Aftermath of Full Reinvestigation into the 'Fund Scandal'... Sanctions on Sales Company CEOs, Conclusion After National Assembly Audit

"Need Time to Discuss Sanction Severity and Method"
Policy to Maintain Existing Severe Disciplinary Measures Remains Unchanged

As the reinvestigation into the 'three major fund scandals' involving Lime, Optimus, and Discovery begins, the financial authorities' sanctions against the CEOs of the fund distributors are expected to be concluded after the National Assembly audit.

According to the financial investment industry on the 4th, the Financial Services Commission (FSC) decided not to refer the sanction proposal against the CEOs of Lime and Optimus fund distributors to the agenda of the regular meeting scheduled for the 13th.

From the left, Park Jeong-rim, President of KB Securities; Yang Hong-seok, Vice Chairman of Daishin Securities; and Jeong Young-chae, President of NH Investment & Securities.

The FSC's regular meetings are generally held every other Wednesday. This month, meetings are scheduled for the 13th and 27th, but the meeting on the 27th will not be held due to the upcoming Chuseok holiday. Although the 13th is available for agenda referral, it is reported that the commissioners felt more time was needed to discuss the level and method of sanctions against the CEOs of the distributors. The reinvestigations by the Financial Supervisory Service (FSS) and the prosecution are also influencing this decision. The financial investment industry views that since next month is the National Assembly audit season, it will be difficult to refer sensitive and complex agenda items to meetings. Therefore, it is anticipated that the sanction proposals will be referred only after November, following the start of the National Assembly audit next month.

The FSC had suspended deliberations on sanction proposals against distributor CEOs since the end of March last year but resumed them earlier this year. This was after the Supreme Court confirmed the basic legal principle regarding the 'duty to establish internal control standards' in a lawsuit involving former Woori Financial Group Chairman Sohn Tae-seung in December last year. At that time, the industry expected this ruling to be favorable to securities company CEOs who had received heavy sanctions from the FSS for violating internal control standards under the Financial Company Governance Act, similar to former Chairman Sohn. This is because the first trial, second trial, and Supreme Court all ruled that there is no basis under current law to sanction violations of the duty to comply with internal control standards and that the duty to establish and the duty to comply with standards should be distinguished. Han Young-joo, Chairman of Hana Financial Group, who received a reprimand warning due to the DLF scandal, lost the first trial in March last year, and the appeal trial is ongoing.

The FSC has held 7 to 8 agenda subcommittee meetings to review the issues and legal principles intensively. If the FSC confirms sanctions heavier than the 'reprimand warning' decided by the FSS for some distributor CEOs, the sanctioned individuals will face restrictions on reappointment and employment in the financial sector for 3 to 5 years.

In November 2020, the FSS held a disciplinary review committee and decided on heavy sanctions of 'reprimand warnings' for KB Securities President Park Jung-rim and Daishin Securities Vice Chairman Yang Hong-rim for violating the duty to establish internal control standards (violation of the Financial Company Governance Act) related to the Lime fund scandal. In March 2021, the FSS also resolved heavy sanctions of 'reprimand warnings' for NH Investment & Securities President Jung Young-chae for violating the duty to establish internal control standards related to the sale of Optimus funds.

The securities industry is closely watching whether the reinvestigation and reinspection of the Lime scandal will affect the CEO sanction procedures and severity. Since additional illegalities related to the three major fund scandals have been revealed through reinspection and further inspections of distributors are underway, the existing heavy sanction proposals are expected to be maintained. A source familiar with the financial authorities hinted, "Considering the FSC's changed stance towards CEOs due to the FSS's additional inspections, it is practically difficult to ease the sanction severity, and the prevailing view is that heavy sanctions will be imposed."

The FSS recently began reinspection of Mirae Asset Securities and NH Investment & Securities, the distributors involved in the Lime fund preferential redemption allegations, and plans to soon start an inspection of Yuanta Securities. As the focus of the preferential redemption allegations shifts to the involvement of distributors, the tension among the sanctioned securities companies is rising. This could strengthen the justification for heavy sanctions.

However, since adding sanction reasons requires procedures such as prior notification to the parties and opportunity to present opinions, the sanction review period may be prolonged. There is also a view that the process might have to go through the FSS disciplinary review committee again or proceed separately under the Capital Markets Act violation by the FSS, making the calculation very complex and potentially delaying the conclusion.

Meanwhile, FSS Governor Lee Bok-hyun will attend the National Assembly's Political Affairs Committee plenary session at 2 p.m. on the same day to express his position regarding the preferential redemption allegations of the Lime fund. Depending on the content and tone of Governor Lee's remarks, political disputes surrounding the Lime fund reinvestigation may intensify.

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