Financial Supervisory Service Holds Meeting to Improve Securities Firms' Business Practices... Discussions on Research, Bond-type Wraps, and Trusts

The Financial Supervisory Service (FSS) announced on the 5th that it held a meeting to improve business practices with Seo Yu-seok, Chairman of the Korea Financial Investment Association, and CEOs of 27 domestic and international securities firms.

At this meeting, discussions were held on enhancing the reliability of securities firms' research reports. The FSS urged caution regarding the practice of securities firms publishing research reports predominantly with a "buy" investment opinion. The financial authorities plan to promote measures to enhance the independence of research departments, including improving researcher performance evaluations, budget allocation, disclosure methods, and introducing an independent research system.

The FSS emphasized, "During the discussions of the 'Research Practice Improvement Task Force (TF)' operating since March this year, it is very regrettable that many securities firms blame only the domestic market environment without reflecting on their past practices. Cases where researchers misuse investigative analysis data to gain unfair profits have frequently occurred, further deteriorating trust in research reports."

It added, "We believe that enhancing the credibility of research reports is more important as a collective and proactive change led by the Korea Financial Investment Association rather than at the individual securities firm level."

In response, the securities industry stated, "We strongly agree on the need to strengthen self-regulatory efforts such as internal controls to eradicate repeated illegal acts by some researchers and restore market trust. However, considering the high proportion of buy positions in the domestic market and the free provision of research reports, which also influence research practices, it is important to improve market participants' awareness respecting intellectual property rights and securities firms' efforts to protect them."

Furthermore, regarding bond-type wrap accounts (wraps) and specific money trusts (trusts), the FSS announced a firm stance to strictly respond to business practices premised on illegal activities. The FSS stated, "We can no longer attribute violations related to customer asset management and operation to the deviation of practitioners or unavoidable business practices. The securities industry needs to pay attention to improving internal controls to firmly eradicate unhealthy and illegal practices in the asset management market and establish the principle of self-responsibility for financial investment products."

Earlier, the FSS revealed that it is inspecting the actual conditions of securities firms' bond-type wrap and trust-related operations. At the end of last year, when a large-scale redemption request occurred in bond-type wraps and trusts due to liquidity tightening in the money market, suspicions arose that some securities firms compensated customers' investment losses through so-called "bond rollovers."

The FSS called for redesigning incentive systems and establishing effective internal control systems amid a situation where trust in the capital market and financial investment industry is severely damaged. It also urged special caution to ensure that finance is not directly or indirectly involved in the recently highlighted interest cartel issue.

Ham Yong-il, Deputy Governor for Capital Markets and Accounting at the FSS, said, "If a practice is good, it should be supported legislatively, but if it goes against the order of the capital market and investor protection, it must be improved as soon as possible. From now on, all of us must be vigilant, redesign inappropriate incentive systems that cause wrong practices, establish effective internal control systems, and focus our capabilities on strengthening the core functions of securities firms in capital intermediation and supply in the capital market."

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