Three Perspectives on the Introduction of the 'Korean Version of Fair Fund' [War on Stock Manipulation]

④-⑶ Forecast, 2020 Fair Fund Introduction Research Report
Last Year Fair Fund Service Order... Second Half Results Report
Funding from 'Fines, Penalties, and Other Civil Sanctions'
Operational Entities Differ: Financial Authorities, Courts, and YeBo
Proposal to Introduce 'Consent Decision System' and Operate in US Style

[Image source=Reuters Yonhap News]

Experts are proposing the introduction of the U.S. 'Fair Fund' as a remedy for victims of unfair trade practices. The Fair Fund is a fund established to distribute disgorgement or civil penalties recovered from investigations of violations of U.S. federal securities laws to investors harmed by such violations, instead of reverting these amounts to the treasury. South Korea also discussed introducing a 'Korean-style Fair Fund' in the National Assembly in 2020, but disagreements over the operating entity and funding sources prevented progress. The Asia Economy special investigation team gathered expert opinions on the introduction of a Korean-style Fair Fund and found general consensus on funding sources but differing views on the operating entity. Separately, some experts suggested that operating the Fair Fund under the 'consent decision system' structure of the Fair Trade Act would be desirable.

Korea Deposit Insurance Corporation (KDIC) "Operating entity should be financial authorities or courts" … Professor Jeong Soon-seop "Considering allocating fines to a special account"

The Korea Deposit Insurance Corporation (KDIC) disclosed in 2020, under the theme 'Current Status and Implications of the U.S. Fair Fund Operation,' its views on the funding, operating entity, and compensation targets for a Korean-style Fair Fund. It analyzed that the most rational funding source would be various penalties imposed for unfair trade practices, such as fines, criminal penalties, and confiscations imposed by the Financial Services Commission (FSC). At that time, there was no fine system for the three major unfair trade practices (fraudulent trading, market manipulation, insider trading), and only criminal penalties were possible. Therefore, punitive fines for incomplete sales acts stipulated in the Financial Consumer Protection Act were considered the main funding source.

The KDIC explained that the financial authorities would be the appropriate operating entity since the FSC is the body that imposes fines and penalties. The courts were also mentioned as an operating entity. If the Fair Fund includes not only fines but also criminal penalties, court approval is required. Additionally, in the event of a financial company's bankruptcy, court approval is necessary for securing creditor status and distributing bankruptcy assets. In the U.S., the Securities and Exchange Commission (SEC) and courts operate the Fair Fund separately. However, due to conflicts of interest, it was suggested that a unified deposit insurance organization like the UK's Financial Services Compensation Scheme (FSCS) could also be considered. The KDIC commissioned a research project on the introduction of a Korean-style Fair Fund on December 18 last year. The results are expected to be reported in the second half of this year.

Professor Jeong Sunseop, Seoul National University School of Law Photo by Dongju Yoon doso7@

However, the biggest current issue is that fines and penalties are reverted to the treasury, meaning they cannot be used as Fair Fund resources under current law. Professor Jeong Soon-seop of Seoul National University School of Law said, "We need to consider ways to secure the funds obtained by the state for investor damage compensation. One idea is to allocate fines reverted to the treasury to a special account." He added, "The ultimate goal of establishing unfair trade-related systems is 'victim relief.' Like the KDIC, a fund could be created, defining the target as victims of unfair trade, and upon confirming the damage, a portion of the loss could be compensated first."

Um Se-yong, Legal Expert at Law Firm Lin: "Financial Authorities Should Operate Using Fines as Funding"

Eom Seyong, Senior Advisor at Law Firm Lin

Um Se-yong, a legal expert at Law Firm Lin and recognized authority on the U.S. Fair Fund system, also supports using fines and penalties as funding sources. He stated, "Since fines and penalties used as funding for the Fair Fund are generally reverted to the treasury, it is necessary to amend the law so that these amounts are allocated to the Fair Fund account instead of the treasury."

Unlike the KDIC, he proposed financial authorities as the operating entity. The U.S. Fair Fund operates with civil penalties imposed for unfair trade, disclosure violations, and broker rule violations in the financial investment industry. The nature of deposits and financial investment products differs, as does the nature of financial companies selling these products. The KDIC is an institution established to protect deposits (safe assets). There may be legal questions about whether the KDIC has the authority to compensate for unfair trade damages related to financial investment products. Therefore, if the U.S. Fair Fund is introduced in Korea, it is preferable for the FSC and Financial Supervisory Service (FSS), which supervise and sanction unfair trade practices, to operate it.

Above all, considering administrative efficiency in confirming victims, financial authorities are the best choice. The FSC imposes fines for unfair trade practices and determines the amount of fines. Um pointed out, "There is an issue of confirming victims after verifying violations of the Capital Markets Act. Related data must be requested from securities firms, the Korea Exchange, and the FSS, and it is administratively inefficient for institutions other than the FSC to handle this."

He added, "In the U.S., compensation for unfair trade damages is completed within one year at the earliest and two to three years at the latest. While a distribution cooperation system centered on the KDIC could be created to establish the Fair Fund system, it is not appropriate in terms of prompt victim relief."

Choi Seung-jae, Attorney: "Consent Decision System Should Be Introduced in the Financial Sector"

Choi Seung-jae, Attorney at Law, Class Hangyeol Law Firm

There is also an opinion to adopt the U.S. Fair Fund model as closely as possible. The U.S. system is called 'administrative settlement.' In Korea, it is similar to the 'consent decision system' introduced by the Fair Trade Commission. The consent decision system is a mechanism where, instead of imposing fines for legal violations, the unfair trade offender voluntarily proposes and implements corrective measures to close the case.

Choi Seung-jae, attorney at Law Firm Class Han-gyeol and professor at Sejong University Law Department, opposes using fines and penalties imposed on unfair trade acts as Fair Fund resources. He said, "Civil penalties reverted to the treasury are essentially taxes. Using them to compensate victims of unfair trade would raise fairness issues such as 'privatization of investment gains and socialization of losses.'" Choi is regarded as a top expert in practical and theoretical aspects of the Fair Trade Commission's consent decision system and related fields.

The greatest advantage of the consent decision system is its flexibility in design. Compensation amounts can be negotiated from 10% to 100% depending on the severity of the unfair trade offender's crime. It is also possible to require sufficient funds for victim relief and then reduce sentencing accordingly.

This approach is closest to the U.S. Fair Fund but is not easy in practice. The FSC has not introduced the consent decision system yet. Legal amendments are required. The FSC, which started imposing fines this year, faces burdens in introducing new systems.

Some criticize the consent decision system as allowing offenders to 'escape punishment by paying money.' However, Choi dismissed this view, saying, "Even now, if a settlement amount is deposited during trial, sentence reductions are granted."

Choi emphasized the need for Korean society to fundamentally reconsider victim relief methods. He said, "Generally, when unfair trade cases occur, victims want to resolve them through the FSS dispute mediation, which also has advantages for victim relief. However, the advanced method is to compensate victims through class-action lawsuits in court using funds paid by financial companies."

Editor's NoteThe 'Ra Deok-yeon Gate,' the largest stock manipulation crime to date (total disgorgement of 730.5 billion KRW), is approaching its first anniversary (April 24, 2023), yet victims' nightmares continue. There is no effective remedy for victims in the Korean capital market. Litigation is the only option, but cost burdens and difficulties in proving damages deter victims from pursuing it. The amendment to the Capital Markets Act, which supplemented the limitations of criminal punishment and introduced effective monetary sanctions following the 'Ra Deok-yeon Gate,' is significant. However, to eradicate the increasing variety of securities crimes, it is necessary to establish a system capable of efficiently detecting and investigating such crimes and to improve additional systems for swift and strict sanctions. The Asia Economy Securities Capital Market Department special investigation team examines advanced overseas capital market systems and reviews the challenges and directions for our market to suppress securities crimes. Additionally, as intelligent and organized criminal acts occur, we seek effective measures to compensate investors.

We plan to intensively report from various perspectives on unfair trade practices such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to establish comprehensive countermeasures to eradicate capital market crimes. Please send tips to (lsa@asiae.co.kr). We will investigate thoroughly and report.

▲Team Leader Lee Seon-ae, Manager △Reporters Kim Min-young, Hwang Yoon-joo, Cha Min-young, Kim Dae-hyun

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