'Legal Basis Controversy Over NH Bank OEM Fund Sanctions'

Financial Services Commission Finalizes Sanctions on 24th
Fine Reduced to 2 Billion Won but Controversy Over Lack of Legal Basis
Possible Lawsuit by NongHyup Bank

[Asia Economy Reporter Jo Gang-wook] Ahead of the Financial Services Commission's regular meeting scheduled for the 24th, NH Nonghyup Bank is focusing on preparing countermeasures. This follows the imposition of a 2 billion KRW fine at the Financial Services Commission's Securities and Futures Commission meeting held on the 3rd for the sale of "Original Equipment Manufacturer (OEM) funds." Nonghyup Bank plans to actively explain its position to the Financial Services Commission. However, some speculate that, given the rarity of the financial authorities reversing their decisions, the matter could proceed to legal litigation.

According to the financial sector on the 11th, the Financial Services Commission will hold a regular meeting on the 24th to finalize the final sanctions against Nonghyup Bank, which was fined 2 billion KRW by the Securities and Futures Commission for selling series funds using the OEM method. Although it was initially expected to be finalized at the regular meeting on the 10th, it has been postponed by two weeks.

Nonghyup Bank intends to actively clarify its stance at this regular meeting. Although the fine imposed by the Financial Supervisory Service was reduced from 10 billion KRW to 2 billion KRW through the Securities and Futures Commission, the bank maintains that it cannot accept the punishment itself. This is the first time a fund sales company has been fined for selling collective investment securities without submitting a securities registration statement.

There are three main points of contention. First, there is no legal basis for the punishment. The financial authorities applied the so-called "Mirae Asset Prevention Act (Article 119, Paragraph 8 of the Capital Markets Act)," which effectively prohibits splitting a public offering product into multiple private funds (series funds) because, under current law, only the OEM fund manager can be punished. The Mirae Asset Prevention Act was amended in May 2018. However, Nonghyup Bank sold the relevant funds before this law was enforced. Nonghyup Bank set up corporate bond funds through Fine Asia Asset Management and Aram Asset Management in 2017. The sales amount reached approximately 700 billion KRW. In other words, there is criticism that retroactively applying current regulations to past actions could be problematic.

Notably, the basis for the Mirae Asset Prevention Act was the U.S. Securities and Exchange Commission (SEC)'s "Integration Guidelines." However, these guidelines were abolished in March. The SEC's amendment stipulates that if disclosure obligations for individual securities issuance are met, liability for securities law violations cannot be imposed through integration. Additionally, the fact that there have been no victims from the sale of these products is also a point of controversy. Nonghyup Bank's series funds are bond-type funds, and there have been no investor losses to date.

Concerns about the imposition of fines on Nonghyup Bank have also been raised in academia. Kim Hong-ki, chairman of the Korea Economic Law Association and a professor at Yonsei University Law School, who serves as a legal interpretation committee member for the Financial Services Commission, said, "The Nonghyup Bank case is the first instance where series securities regulations are applied to funds and the obligation to submit registration statements is imposed on the sales company rather than the issuer." He added, "Given the legal interpretation controversies surrounding the first-instance ruling on the underwriter lawsuit and issues of retroactive application of punitive regulations (which could be disadvantageous to the opposing party), careful review is necessary."

Additionally, Kwon Jae-yeol, dean of Kyung Hee University Law School, pointed out, "The Nonghyup Bank case differs from similar lawsuit precedents and factual circumstances, and there are many legal issues involved." He added, "Since related lawsuits are currently pending in appellate courts amid legal interpretation controversies, it would be unreasonable to apply this case simply to the financial market."

Some expect that if the Financial Services Commission finalizes the sanctions as is, Nonghyup Bank will file a lawsuit. Until now, there have been almost no cases where the Securities and Futures Commission's sanctions were overturned at the Financial Services Commission's regular meetings. If the fine is confirmed, Nonghyup Bank will become the first case of sanctions related to OEM funds and series funds.

A financial sector official said, "From Nonghyup Bank's perspective, whether the fine is 10 billion KRW or 2 billion KRW, the difference is not significant." He added, "Given the many controversies, it is inevitable that being the first pilot case for OEM fund sanctions is burdensome, so it is highly likely that they will seek to resolve the matter through official litigation."

This content was produced with the assistance of AI translation services.