to stand at KRW 110.3344tn. The portion of private
placement funds in the total AUM still stands around 37%, though
it is on a decline. Most private placement funds are assumed to
be purchased by institutional investors such as pension funds and
large companies.
Table
25
AUM
BY
PUBLIC
OFFERING
FUNDS
AND
PRIVATE
PLACEMENT FUNDS
(unit: billion won, %)
public
2004
offering private
placement
funds
funds
107,888(57.7)
79,105(42.3)
- 163 -
total AUM
186,993(100)
2005
123,769(60.6)
80.577(39.4)
204,346(100)
2006
143,299(61.1)
91,316(38.9)
234,615(100)
2007
203,250(68.6)
93,210(31.4)
296,460(100)
2008
232,931(64.8)
126,556(35.2)
359,487(100)
2009
224,640(67.7)
107,240(32.3)
331,880(100)
2010
197,501(62.7)
117,682(37.3)
315,183(100)
2011
188,146(63.0)
110,334(37.0)
298,480(100)
As for the AUM held by the different investment assets, the total
AUM held by equity-type funds recorded a huge increase from
about KRW 9tn at the end of 2004 to a whopping KRW 126tn by
the end of 2009, before dropping to KRW 104tn at the end of
2011. This decline was due to the increased redemptions after
2009 by investors who suffered losses in 2008 global financial
crisis and were seeking to recoup those losses in the market
recovery. In the same period, the figure for bond-type funds
declined from KRW 76tn to KRW 45tn. This clearly shows that the
growth of equity-type funds has driven the rise of the total assets
managed by funds.
- 164 -
Table 26. AUM BY FUNDS INVESTMENT ASSET TYPE

(unit: billion won)
equity
type
securities
hybrid
bond
equity
2004
2005
2006
2007
8,580
26,185
46,491
116,353
type
8,160
8,383
8,891
12,878
2008
140,214
13,592
2009
126,232
2010
2011
type
26,502
34,106
39,121
31,786
bond
type
sub total
MMF
derivati
ves
others
t o t a l
AUM
75,749
51,336
50,417
40,862
118,991
119,981
144,921
201,880
59,801
64,846
57,154
46,739
4,727
12,201
16,845
22,393
3,473
7,317
15,695
25,449
186,993
204,346
234,615
296,460
25,658
30,342
209,806
88,903
27,880
32,898
359,487
13,436
18,003
46,108
210,778
71,691
19,335
37,077
331,880
100,992
12,272
20,493
52,569
186,325
66,918
18,249
43,691
315,183
104,201
11,974
18,226
44,844
179,244
53,127
22,928
43,182
298,480
Funds for over-seas investment are divided into on-shore funds

and off-shore funds: On-shore funds are registered under domestic
law, having domestic investors as an investment entity and invest
30% or more of their net assets in overseas asset. Off-shore funds
are established in overseas jurisdictions and are sold to domestic
investors with the intention to invest overseas assets. The AUM of
on-shore funds posted a record growth of about 10 times from
KRW 5.6826tn at the end of 2011. As a result, the total AUM of
funds jumped from 3% to 19%, an increase of about 6 times.
However, after the dramatic growth in 2006, on-shore funds have
experienced continuous fund outflows and a sharp decrease in net
- 165 -
assets due to the global financial crisis and the end of tax
exemption benefits for on-shore funds at the end of 2009.
Table 27 AUM AND TOTAL NET ASSETS OF DOMESTIC INVESTMENT
FUNDS AND OVERSEAS INVESTMENT FUNDS
(Unit: billion won)
2004
2005
2006
2007
2008
2009
2010
2011
AUM
domestic
overseas
in v e s tm e n t
investment
funds
181,310
funds
5,683(3.0)
Total net assets

do m es tic overseas
total
186(100)
in v es tm e n t
investment
funds
184,460
funds
204,346
(97.0)
207,665
19,690
(100)
234,615
(95.8)
220,529
(91.6)
224,656
(8.4)
73,040
(100)
297,698
(75.5)
283,831
(24.5)
76,958
(78.7)
258,640
(97.0)
195,535
8,810(4.3)
5,659(3.0)
9,144(4.2)
total
190,119
(100)
216,809
21,904
(100)
262,633
(91.0)
233,687
(9.0)
8 4 , 7 3 4
(100)
288,507
(100)
360,789
(73.4)
245,354
(26.6)
(100)
288,507
(21.3)
73,240
(100)
331,880
(85.0)
257,682
(77.9)
251,398
(22.1)
63,785
(100)
315,183
(79.8)
241,840
(20.2)
56,641
(81.0)
(19.0)
(95.7)
214,925
43,153(15.0)
60,834
(100)
318,515
(80.9)
261,505
(19.1)
57,307
(100)
318,812
(100)
298,480
(82.0)
233,244
(18.0)
44,097
(100)
277, 341
(100)
(84.1)
(15.9)
(100)
* Source: Financial Supervisory Service
- 166 -
Chapter 9
Financial Infrastructure : Market, Clearing Facilities,
Deposit and Settlement
I. Market : Korea Exchange (KRX)

1. Overview
The Korea Exchange (KRX), a corporation subject to commercial
law, promotes the safety and efficiency of transactions such as the
fair pricing and buying and selling of securities and listed
derivatives. In January 2005, through a combination of the Korea
Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock
Market and the KOSDAQ Committee of the Korea Securities
Dealers Association, the KRX was established under the name of
the Korea Securities and Futures Exchange. The name was
changed to the Korea Exchange in February 2009.
The Korea Stock Exchange was founded as the Daehan Stock
Exchange, a not-for-profit corporation, in February 1956, and was
reorganized as a corporation upon enactment of the Securities and
Exchange Act in April 1962.
Owing to a stock market crisis, however, it was reorganized again
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one year later in May 1963 as the Korea Stock Exchange, a public
organization funded through joint investment by the government
and brokerage houses. As the Securities and Exchange Act was
revised
to
address
the
evolution
of
the
securities
market
environment (for example, the expansion of securities markets and

globalization of capital markets), the Korea Stock Exchange was
reformed in March 1988 as a corporate juridical person with a
membership consisting of securities companies. Since then, it has
dealt with opening and managing securities markets, listing and
managing securities, and maintaining fair trading.
As the demand increased for a domestic futures exchange as a
means for coping with fluctuating foreign exchange and interest
rates in an open economy, the Korea Futures Exchange was
established in February 1999 following enactment of the Futures
Trading Act in December 1995.
The KOSDAQ Stock Market was created in May 1996, as a venue
for off-board trading of unlisted stocks registered with the Korea
Securities
Dealers
Association.
To
promote
fairness
and
transparency in operation of the KOSDAQ market, the KOSDAQ

Committee, its decision-making body, was established within the
Korea Securities Dealers Association.
Those
intending
to
carry
out
transactions
in
securities
and
derivatives through the KRX must be admitted by the KRX board

of directors as members and be qualified as approved investment
traders and brokers. As of the end of June 2011, the KRX
consisted of 94 institutions, 87 securities trading members and 61
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derivatives traders.
The Board of Directors of the KRX is comprised of the Chair of
the Board, the Chair of the Market Oversight Commission, five
standing directors and eight outside directors. The Board of
Directors decides on issues regarding management goals; budgets
and operational plans; enactment, revision and revocation of
important rules related to the KRXs operation and management;
the handling of major assets; borrowing of large-scale properties
and long-term loans; contributions and investments to other
corporate bodies, and items to be submitted to the shareholders
meeting.
2. Businesses
(1) Opening and Management of Securities and KOSDAQ Markets
The KRX engages in the businesses of listing securities, concluding
transactions, publicizing market
prices, and improving market
systems. It evaluates whether or not to list securities. In addition, if

mismanagement at securities-issuing houses impacts the public
interest or investor protection, or causes difficulty in fair pricing
and distribution of the related securities, the KRX takes actions
such as delisting or suspending transactions for a set period of
time. In the case of delisting, even though the securities may
satisfy the requirements for delisting, their immediate delisting
could result in considerable loss of property for the investors
concerned.
The
securities
are
therefore
for
the
time
being
designated as issues for administration, and earn grace periods. If
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the cause of their designation as issues for administration is

settled, the KRX lifts the designation.
The KRX opens and manages the securities markets the stock
markets, bond markets, ETF ((ETF (Exchange-Traded Fund) is a
listed fund traded like a stock. It is designed so that its earnings
rate is interlocked with the movement of specific index and asset
prices)/ ELW(An ELW (Equity-Linked Warrant) is a new type of
security that holds a right to buy and sell stocks or receive cash
at maturity, interlocked under prescribed methods with a specific
stock price or stock index) markets and additional markets (REITs
(mutual funds specialized in real-estate investment) and mutual
funds are traded in other markets)) and provides to the public
each markets overall market prices, transaction trends and
business performance results, as well as information on foreign
markets.
The KOSDAQ market is opened and operated with less stringent
listing requirements than the stock market to facilitate the financing
of promising small and medium-sized companies, including venture
companies with high growth potentials.
The trading days of the securities and KOSDAQ markets are from
Monday through Friday, and their trading hours are from 9:00
until 15:00. In addition, pre-hours closing price trading takes place
from 7:30 until 9:00, and off-hours closing price trading is allowed
in the period from 15:10 until 18:00. Those allowed to trade
securities in the KRX market are limited to members of the KRX.
Individual investors may therefore trade in the KRX market only
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through member companies. A member submitting an order to the

KRX enters into a contract under the operating regulations of the
KRX.
The KRX notifies the member company of the results of the trade,
and the company then notifies its client. The investor should pay
the price or a bill of sale to the entrusted member company
before the third day (T+2) from the day of trading, and the
member completes the trade by settling the account with the KRX.
(2) Opening and Management of Derivatives Markets
The KRX opens, operates and manages derivatives markets, trades
and
settles
listed
derivatives,
publishes
market
prices,
and
determines the types and items to be traded.

The derivatives markets are markets intended to efficiently absorb
the risks of fluctuation in prices and interest rates in the spot
markets where many derivatives, including stock indexes and
individual stock futures and options, bond futures, currency futures
and options, and gold and pork belly futures are traded. Their
trading days are Monday through Friday and their trading hours
generally from 9:00 until 15:15. However, in the case of items
reaching their delivery days, trading hours are from 9:00 until
14:50 for the stock commodity market and from 9:00 until 11:30 for
the
interest
rate,
currency
and
gold
commodities
markets
(excepting mini gold futures).

When an investor submits an order through a member company
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which operates derivatives accounts, the KRX enters into a contract

with the member companies involved in accordance with the
specified priorities, (for example, concerning order prices and times
of reception). When an order is submitted or a contract is made,
the KRX announces the contents of the order or the results of the
contract to members and investors through its computer system.
(3) Market Surveillance
To prevent and regulate unfair trading practices in the securities,
KOSDAQ and derivatives markets, and to mediate conflicts both
between
members
and
investors
and
between
members
themselves, the KRX operates the Market Oversight Commission.

This commission monitors the markets, reviews abnormal trading(in
cases of overt fluctuation in the prices of items in the securities or
derivatives markets, or in the volume of trading, or of public
announcement, rumors or reports that could affect the prices of
traded items, it conducts reviews to check on the possibility of any
abnormal dealings) and supervises members(this is to examine
related members businesses, financial statuses, books, papers
and other items in order to ascertain whether member companies
are
in
compliance
surveillance,
with
self-regulates
the
operating),conducts
trade-related
disputes,
inter-market
determines
disciplinary actions to be imposed on members or employees as

necessary, and enacts or revises related regulations.
II. Clearing Facilities

1. Payment and Settlement Systems Overview
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Payment and settlement refer to the finalization of a direct

debtor- creditor relationship incurred as a result of spot and
financial transactions, by transferring of currency values through
some payment method.
Payment refers to the act of transferring monetary claims to
the rightful recipient by presenting cash, check or card, or through
transfer from an account.
Settlement refers to the settlement of the difference remaining
after the offsetting of credit and debt occurring from the use of
non-cash means of payment, through transfer between the current
deposit accounts at the Bank of Korea (BOK) of the financial
institutions involved(What is referred to here as settlement is a
complex concept that means both settlement and clearing. The
offsetting of the credit and debt arising from payments between
financial institutions is called clearing, and the finalization of a
debtor-creditor relationship by a financial institution through a
transfer of the total debt or unpaid difference into its BOK current
deposit account is called settlement (in the narrower sense)).
The payment and settlement system is the part of the financial
system infrastructure that covers payment methods, participant
institutions, business settlement regulations, computer
processing
systems, etc. Payment methods include cash, bills, checks, credit

cards
and
account
transfers,
and
can
be
categorized
into
paper-based payment methods that use bills, checks, giro slips,

etc., and electronic payment methods that include credit-, debit-
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and prepaid-card services, account transfers, etc.

Participant institutions can be divided into institutions that provide
payment services, institutions that operate payment and settlement
systems, and the BOK. Institutions that provide payment services
include banks, the post office, financial investment firms and credit
card companies, while institutions that operate payment and
settlement
systems,
which
are
in
charge
of
clearing
and
settlement, include the Korea Financial Telecommunications and

Clearings Institute (KFTC), the Korea Exchange (KRX), the Korea
Securities Depository (KSD) and institutions that operate businesses
related to foreign exchange settlement. The BOK operates the
nations Large-value Payment System, and simultaneously plays a
pivotal role in the payment and settlement systems by issuing
currency and by providing final settlement services and funding to
alleviate shortages of funds as lender of last resort, as well as by
supervising, improving and expanding the payment and settlement
systems.
There are three settlement methods: the Net Settlement Method, of
settling only the difference remaining after the credit and debt
between
financial
institutions
is
offset,
based
on
the
total
transaction amount during a certain period; the Gross Settlement

Method,
of
settling
the
entire
transaction
amount
without
calculating or offsetting credit and debt; and the Mixed Settlement

Method, which combines the advantages of the former two
methods. Under the Net Settlement Method only the net difference
in a debtor-creditor relationship between financial institutions is
settled, and so the frequency and value of such settlements are
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reduced. Due to differences in time between the point of payment

and the point of final settlement, however, the problem of
settlement
risks
emerges.
The
Gross
Settlement
Method
is
meanwhile advantageous in that it minimizes settlement risk since

payment and settlement occur at the same time.
However, these individualized settlements take place with greater
frequency and in larger volumes. The Net Settlement Method is
accordingly used in the Retail Payment Systems that process
transactions
having
small
monetary
amounts
but
with
high
frequency, such as transactions between financial institutions and

their customers, while the Gross Settlement Method is used in the
Large-value Settlement System that processes transactions having
large monetary amounts but
with low frequency. Settlement
systems can also be classified in accordance with the points in

time of their settlement into the Designated-time and the Real-time
Settlement Systems, and, based upon the main operating entity
involved, into the Central Bank and the Private Settlement Systems.
Payment and settlement systems act as a catalyst for economic
activity by enabling the smooth flow of the monetary settlements
that accompany economic activity. There are various risks inherent
in the payment and settlement processes, however, and if these
risks are not adequately controlled the entire financial system can
be destabilized. In this regard, payment and settlement systems
are recognized as an important part of the financial infrastructure.
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2. Main Payment and Settlement Systems

(1) Large-value Payment System: BOK-Wire+
The Large-value Payment System of Korea is BOK-Wire+2, which
began operation in April 2009. This system plays a pivotal role in
the payment and settlement systems of Korea by interconnecting
the computer systems of the BOK and financial institutions and
processing large-value fund transfers between financial institutions
in real time, by handling final settlement of interbank credit and
debt in the Retail Settlement Systems at designated times, etc. The
system also contributes to the reduction of settlement risks in
securities and foreign exchange transactions through links to the
Delivery versus Payment (DvP) and Continuous Linked Settlement
(CLS) systems.
There are two settlement systems within BOK-Wire+: the Gross
Settlement System and the Mixed Settlement System. The former
utilizes only pure gross settlement methods, while the latter
applies both pure gross settlement as well as bilateral and
multilateral
concurrent
settlement
methods.
Large-value
fund-transfer transactions requested by financial institutions at

midday are processed as soon as they are received. The net
settlement
cases
requested
by
the
Korea
Financial
Telecommunications and Clearings Institute (KFTC) are processed at

predetermined dates after calculating the multilateral net settlement
amounts, the repayment of call moneys marked with specific
repayment dates, and the retrieval of treasury funds received by
financial institutions.
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(2) Retail Payment Systems

The retail payment systems include the Check Clearing System, the
Giro System, the Financial Information Networks, and BANKPAY PG,
and because numerous small-volume payments are processed
through them, the net settlement method is usually employed.
Check Clearing occurs when numerous banks gather at a
clearing house at a particular time and exchange bills and checks
received by one bank but issued by another, and then settle the
payments.
Recently,
with
the
development
of
information
technology and enforcement of the Issuance and Negotiation of

Electronic Bills Act, fewer bills and checks are being exchanged in
paper form, while in an increasing number of cases only the
information
recorded
on
bills
and
checks
is
exchanged
separate from the actual bills and checks. The differences that
occur from the clearing of bills and checks between participant
banks are settled through the participant banks current deposit
accounts opened in the BOK.
The Giro System is a payment and settlement system through
which
giro-based
account
transfers
are
batch
processed
at
payment and settlement intermediation centers. It is a convenient

way of processing large-volume payment transactions such as
electric/telephone bills and purchase
payments. The
Financial
Information Networks are payment and settlement systems that

provide
customers
with
financial
transaction
services
and
transaction information by connecting the computer systems of
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financial institutions and the KFTC. They also constitute the core of
the Retail Settlement Systems of Korea. The Financial Information
Networks currently in operation are the Cash Dispenser (CD)
Network, the Interbank Funds Transfer (IFT) Network, the Electronic
Funds Transfer at the Point of Sale (EFT/POS) Network, the Cash
Management Service (CMS) Network, the Local Banks Information
Network (BANKLINE), the K-CASH Network, and the Interbank
Home/Firm Banking Network (HOFINET).
As a payment and settlement system used in e-commerce online,
BANKPAY PG is divided into the B2C and B2B payment and
settlement systems, depending upon the counterparties involved.
(3) Clearing and Settlement institutions under the FSCMA
A. KRX as the clearing institutions for the securities and derivatives
market
According to the Article 378(1) of the FSCMA, the KRX shall as a
clearing
acquisition,
institution,
deduction,
perform
transaction
confirmation
of
confirmation,
settlement
debt
securities,
settlement item, and settlement amount, settlement execution

guarantee, follow-up measures on settlement failure, or settlement
instruction as a result of transactions on the securities market and
derivatives market.
B. KSD as the settlement institution for the securities market and
KRX as the settlement institutions for the derivatives market
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The
KSD
is
designated
as
the
securities
market
settlement
institution which will conduct the delivery an payment of securities

(the delivery of securities and payment of funds) subsequent to
transactions on the securities market (Article 297). The KRX shall
perform delivery of items and payment of money on the derivative
market as a settlement institution(Article 378(2)).
Figure 8. PAYMENT AND SETTLEMENT SYSTEMS IN KOREA
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* Source Bank of Korea (http://www.bok.or.kr/broadcast.action?menuNaviId=649)
III. Deposit and Settlement

1. Korea Securities Depository
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(1) Overview of Securities Settlement Systems

Securities settlement refers to the settlement of the credit-debt
relationship between a seller and a buyer occurring from a
transaction in securities or bonds in the securities market, by
delivery of the securities and settling of the payment. The
Securities
Settlement
Systems
include
the
Securities
Market
Settlement System and the KOSDAQ Market Settlement System,

operated jointly by the Korea Exchange and the Korea Securities
Depository, and the Institutional Settlement Systems for Bonds and
for Stocks operated by the Korea Securities Depository (KSD).
In the Securities and KOSDAQ Market Settlement Systems, after the
KRX
decides the
securities
and
payment
amounts
to
be
transferred on settlement day by each securities firm through

clearing,
the
securities
and
payment
amount
are
settled
simultaneously, the former by book entry through a KSD depository

account and the latter by fund transfer through the KSD account
opened in the BOK. Meanwhile, settlement through the Institutional
Settlement System for bonds is performed on a case-by-case basis
and that through the Institutional Settlement System for Stocks by
the entities involved in the transactions, both under management
of the KSD, the securities are transferred in the face-to-face
market through a KSD account, while the payment amount is
settled at the same time as the securities through the KSDs
account with the BOK.
The Korea Securities Depository (KSD) is a securities depository and
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a settlement institution. The Securities Depository System was

introduced
in
order
to
facilitate
the
issuance
and
effective
distribution of securities by, first, the depositing of all securities

transacted in the securities market into centralized securities
deposits in a securities depository organization, then replacing the
settlements and actual delivery of physical securities accompanying
sales, transfers and collateralized transactions between transaction
participants
depository
with
and
book-entry
settlement
system.
system
was
Koreas
introduced
securities
after
the
securities market expanded in scale and increased in volume in

the early 1970s, in order to lower the risk of securities getting lost
or stolen in physical distribution and simplify and enhance the
efficiency of sales transaction settlement services, by amending the
Securities and Exchange Act in 1973 to add clauses regarding
central deposit and book-entry clearing services so that the KRX
could provide these services. The Korean Securities Settlement
Corporation (KSSC) was established in 1974, and as the KRX
entrusted it with these services in 1975 the KSSC began to provide
securities depository and settlement services in earnest. In 1994, as
the KSSC became the central securities depository (CSD) in line
with the Securities and Exchange Act, its Korean name was
changed to the Securities Depository, and then to Securities
Depository and Settlement in 2005, and to Korea Securities
Depository and Settlement as of 2009. In English, however, it is
referred to as the Korea Securities Depository.
(2) business
As the central securities depository, the KSD mainly provides
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services
such as the central deposit of listed securities, book-keeping entry,
securities
clearance
and
settlement
services.
On
behalf
of
depositors, the KSD also settles matters such as the exercising of

rights regarding deposited securities, and on behalf of securities
issuing houses acts as their agent in all matters related to
securities, such as the issuance of securities and the payment of
dividends.
The KSD in addition also provides services related to funds, to the
registration of bonds and debentures, to the management of
collateral, etc.
A. Securities Depository and Settlement Services
The KSD receives securities deposits by opening accounts for
banks, financial investment business entities, insurance companies,
foreign securities depository organizations, institutional investors,
etc. In the cases of general corporations and individual investors,
the KSD receives securities deposits indirectly through financial
investment
business
entities
(investment
brokerage
business
entities). To enhance the efficiency of their safekeeping and

management, deposited securities are not categorized by depositor
but rather kept together by type, and the legal relationships
between rights and duties are made clear by recording the
depositors names,
securities,
causes
for
addresses, types and quantities of

fluctuations
in
quantity,
etc.,
in
the
the
depositors account books. As of end-June 2012, stocks, bonds,

CDs and CP in custody of the
- 183 -
KSD amounted to market
capitalization of 2.6 quadrillion won.

When a securities sale has occurred, the KSD first receives the
transaction information from the KRX and the institutions involved
in the sale, then confirms that the buyer has deposited the full
payment, and finally settles the securities at the same time as the
payment through book-entry between accounts. For this purpose,
the KSD operates SAFE+ (Speedy, Accurate, Faithful, Efficient), a
securities
depository
and
settlement
information
network
that
connects to customers computers as an electronic system of

services. Looking at the securities settlement services of the KSD
by the market concerned, in the face-to-face markets the KSD
operates
the
Securities
and
the
KOSDAQ
Market
Settlement
Systems, providing securities settlement services through BIS DvP

Model III (simultaneous net settlement of securities and fund
transfers). In the off-board markets, it provides securities clearance
and settlement services by operating the Institutional Settlement
System for Bonds and the Institutional Settlement System for
Stocks. Settlements are processed on a case-by-case basis for
bonds, and simultaneously by each entity involved in stock
transactions. The volumes of face-to-face plus off-board market
settlements through the KSDs Securities Settlement Systems
reached 4,753 won in total in 2011.
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Figure 9. DEPOSIT AND SETTLEMENT FLOW
B. Services for Execution of Rights Regarding Deposited Securities,

and Transfer Agent Services
The
KSD
processes
the
dividends,
principal
and
interest,
obtainment of stocks and all other matters for every right

regarding deposited securities. The depositor and the investors,
who are the depositors customers, thus do not have to redeem
the securities from the KSD in order to exercise their rights. In
2011, the KSD exercised rights on behalf of customers to 853
trillion won worth of deposited securities.
Meanwhile, the KSD also acts as a transfer agent based on
unique functions that it performs such as depositing and settling
securities and managing de facto stockholders. Transfer agent
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services refer to the processing of matters related to stocks such

as managing the lists of shareholders on behalf of the issuing
houses, transferring the names of shareholders, assigning and
providing notification of the rights of shareholders such as the
rights to vote and to acquire new shares, issuing stocks and
paying dividends. And while these are not exclusive services of the
KSD, the KSD was the first to provide them, and to this day
remains the largest provider of transfer agent services.
C. Services Related to Foreign Securities Transactions
KSD services such as securities depository and settlement and
custodianship
over
deposited
securities
are
not
restricted
to
domestic transactions. When a Korean investor invests in foreign

currency
securities,
to
keep
the
deposited
foreign
currency
securities overseas the KSD designates a Global Custodian or an

International Securities Depository (ICSD) as the foreign custodial
organization to process settlements and act as custodian. When a
foreign investor invests in Korean securities, the KSD holds the
Korean securities obtained by the foreign investor, and acts as the
standing representative.
When a Korean company issues a Depositary Receipt (DR) in a
foreign securities market, the KSD takes custody of the underlying
shares. When a foreign company issues a DR in Korea, however,
the KSD designates an organization in a foreign market to hold
the underlying shares in the name of the KSD and to act as the
custodian of them.
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The KSD also supports the listing of Korean companies in foreign

markets, and of foreign companies in the Korean market. To
promote such cross-border securities transactions, as of June 2011
the KSD had established Cross-border Clearing Networks (CCNs) in
36 foreign markets including that of the United States.
D. Other Services
Through FundNet, a collective investment securities and asset
depository system, the KSD standardizes and automates services
ranging from the establishment, redemption and beneficiary list
management of collective investment securities (funds), to the
central deposit,
concurrent
settlement
and
fund-based
ledger
management of collective investment assets. As a specialized bond

registration institution, moreover, the KSD also provides registration
services for national housing bonds, public bonds and corporate
debentures. It acts in addition as an intermediary for securities
lending transactions, in which it lends securities and receives a
commission, for repurchase agreement sales, and for collateralized
call transactions (the short-term borrowing and lending of funds
with securities, etc., as collateral).
- 187 -
Figure 9. FUND Net SERVICE FLOW
- 188 -
Chapter 10 Regulation of Cross-Border Financial

Investment Services
I. Declaration of the Effects Test

The FSCMA introduced the effect test in Article 2, which provides
that the Act shall apply to the activities conducted overseas, the
effect of which extends to the domestic territory. However, there
are no specific standards regarding which activities performed
outside Korea have a domestic effect. It may be interpreted mean
an effect on credibility and stability of domestic capital markets or
on domestic investor protection.
II. Regulation of Cross Border Dealing/Brokerage

Under the FSCMA, in order to engage in the dealing and
brokerage business, a subsidiary, branch and business office must
be established in Korea. Conducting a Dealing and brokerage
business
through
direct
contact
with,
or
by
means
of
communication with, Korean customers without having such an

office in Korea is not permitted (Article 11, 12).
However, under certain circumstances, a foreign dealer/broker with
no subsidiary or branch offices in Korea can do business with
Korean customers.
- 189 -
First, as for the primary market regulation, the Article 7(6)(iii) of the
FSCMA and Article 7(3)(v) of the Presidential Decree stipulates the
regulation that applies to primary markets activities related to
extra-territorial jurisdiction. Where a Korean issuer makes a public
offering or private placement, and (i) a foreign dealer enters into
an underwriting agreement with the Korean issuer within Korea in
accordance with the criteria set by the FSC and the act is
approved by FSC or (ii) if only the deliberation to determine the
contents of the underwriting agreement is made within Korea and
related documents are
submitted to the FSC beforehand, these
activities are not regarded as doing financial investment service

business in Korea. In order to get approval under (i) above, the
foreign dealer must have been engaged in the business at least 3
years and have equity capital of not less than 50 billion won.
Foreign dealers which participate in issuing bonds issued or
guaranteed by the Korean government bond are assumed as
qualifying (i) and (ii) above(the Article 1-5(2) of the Financial
Investment Business Regulation).
Second, as for the secondary market activities regulation, the
Article 7(6)(iii) of the FSCMA and the Article 7(3)(vi) of the
Presidential
Decree
stipulate
that
if
foreign
dealer/broker
conducts outside Korea (i) business activities with dealers/brokers

licensed under the FSCMA or (ii) receiving trade orders from a
Korean resident without solicitation or advertisement, such activities
are not regarded as financial investment service business in Korea.
Therefore, if a foreign dealer/broker is engaged in any solicitation
of a
Korean investor (regardless of whether
- 190 -
institutional or
professional investors or non-professional investors), it will be

regarded as conducting business in Korea and if it is proceeded
without license, which would be a violation of the FSCMA which
may be subject to criminal sanctions(Article 11, Article 444(i)).
III.
Regulation
Businesses
of
and
Cross
Border
Discretionary
Investment
Investment
Advisory
Management
Businesses
Foreign
investment
non-discretionary
advisors
investment
can
engage
advisory
in
discretionary
businesses
for
or
Korean
residents without having an office in Korea by means of direct

communication
with
Korean
residents,
unlike
the
dealing
or
brokerage/arranging business. However, the foreign investment

advisors need to complete registration with the FSC in order to do
so, and failure to register could subject the foreign investment
advisor to criminal sanctions (Article 17 and 445(1)).
There is a registration exemption for the certain cross border
investment advisory service activities in the Article 7(6)(iii) of the
FSCMA
and
the
Article
7(3)(vii).
Providing
discretionary
or
non-discretionary investment advisory services (i) outside of Korea,

(ii) without investment recommendation or advertisement, (iii) to the
Korean government, the BOK, the Korea Investment Corporation or
an entity designated by certain statutory pension fund or other
financial
commission,
is
not
considered
to
be
providing
discretionary or non-discretionary investment advisory services.
- 191 -
To
engage
in
business
activities
for
Korean
residents
(whether
corporations or individuals) without having an office in Korea, a

registration with the FSC is required even if the business activities
are conducted on an unsolicited basis.
A non-Korean investment advisor which is duly registered with the
FSC
for
its
cross-border
discretionary
or
non-discretionary
investment advisory business with Korean residents is required to

appoint a person in charge of liaison within Korea for protection
of
investors(Article
100(2)
of
the
FSCMA,
Article
11
of
the
Presidential Decree). Banks, financial investment service companies,

certain financial institutions, lawyers and accountants are qualified
to
be
appointed
non-Korean
as
such
investment
advisor
person.
is
Such
also
required
duly-registered
to
use
an
investment advisory contract or a discretionary investment contract

with Korean residents
that is governed by Korean law and that
contains a clause that Korean courts have jurisdictions over the

disputes under the contract (Article 100(3)).
Such a non-Korean
investment advisor is required to establish appropriate standards

and procedures that should be followed by its employees in order
to prevent unsound business activities, periodically monitor and
report it to the FSC (Article 100(4) and 100(5)). Non-Korean
investment advisors are subject to these regulations because they
do not have an office in Korea and therefore there is a concern
for inadequate supervision and customer protection.
There are additional regulations applicable to duly registered
non-Korean
discretionary
investment
advisors
conducting
their
business on a cross border basis. Korean resident customers to
- 192 -
which
such
non-Korean
investment
advisors
can
provide
discretionary investment advisory services are limited to the Korean

government,
local
governments,
the
BOK,
certain
financial
institutions such as banks, certain statutory financial agencies and

institutions (such as the Korea Deposit Insurance Corporation, the
Korea Investment Corporation, the Korea Exchange, the Korea
Securities Depository) and certain statutory funds(Article 100(6),
Article 101(2) of the Presidential Decree). Also, such non-Korean
discretionary advisors are required to keep in custody with foreign
depository institution designated by Korea Securities Depository
foreign currency securities acquired as the discretionary investment
assets for customers(Article 100(7), Article 101(3) and 63(2) of the
Presidential Decree). In addition, they are required to send a
discretionary investment report at least once a month to their
customers in person or by mail or (if the customer agreed) by
electronic mail(Article 101(4) of the Presidential Decree).
- 193 -
REFERENCE
Ahn, S. H. (2006). [Consumer protection in the financial investment

services
and
newly
proposed
bill
on
Capital
Market
Consolidation Act]. [The Korean Journal of Securities Law], 7(2),

199-248.
Ahn, S. H. (2008). [Meeting the demanding challenges in protecting
the financial consumers by the Capital Market and Investment
Service Provider Act]. [ The Korean Journal of Business Law
Review], 22(4), 73-122.

Ahn, S. H. (2010). [Change of unfair trading regulation after
enforcement of the Capital Markets Act and future issues], BFL,
40, 70-88.
Center
for
[Research
Financial
on
Law,
Financial
Seoul
Law
National
System
University,
Improvement
(2002).
Due
to
Changes in Financial Market Environment].

Cho, I. (2010). [A comment on the insider trading regulation
provisions
in
the
Act
on
Capital
Market
and
Investment
Banking]. [The Korean Journal of Commercial Cases Review],

23(3), 209-235.
Choi, W. (2006). [Main contents and progress of the Financial
Investment Services and Capital Markets Act]. [The Korean
Journal of Financial Law], 3(1), 127-157.
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Eun Hou Song, Dong Wuk An, The Investor Protection Regime of
the Financial Investment Services and Capital Markets Act of Korea,
(2010), Korea University Law Review, Vol. 7, Korea University
Financial
Services
Commission.
(2009,
March
9).
[The
basic
direction and management plan of financial investment service

license] (Press Release).
Financial Services Commission. (2009, July 30). [The basic direction
and management plan of financial investment service license Second stage] (Press Release).
Financial Services Commission.
Conduct of Business Sourcebook,
FSA Handbook
Yoon
Mo
Chung,
(2011).
Analysis
of
the
Investment
Recommendation Regulation on Derivatives, Perspective vol. 3

No. 1., KCMI
Han, K. J. (2006). [Draft Capital Market Consolidation Act and
improvement of financial customer protection]. BFL, 18, 17-28.
[Capital Market Consolidation Act Research Group]. (2008). [Capital
Market Consolidation Act Guidebook]. Seoul, Korea: [Korea
Securities Dealers Association].
Joon Park, (2011). Consolidation and Reform of Financial Market
Regulation in Korea: Financial Investment Services and Capital
Markets Act,
National Taiwan University Law Review, Vol. 6,
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91-141
Jung, S. (2005). [Comment on concept of securities - Focusing on
derivatives-linked securities]. [KRX Review], 7, 3-20.
Kim, K. S. & Jung, S. (2010). [Capital market law](2nd ed.). Seoul,
Korea: DuSeongSa.
Korean
Securities
Law
Association.
(2009).
[Capital
market
law(Annotation , )] Seoul, Korea: PakYoungSa.

KRX, (2008). A Guide to the Corporate Disclosure For listed foreign
corporation
The Korea Financial Investment Association, (2012).
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Final Report

Financial Service and Capital Market

Soo Hyun Ahn

Capital Markets Act in Korea

Soo Hyun Ahn

(Professor, Hankuk University of Foreign Studies)

Chapter 1 History and Development of Financial

II. Legislative Change and Progress

Services and Capital Markets Act(FSCMA)

I. Legislative Background and Process

II. Main Features and Framework

III Structure of FSCMA

Chapter 3 Definition and Classification of Financial

II. Definition and Classification of Securities

III. Definition and Classification of Derivatives

IV. Distinction between Securities and Derivatives

Chapter 4 Regulation of the Financial Investment

Chapter 5 Corporate Disclosure: Listing and Public Offers

II. Primary Market Disclosure System

III. Disclosure in the Secondary Market

III. Prohibition of Market Manipulation

Chapter 7 Regulation of OTC Derivatives

V. Introduction of the CCP System

Chapter 8 Collective Investment Schemes

II. Characteristics of Funds

Facilities, Deposit and Settlement

II. Clearing Facilities

III. Deposit and Settlement

Chapter 10 Regulation of Cross-Border Financial Investment

Businesses and Discretionary Investment Management

3. STATUS OF THE SECURITIES MARKET: POST-GOVERNMENT OWNERSHIP 5

8. EMPLOYEE STOCK OWNERSHIP UNIONS

11. CEILINGS ON STOCK INVESTMENT FOR FOREIGN INVESTORS

13. PLAN FOR FINANCIAL LIBERALIZATION AND MARKET OPENING

14. POST ASIAN FINANCIAL CRISIS RESTRUCTURING OF MERCHANT BANKS,

SECURITIES FIRMS, AND INVESTMENT TRUSTS

16. TYPES AND DEFINITION OF SECURITIES

18. LICENSING UNITS OF THE FINANCIAL INVESTMENT BUSINESS

PROHIBITED ACTS OF MARKET PRICE MANIPULATION

20. TYPES OF DERIVATIVES

COMPARISON BETWEEN EXCHANGE-TRADED AND OTC DERIVATIVES

25. AUM BY PUBLIC OFFERING FUNDS AND PRIVATE PLACEMENT FUNDS

2. ORGANIZATION OF THE FSS

2. REGULATORY FRAMEWORK OF FINANCIAL INVESTMENT BUSINESS

6. DERIVATIVES TRADING VOLUME

7. TRUST TYPE V. COMPANY TYPE

8. PAYMENT AND SETTLEMENT SYSTEMS IN KOREA

I. Development of Financial Services and Markets

Korea's securities market has developed significantly over the past

Association (KSDA) was organized, and in 1956, Korea Stock

Its growth can be divided into 6

stages: Early stages

modernization (1953-1967), Capital market development (1968-1978),

(FSCMA) was enacted in South Korea, in order to promote

the further growth of the Korean capital market. As Korea's

To further advance its capital market, Korea passed the FSCMA

2. Early Stages of Modernization (1953-1967)

The securities market is where stocks and bonds are traded as a

Korea's capital market was officially organized in March 1956 with

(est. 1931) and the Joseon

Stock Exchange (est. 1943), they were exclusively designed to

With the launch of the KSE, 12 corporations, 3 government bonds

from settlement failures, causing the long-term suspension of the

TABLE 1 TRADE IN GOVERNMENT BONDS