Financial Services Commission Raises Penalties for 5% Rule Violations... Strengthens Disclosure Requirements for CB and BW

[Asia Economy Reporter Park Jihwan] Financial authorities will raise the cap on fines for violations of the 5% large shareholding reporting obligation from the current '1/100,000' of market capitalization to '1/10,000'. Additionally, to facilitate shareholders' smooth exercise of rights, issuers of private convertible bonds (CB) and bonds with warrants (BW) will be required to disclose information at least one week before the payment date.

On the 3rd, the Financial Services Commission announced a legislative notice for amendments to the Capital Markets Act and subordinate regulations, including these measures. This is a follow-up to the measures announced in October last year and January this year to eradicate illegal and unsound practices in the securities market and improve corporate disclosure systems.

Under the current Capital Markets Act, investors must report and disclose within five days when they hold 5% or more of a listed company's shares or when there is a change of 1% or more in their holdings thereafter, including any changes in the purpose of holding or major contract terms. However, the fines for violating the 5% rule have been significantly lower compared to other disclosure violations, leading to concerns about their effectiveness. Accordingly, the amendment plans to raise the fine cap for violations of the 5% rule from the current 1/100,000 of market capitalization to 1/10,000 of market capitalization. The Financial Services Commission expects that the average fine, which has been about 370,000 KRW over the past three years, will increase to approximately 15 million KRW after the amendment.

Disclosure requirements for private CBs and bonds with warrants (BW) will also be strengthened. This is based on the judgment that investor protection is difficult because investors cannot access relevant information in advance when CBs or BWs are issued. Going forward, companies must disclose a major event report at least one week before the payment date when issuing private CBs or BWs.

Newly listed companies will be required to submit quarterly and semi-annual reports immediately prior to listing. Until now, newly listed companies were not obligated to submit quarterly or semi-annual reports before listing, making it difficult for investors to grasp up to six months of financial information. The Financial Services Commission stated, "This takes into account the increased investor interest immediately after a company's listing."

The criteria for imposing fines for disclosure violations such as business reports have also been adjusted: the maximum fine for listed companies will be set between 1 billion and 2 billion KRW, while the cap for unlisted companies will be lowered from 2 billion KRW to 1 billion KRW.

The short-term finance business licensing review has also been supplemented. When financial investment businesses obtain a short-term finance business license, they will be examined for sound financial status and social credit requirements, similar to existing financial investment businesses.

Furthermore, as a follow-up to the recently amended Capital Markets Act, investment trading and brokerage businesses that have obtained licenses will be able to add similar operations within the same financial investment business category by switching from a licensing system to a registration system, reducing their burden. When foreign financial investment businesses change their organizational form from a 'local corporation' to a 'branch,' the licensing review will exempt or relax requirements related to business plan feasibility, personnel, IT and physical facilities, and major shareholder qualifications.

The Financial Services Commission plans to submit the amended Capital Markets Act to the National Assembly within this year after legislative notice, regulatory review, and legal review. Subordinate regulations such as enforcement decrees will also be revised to take effect on December 9, the effective date of the amended Capital Markets Act.

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