Financial Services Commission Raises Penalties for 5% Rule Violations... Registration System Applied When Securities Firms Add New Business

Published 07 Dec.2021 12:00(KST)

[Asia Economy Reporter Ji-hwan Park] In the future, if a listed company violates the 5% reporting obligation disclosure requirement, the penalty fines will be significantly increased. Additionally, when a licensed securities firm adds similar business lines, it only needs to register instead of obtaining a new license. In this case, it will not be required to undergo a separate business plan feasibility or major shareholder eligibility review. Furthermore, foreign securities firms entering the domestic market will be exempt from major shareholder eligibility reviews when changing their organizational form from a branch to a corporation or other types.

On the 7th, the Financial Services Commission announced at the Cabinet meeting that the amendment to the Enforcement Decree of the Capital Markets Act to simplify the licensing procedures for financial investment businesses was approved.

Looking at the main resolutions of the day, first, the penalty fines for the 5% reporting obligation will be adjusted to reflect reality. Currently, investors must report and disclose within 5 days when they hold 5% or more of a listed company's shares or when there is a change of 1% or more in their holdings, or changes in the purpose of holding or major contract details.

However, it has been pointed out that the current penalty fines for violating the 5% reporting obligation are significantly lower compared to other disclosure obligation violations. The average penalty fine for 5% reporting violations over the past three years was 370,000 KRW, which is lower than other disclosure violations such as securities registration statements (58 million KRW).

The amendment improves the penalty fine criteria for violations of the 5% reporting obligation to enhance the effectiveness of sanctions. For companies with a low market capitalization (less than 100 billion KRW), the minimum market capitalization standard (100 billion KRW) will be applied.

The licensing review will also be relaxed for simple organizational changes of foreign securities firms. When a foreign securities firm changes its organizational form from a branch to a corporation, or vice versa, or changes its head office, it will be exempt from reviews of business plans, personnel, IT and physical facilities requirements, and major shareholder eligibility requirements.

Additionally, when a licensed securities firm intends to add similar business lines, the system will change from a licensing system to a registration system. Accordingly, it will not be required to undergo separate business plan feasibility or major shareholder eligibility reviews.

Moreover, in the event of a securities firm's bankruptcy, measures have been taken to allow the deposit institution to directly pay investor deposits to customers promptly and securely instead of the securities firm.

When licensing short-term finance businesses that can handle issued promissory notes, not only major shareholders but also the applicant's financial requirements and social credit requirements must be reviewed, similar to other financial investment businesses.

The amendment also improves the system for suspending licensing reviews. Previously, during the licensing or registration review of financial investment businesses, if criminal lawsuits or investigations by the Financial Services Commission or prosecutors targeting the applicant or major shareholders were ongoing, the review process was suspended for a long period until these procedures concluded. Going forward, if the review is suspended due to lawsuits, the resumption of the review must be reviewed every six months. A Financial Services Commission official stated, "Even before the review period arrives, we plan to resume the review as necessary considering the progress of lawsuits and other factors."

This amended regulation will be applied from the 9th, the effective date of the related amended law.