The Second Disciplinary Hearing for Lime Seller...Disciplinary Level Likely to Depend on 'Fund Victim Relief' Decision

CEO Preliminary Disciplinary Notice
Key Issues in Executive Sanctions
FSS Considers Relief Degree
Possible Conclusion at 3rd Sanctions Review

[Asia Economy Reporter Park Jihwan] The Financial Supervisory Service's (FSS) second disciplinary committee meeting for securities firms selling Lime Asset Management funds, which faced a redemption suspension crisis involving approximately 1.6 trillion KRW in private equity funds, will be held on the 5th. Similar to the first meeting, fierce debates are expected over the grounds for sanctions and the scope of responsibility between the financial authorities and the selling securities firms. In particular, attention is focused on whether the FSS will issue mitigated sanctions compared to the original proposals, taking into account the extent of consumer damage relief efforts by financial companies.

The FSS plans to conduct the disciplinary hearings at 2 p.m. at its headquarters in Yeouido, Seoul, proceeding in order with Daishin Securities and KB Securities regarding the Lime fund securities firms. At the first disciplinary hearing held on the 29th of last month, the measures for Shinhan Financial Investment and Daishin Securities were reviewed, but due to time constraints, the review of measures for Daishin Securities was not completed and will continue on this day.

Currently, these securities firms have been preliminarily notified of severe disciplinary actions such as corrective orders. Additionally, current and former CEOs have been notified of severe disciplinary actions, including 'suspension of duties,' citing responsibilities such as deficiencies in internal control standards. The subjects of the sanctions include Park Jung-rim, CEO of KB Securities during the Lime management incident; Yoon Kyung-eun, former CEO of KB Securities; Kim Byung-chul, former CEO of Shinhan Financial Investment; and Na Jae-chul, former CEO of Daishin Securities (currently Chairman of the Korea Financial Investment Association).

Particularly, intense disputes are expected over the proposed measures against KB Securities in this disciplinary hearing. Park Jung-rim, the current CEO of KB Securities, is the only incumbent CEO among the involved current and former CEOs and is facing reappointment at the end of the year, so a more proactive defense is anticipated.

The core issue in the disciplinary hearing is whether management can be sanctioned for responsibility over internal control deficiencies. The FSS holds current and former CEOs accountable based on Article 24 (Internal Control Standards) of the Act on Corporate Governance of Financial Companies, which mandates that financial companies establish internal control standards, and Article 19 of its Enforcement Decree, which requires effective internal control standards. The FSS argues that securities firm CEOs can be considered 'actors' who failed to establish key internal control standards, making them subject to sanctions.

However, the securities industry is pushing back, claiming the disciplinary actions lack legal grounds. They argue that expanding punishment to CEOs as actors for 'deficiencies in internal control standards' is difficult to accept. Especially since the amendment to the Corporate Governance Act has not yet passed the National Assembly, sanctioning CEOs is seen as excessive.

There is also a possibility that the financial authorities' original disciplinary proposals may be mitigated during the hearing. This is because the FSS plans to actively reflect efforts to compensate consumer damages when deciding sanctions against financial companies and their CEOs. The disciplinary committee will comprehensively review the draft sanctions, the securities firms' explanations, and the extent of consumer damage relief to finalize the sanctions. If financial firms adequately demonstrate their efforts to compensate investors, the original sanctions may be reduced. It is known that securities firms will emphasize their proactive measures, such as preparing advance compensation plans for Lime fund investors and agreeing to comply with the FSS Dispute Mediation Committee's compensation decisions.

A senior FSS official stated, "We will actively reflect how and to what extent financial companies have made efforts to compensate Lime fund victims in determining the level of sanctions. We cannot treat companies with no investor damage the same as those with massive damage who have actively addressed it."

Both the financial authorities and the industry expect that no final decision will be reached at this disciplinary hearing. It is highly likely that the conclusion will be made at the third disciplinary hearing, expected to be held on the 12th. Previously, the disciplinary hearings for the overseas major interest rate-linked derivative-linked fund (DLF) incident also concluded after three sessions. An FSS official said, "Since this is a very serious case, a re-hearing is scheduled for next week as well, but the date is flexible."

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