Fund Sales Company CEO Sanctions Likely Decided on the 29th... Will It Escalate to Administrative Litigation?

Not on the Financial Services Commission agenda on the 15th... Disciplinary decision at the regular meeting on the 29th
Targets: Park Jeongrim KB Securities CEO, Jeong Youngchae NH Investment & Securities CEO, Yang Hongseok Daishin Securities Vice Chairman
"Warning or higher vs possibility of mitigation" conflicting forecasts... Administrative litigation possible depending on the outcome

The Financial Services Commission (FSC) is expected to finalize sanctions against the CEOs of Lime and Optimus sales companies within this month. At the regular meeting held at the Government Complex Seoul at 2 p.m. on the 15th, the agenda regarding the level of sanctions for Jung Young-chae, President of NH Investment & Securities, Park Jung-rim, President of KB Securities, and Yang Hong-seok, Vice Chairman of Daishin Securities, was not included. Accordingly, the agenda is expected to be submitted and sanctions finalized at the regular meeting scheduled for the 29th.

On that day, a senior FSC official stated, "The agenda for sanctions against securities company CEOs was not submitted at today's regular meeting." Regular meetings are usually held every other Wednesday. The next regular meeting is scheduled for the 29th. Therefore, it is highly likely that the sanctions agenda will be submitted on the 29th, and if it is not submitted then, it will be postponed until December. However, considering the recent critical views regarding internal controls within securities companies, the FSC official explained that the possibility of postponement until December is low.

In November 2020, the Financial Supervisory Service (FSS) held a disciplinary review committee and decided on a severe disciplinary action of a 'reprimand warning' against Park Jung-rim, President of KB Securities, and Yang Hong-rim, Vice Chairman of Daishin Securities, for violations including failure to establish internal control standards related to the Lime fund incident (violation of the Financial Company Governance Act). In March 2021, a similar severe disciplinary action of a 'reprimand warning' was decided against Jung Young-chae, President of NH Investment & Securities, for violations related to the failure to establish internal control standards in connection with the sale of the Optimus fund.

The sanction review process by financial authorities goes through the stages of 'FSS Disciplinary Review → Agenda Subcommittee → FSC Securities and Futures Commission → FSC Agenda Subcommittee → FSC Regular Meeting Resolution.' While fines and penalties against financial companies are reviewed in advance by the Securities and Futures Commission, sanctions against executives or business suspensions of institutions are deliberated and resolved by the FSC.

The FSC suspended the review of disciplinary proposals for sales company CEOs after the end of March last year but resumed it earlier this year. This was after the Supreme Court confirmed the basic legal principles regarding the 'duty to establish internal control standards' in a lawsuit involving former Woori Financial Group Chairman Sohn Tae-seung in December last year. The FSC decided to clearly apply the internal control-related legal principles established through Supreme Court precedents on a case-by-case basis. At that time, the industry expected this to work favorably for securities company CEOs who had received severe disciplinary judgments from the FSS for violations of internal control provisions under the Financial Company Governance Act, similar to former Chairman Sohn. This was because the first trial, second trial, and Supreme Court all ruled that there was 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.

The FSC has held eight agenda subcommittee meetings this year to intensively review the issues and legal principles involved. The CEOs reportedly pleaded for leniency, stating, "We have strengthened investor protection and internal controls and have worked hard to compensate the victims."

The FSC, after gathering opinions from experts in academia and the legal field, is judging that sanctions can be imposed on Park Jung-rim, President, Yang Hong-rim, Vice Chairman, and Jung Young-chae, President, based on the internal control provisions of the Governance Act. Initially, the fact that securities companies actively engaged in victim relief was considered a mitigating factor, and the FSC considered lowering the level of sanctions by one step, but the situation began to change due to new variables. The FSS has been conducting additional inspections related to the three major funds (Lime, Optimus, and Discovery) since early this year and has uncovered new illegalities.

Moreover, the public opinion toward the securities industry has worsened due to successive incidents. The financial authorities are pointing out internal control issues within securities companies. The FSS has ordered securities companies to re-examine internal control issues from scratch and has taken a tough stance, warning that responsibility will be held if internal control duties are neglected. A financial authority insider familiar with the matter said, "Considering the FSC's current stance, it seems practically difficult to reduce the level of disciplinary sanctions." On the other hand, another view has emerged. A financial investment industry official predicted, "Given the ruling on former Chairman Sohn Tae-seung and the CEOs' active efforts to compensate victims, there is room for mitigation."

If the FSC confirms severe disciplinary actions exceeding the 'reprimand warning' decided by the FSS for some sales company CEOs, the sanctioned individuals will be restricted from reappointment and employment in the financial sector for 3 to 5 years. Park Jung-rim's term was extended by one year at the end of last year, and he has been serving as President of KB Securities for four years. Jung Young-chae, who has been leading since 2018, also succeeded in his third consecutive term in March last year after the Optimus fund incident and has held his position for six years. The third consecutive term is a first for NH Investment & Securities. Yang Hong-seok, who was president during the Lime fund incident, was promoted to vice chairman in 2021, and his term lasts until March 31, 2024.

The reason Park Jung-rim and Jung Young-chae succeeded in their reappointments despite sanction risks was largely due to the strong internal company stance that management performance should be considered. Moreover, there was also an expectation at the time of reappointment that the level of severe disciplinary sanctions would ultimately be mitigated. If they receive a cautionary warning, which is one level lower than a reprimand warning, reemployment is possible. If the FSC lowers the level of sanctions, Jung's fourth term, ending in March next year, or Park's reappointment, ending in December this year, could be possible.

Accordingly, depending on the outcome after the FSC's disciplinary decision, there is a possibility of administrative litigation. In particular, after Sohn Tae-seung, Chairman of Woori Financial Group, who received a reprimand warning in the overseas interest rate-linked derivative-linked fund (DLF) loss incident in December last year, won the disciplinary cancellation lawsuit against the FSS, it is analyzed that court rulings related to internal controls may also influence administrative lawsuits against the FSC's decisions and sanctions.

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