Financial Investment Services and Capital Markets Act | Analysis of a Supreme Court Decision Recognizing the Validity of a Contract Even With an Unregistered Investment Advisory Firm

The plaintiff that brought the lawsuit was Company A, a provider of securities information. It filed suit claiming that it was entitled to receive a refunded amount and a penalty for breach from B, the defendant in this case and an individual investor.

Both the first-instance and second-instance courts ruled in favor of B.

The reasoning was that, although Company A was not an investment adviser as defined under the Financial Investment Services and Capital Markets Act, it engaged in investment advisory conduct directed at a specific person, and because that conduct itself violated the applicable law, the contract was likewise unlawful and therefore void.

The courts also held that the settlement agreement prepared by Company A and B during the refund process was premised on the validity of the underlying contract, and therefore could not be given effect.

The Supreme Court reached a different conclusion.

It found that Article 17 of the Financial Investment Services and Capital Markets Act, on which the lower court relied in holding the contract void, was a regulatory provision rather than a validity provision.

Here, a regulatory provision means one under which an unlawful act is punished while the validity of the related contract is still recognized.

In other words, even if Company A's investment advisory conduct was unlawful, the contract concluded between Company A and B cannot, for that reason, be regarded as void.

“A discretionary investment contract or investment advisory contract concluded in violation of the provision cannot be said to possess such a marked degree of antisocial or immoral character that even its validity under private law must be denied, nor can it be said that the legislative purpose can be achieved only by denying the validity of the act under private law; accordingly, the said provision is not a validity provision but a regulatory provision. (See Supreme Court, Decision of June 13, 2019, 2018 Da 258562; Supreme Court, Decision of May 9, 2024, 2023 Da 311665.)

The Supreme Court also held that Article 55 of the Financial Investment Services and Capital Markets Act could not be applied by analogy to the contract that Company A, which was no more than a quasi-investment advisory operator, had concluded with B.

It then reversed the lower court's judgment and remanded the case to that court, finding that the case needed to be heard and decided anew.

Civil suits disputing responsibility for the termination of contracts continue to be filed.

Through this decision, the Supreme Court held that, even where a contract that an unregistered investment advisory firm concluded with investors is unlawful, the validity of the contract itself is maintained.

This decision of the Supreme Court appears likely to have a significant effect on related civil cases currently pending in the lower courts.

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