FSS: "Securities Firms Must Comply with Financial Consumer Protection Act When Recommending Investment in New Technology Associations"...Administrative Guidance to Begin Next Month

[Asia Economy Reporter Ji-hwan Park] The Financial Supervisory Service announced on the 29th that it will implement administrative guidance starting next month 1st, which mandates securities companies to comply with the Financial Consumer Protection Act's regulations on the sale of financial investment products, including the obligation to provide explanations when soliciting investments in private New Technology Associations to investors.

The New Technology Business Finance Companies were introduced to expand private investment and support funding for small and venture companies through New Technology Associations. The operation of New Technology Business Finance typically involves establishing investment associations, collecting funds from members, and investing, making the solicitation method and investment targets virtually identical to private funds.

Since the allowance of securities companies to concurrently operate New Technology Business Finance Companies in 2016, the recruitment of individual members through securities companies has surged. The contracted amount (number of associations) increased sharply from 7.2 trillion KRW (459 associations) at the end of 2018 to 10.3 trillion KRW (751 associations) at the end of 2019, and 11.7 trillion KRW (997 associations) at the end of last year.

Looking at the status of individual investor recruitment, among 121 New Technology Companies as of the end of March this year, 23 securities companies raised a total of 2.3 trillion KRW (contract amount basis 2.7 trillion KRW) through 252 New Technology Associations (private). Securities companies tend to perform GP (General Partner) duties jointly with other companies rather than solely.

New Technology Associations mainly invest in high-risk securities (unlisted securities of small and venture companies), so the investment risk is considerably high. However, since investment solicitation for private New Technology Associations is not subject to the Financial Consumer Protection Act, there have been continuous criticisms that there are no investor protection measures such as the obligation of securities companies (GP) to provide explanations.

The administrative guidance scheduled to be implemented next month includes provisions that general investors can decide whether to invest after receiving sufficient explanations about financial investment products (association equity shares) suitable for their investment propensity related to New Technology Association investments.

Specifically, from next month, securities companies will be subject to the Financial Consumer Protection Act's regulations on the sale of financial investment products (professional investor-type private collective investment securities) as financial product sellers when soliciting investments in private New Technology Association equity shares. These include the suitability principle (Article 17), appropriateness principle (Article 18), obligation to explain (Article 19), and prohibition of unfair solicitation acts (Article 21).

Securities companies must establish standards and procedures to comply with when performing their duties according to the Financial Consumer Protection Act and each company's internal control standards for financial consumer protection. When securities companies jointly establish and operate New Technology Associations with other companies (joint GPs), and joint GPs also recruit investors, it is mandatory to enter into contracts to follow the same sales regulations. However, this does not apply when a securities company performs all solicitation duties for New Technology Association equity share investments alone.

A Financial Supervisory Service official stated, "Even after the implementation of the administrative guidance, we will closely monitor the trend of general investors' investments in New Technology Associations through securities companies and whether investor protection measures are functioning properly."

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