Confirmed Sanction on NongHyup Bank OEM Fund Sparks Financial Sector Stir... "Will Other Banks Also Be Affected?"

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[Asia Economy Reporter Kangwook Cho] NH Nonghyup Bank has been fined 2 billion KRW by financial authorities for selling funds through an Original Equipment Manufacturer (OEM) method. This is the first time a bank, as a seller, has been sanctioned for failing to submit a securities registration statement related to OEM and series funds. The financial sector is unsettled as other banks, which serve as fund sales channels, are expected to be broadly affected.

According to financial authorities and the financial sector on the 25th, the Financial Services Commission held a regular meeting the day before and finalized the 2 billion KRW fine imposed on Nonghyup Bank by the Securities and Futures Commission on the 3rd as originally proposed. The initial penalty proposed by the Financial Supervisory Service was 10 billion KRW, but the Securities and Futures Commission lowered it to 2 billion KRW, judging the original fine to be excessive.

Nonghyup Bank is accused of ordering funds from Fine Asia Asset Management and Aram Asset Management via the OEM method between 2016 and 2018, splitting them into private funds with fewer than 49 investors to evade public fund regulations. OEM funds are those created by asset management companies under orders, instructions, or requests from fund sellers such as banks or securities firms, which is prohibited under the Capital Markets Act. Nonghyup Bank has argued that it sold financial products from March 2016 to March 2018, while the obligation to submit securities registration statements to sellers was imposed only from May 2018 when the law was enacted, making retroactive application unreasonable. They also emphasized that investors in the disputed funds did not suffer any losses.

The bank stated, "We respect the Financial Services Commission's decision and accept it with a heavy heart." However, they also expressed regret, saying, "This is the first time a fund seller has been sanctioned for not submitting a securities registration statement while selling collective investment securities, and there have been many legal controversies regarding the application of the law."

Within the financial sector, opinions that the decision is excessive are prevalent. Although the financial authorities confirmed the sanction by viewing the bank as an 'arranger' of the fund sales, the Bioinfra case referenced by the authorities is fundamentally different from this sanction case. It is pointed out that sellers who only handle the sales of collective investment securities (such as funds) without conducting due diligence on the securities issuer cannot be considered arrangers under the Capital Markets Act.

A financial sector official lamented, "Typically, when a product is created and sold, there is basic prior coordination between the manufacturer and distributor. However, this sanction will block communication between fund product sellers and asset managers."

Some speculate that Nonghyup Bank is likely to file an administrative lawsuit due to the burden of being the first case. However, concerns are growing that Nonghyup Bank joining the ranks of banks opposing financial authorities, which has been recently observed, could escalate tensions.

Another financial sector official said, "In cases of legal controversy, it is common practice to use all available means, including administrative lawsuits, even if litigation costs exceed fines, to prevent potential breach of fiduciary duty claims against CEOs in the future." However, they added, "Due to concerns about possible retaliatory inspections, they will likely have no choice but to watch the authorities closely."

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