[Opinion] Misunderstandings About Foreign Legislative Examples

Foreign legislative examples are a very important consideration in the enactment, amendment, or improvement of laws and systems. From the advanced cases of major countries, one can obtain grounds for the rationality and logical validity of a system, and also anticipate the effects of its implementation in advance. Review reports of this kind prepared by the government or public institutions generally consist of the current status and issues, foreign legislative examples, and improvement plans. In practice, the foreign legislative examples section seems to take up more than 70% of the total working time, which is almost the same when legal scholars write papers. However, recently, misunderstandings about foreign legislative examples have been observed in financial system improvements or law amendment work, so I would like to present opinions on two issues for a better understanding necessary for desirable legislation.

First, regarding short selling, recently, as voices for stricter regulation have increased in the political sphere, related legislative amendment bills have been competitively proposed. Among them, there is a proposal to introduce criminal penalties for naked short selling, citing the U.S. legislative example as a model, arguing that since the U.S. imposes imprisonment of up to 20 years, we should do the same. Is that really the case?

The law regulating short selling in the U.S. is the Securities Exchange Act of 1934, which includes criminal penalty provisions. However, while our Capital Markets Act stipulates various criminal penalties individually for specific acts, the U.S. Securities Exchange Act broadly states in Section 32 that violations of this law are punishable by imprisonment of up to 20 years or fines of up to $5 million for individuals and $25 million for corporations. Therefore, there is no specific statutory penalty for particular acts such as naked short selling. The only exception is Section 30A (Foreign Corrupt Practices Act), which prohibits bribery of foreign officials; if corporate officers intentionally provide bribes, they face imprisonment of up to 5 years or fines of up to $100,000.

Violations of the Securities Exchange Act range from insider trading and other unfair trading to violations of disclosure and reporting obligations by public companies and illegal business activities by securities firms. The level of criminal penalties for these violations is determined by prosecutors and judges under federal sentencing guidelines based on the specific content and blameworthiness. Perhaps due to my limited knowledge, I have never heard of any cases in the U.S. where violations of short selling rules such as naked short selling alone have led to criminal prosecution or penalties. Of course, if short selling is used as a means of fraudulent trading such as insider trading or market manipulation, it will be severely punished as unfair trading, which is also the case in Korea.

Next is the issue of granting one-sided binding force to dispute resolution decisions by the Financial Supervisory Service (FSS). The problem of one-sided binding force, where financial companies must unconditionally accept FSS dispute resolution decisions and cannot file lawsuits, was ignited by the FSS Governor and quickly followed by the ruling party’s bill proposal. The foreign legislative examples cited as grounds for introduction were the United Kingdom, Australia, and Japan. However, some of these are factually incorrect, and even if true, there are parts that are difficult for us to accept contextually.

One-sided binding force infringes on the constitutional fundamental right to access the courts, so it is a serious issue that cannot be treated lightly. Yet how is it recognized in those countries? First, the United Kingdom has no written constitution itself, so there is no issue of constitutional fundamental rights infringement. Australia has a written constitution but does not explicitly guarantee the right to access the courts, so it may not be a big problem. However, in the United States, which shares the same legal family but recognizes the right to access the courts in its written constitution, one-sided binding force does not exist. The U.S. even restricts arbitration agreements between parties as a form of dispute resolution to some extent, viewing them as an infringement on the right to access the courts. In Japan, which is a civil law country like us and has a constitutional provision on the right to access the courts, one-sided binding force is due to social pressure rather than legal binding force. More thorough investigation and reasonable acceptance logic are needed regarding foreign legislative examples when working on law enactment and amendment.

Sung Hee-hwal, Professor, Inha University School of Law

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