Financial Investment Services and Capital Markets Act

The Financial Investment Services and Capital Markets Act governs the trading and distribution of various financial investment products, including stocks, bonds, and derivatives.

Its central aim is to build a market environment that investors can trust and to shield them from unfair trading practices.

The Financial Investment Services and Capital Markets Act applies to the following parties and areas.

▪ Financial Investment Instruments
Stocks, bonds, derivatives, collective investment securities, and the like

▪ Financial Investment Business Entities

Securities companies, asset management companies, investment dealers, and the like

▪ Trading Conduct

The issuance, trading, brokerage, and investment advisory of financial investment instruments, and the like

▪ Market Making and Disclosure

Disclosure obligations, maintenance of market order, and the like

In short, the Act reaches a broad range of conduct and parties across the financial investment market, governing the sound operation of the capital markets.

The Financial Investment Services and Capital Markets Act defines a ‘financial investment instrument’ in abstract and comprehensive terms.

The definition is framed so that not only existing instruments but also new types of financial investment instruments that may emerge in the future can fall within the statute's reach.

For a company, this offers the benefit of developing or operating new instruments without legal blind spots, while it also advances the goals of investor protection and stronger market confidence.

The Financial Investment Services and Capital Markets Act moved away from the earlier institution-based approach and adopted a function-based regulatory system.

In other words, a corporation is regulated according to the nature of the financial function it actually performs rather than the line of business, such as investment dealing or investment brokerage, to which it nominally belongs.

By placing conduct that serves the same function under the same rules based on its economic substance, this approach tends to make regulation clearer and more predictable as a company grows its business.

By shifting from specialized operation to combined operation, the Financial Investment Services and Capital Markets Act lets financial investment companies engage in business across multiple lines.

A single company may now, for example, carry out investment dealing and investment advisory at the same time, or run collective investment business and discretionary investment business in parallel.

This change gives companies an institutional basis to offer a range of financial services in an integrated way, allowing them to pursue expansion and synergies.

The Financial Investment Services and Capital Markets Act has considerably strengthened the mechanisms for investor protection.

For example, a duty to explain applies when an investment is recommended, and the suitability principle bars recommending instruments that do not fit an investor's profile.

The Act also calls for internal controls to prevent conflicts of interest and for broader information disclosure.

Companies must comply closely with these requirements when they design or sell instruments.

The scope of disclosure has also widened, so companies active in the primary market should take particular care.

The soundness regulation of financial investment business entities is a framework built to protect investors and secure the stability of the financial system.

A company must meet financial soundness standards, including capital adequacy requirements, and it has a duty to disclose its financial condition transparently.

Rules that restrict transactions with major shareholders also work to prevent improper internal dealings and conflicts of interest.

These rules help ensure that, even if a financial investment business entity runs into management difficulties, harm to customers can be kept to a minimum.

Rules on the governance of financial investment business entities operate to promote transparent and fair corporate management.

When a major shareholder's holdings change or management control shifts, prior approval from the Financial Services Commission must be obtained, and officers must not fall under any of the disqualification grounds prescribed by law.

A company must also appoint outside directors and an auditor or audit committee, and it must maintain systems such as internal controls and the designation of a compliance officer.

These rules aim to reinforce the independence and accountability of management and to protect shareholders and other stakeholders.

Where a company breaches its disclosure obligations, for instance by failing to file a securities registration statement, making false disclosures, or omitting material matters, sanctions follow not only through administrative dispositions and criminal punishment but also through the penalty surcharge system.

A penalty surcharge of up to 2 billion won may be imposed.

The amount is set by weighing factors together, including the total amount planned for the offering or sale, the transaction amount, whether the violation was repeated, the scale of the wrongful gain, the degree of harm to investors, and whether insider trading was involved.

Unfair trading covers all conduct that undermines market order and is prohibited under the Financial Investment Services and Capital Markets Act.

It includes insider trading, market manipulation, and fraudulent trading practices, along with breaches of the disclosure obligations that apply to the primary market and the secondary market.

▶ Types of Unfair Trading Conduct

Where a serious violation such as unfair trading is suspected, the Securities and Futures Commission may, within the scope necessary for the investigation, question the suspect and conduct a search and seizure of relevant items.

These powers are central to establishing the facts and securing evidence.

Where disclosure obligations have been breached, the Financial Services Commission may impose a penalty surcharge not exceeding 2 billion won.

The penalty surcharge system is an important tool for reinforcing a company's disclosure responsibility and improving market transparency.

Where disclosure obligations are breached, for example by failing to file a securities registration statement or by making false statements about an offering or sale, imprisonment for up to five years or a fine of up to 200 million won may be imposed.

Once the Financial Supervisory Service or the Securities and Futures Commission opens an investigation, a company should not react to requests for materials, questioning, or on-site examinations without thought, but should respond with the guidance of experts.

In particular, it should engage in good faith without exaggerating or downplaying the facts, and it should head off needless disputes or misunderstandings.

A company should base its statements on the results of the internal investigation and the supporting evidence, and where appropriate, it should protect its rights through legal procedures.

To prevent violations of the Financial Investment Services and Capital Markets Act, a company should put a strong internal control system in place ahead of time.

Internal control refers to the systematic management and oversight activities that support legal compliance, and it forms the basis for protecting investors and earning corporate trust.

A company should operate a compliance officer system and strengthen regular training for its officers and employees as well as adherence to a code of ethics.

By building a risk management system that reviews internal risk factors and addresses them early, a company can reduce the likelihood that a violation will occur.