Capital Market Surveillance Shifts from Accounts to Individuals... Stronger Fines for Unfair Trading

Financial authorities are introducing a new market surveillance system that shifts from an account-based approach to an individual-based approach. The standards for imposing fines on unfair trading and false disclosures will also be significantly strengthened.

On October 22, the Financial Services Commission announced that it had approved amendments to the “Enforcement Decree of the Financial Investment Services and Capital Markets Act” (Capital Markets Act Enforcement Decree) and the “Regulations on Capital Market Investigation Work.” These measures are part of the previously announced “Action Plan to Eradicate Unfair Trading in the Capital Market.” The focus is on strengthening the initial response to unfair trading and strictly cracking down on market-disrupting activities such as false disclosures.

First, the Korea Exchange’s market surveillance system will be converted from an account-based to an individual-based approach. Currently, the Exchange monitors suspicious trading activities based on each account without utilizing personal information, making it difficult to identify whether transactions are linked to the same individual.

Accordingly, the amendment allows the Exchange’s Market Surveillance Committee to receive pseudonymized personal information (such as resident registration numbers) from member firms and conduct market surveillance work on an individual basis. Financial authorities expect that the number of surveillance targets will decrease by about 39%, thereby improving the efficiency of market surveillance and enabling faster identification of linked individuals, the degree of market manipulation, and whether wash trades have occurred.

The standards for imposing fines for unfair trading and disclosure violations have also been significantly strengthened. In the case of the three major unfair trading practices-use of undisclosed information, price manipulation, and fraudulent trading-the base fine rate has been raised to between one and two times the amount of unjust gains (the statutory maximum). For market-disrupting activities, the base fine rate has been raised to between one and 1.5 times the amount of unjust gains (the statutory maximum).

For disclosure violations, whereas previously fines were imposed within 20% to 100% of the statutory maximum depending on the type of violation, the amendment allows fines to be imposed on parties other than the filer, such as the largest shareholder or directors, in cases of violations of disclosure obligations for securities registration statements or tender offer statements.

Additionally, violations of Article 180 of the Capital Markets Act will be classified as either serious violations or minor negligence. If the violation is linked to unfair trading or if the facts are concealed or minimized, the entire amount of the illegal short sale order will be calculated and imposed as the base fine.

Sanctions for unfair trading committed by financial company executives and employees using undisclosed information in the course of their duties have also been strengthened. The amendment to the Regulations on Capital Market Investigation Work allows restrictions on trading financial investment products and orders to restrict the appointment of executives to be imposed “in principle” alongside monetary sanctions such as fines for unfair trading. The restriction period for those who have committed unfair trading will be determined first, after which any reduction will be considered, in the same manner as fines.

An official from the Financial Services Commission stated, “Through the amendments to the Capital Markets Act Enforcement Decree and the Regulations on Capital Market Investigation Work, we will be able to detect and identify suspicious and unfair trading activities more quickly. By strengthening sanctions such as fines, we will strictly crack down on unfair trading and false disclosures, thereby contributing to the establishment of a fair market order and the protection of investors.”

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