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Extensive Amendments to the Financial Investment Services and Capital Markets Act

January 2012 - Finance. Legal Developments by Lee & Ko .

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Paving Way for Introduction of Full-Service Investment Bank, Are under Delay

The amendments to the Financial Investment Services and Capital Markets Act (FSCMA), the first draft of which was announced in July 2011, are likely to be submitted to the National Assembly at the earliest sometime this month, which makes it unlikely for the amendments to be enacted until sometime this year.  

Given the large number of provisions that are modified or supplemented by the amendments for vitalization and strengthening of the capital markets in Korea - a total of about 190 such provisions touching upon the introduction of full-service investment bank (IB), prime brokerage and others, it is taking a considerable amount of time to form a consensus and finalize the amendment process. As previously introduced in the August 2011 issue of the Newsletter, the main features of the amendments are as follows:

1. Introduction of Full-Service IB

The amendments seek to introduce full-service IBs to encourage the enlargement of domestic investment banks' financial capability so that they can readily support corporations in the new-growth industries and large-scale international infrastructure and/or development projects led by Korean companies. (1) Creation of full-service IB Separate from the existing financial investment businesses, a new category of IB which can provide a full range of corporate finance services will be created and referred to as a "full-service IB". To qualify as a full-service IB, it is necessary to have KRW 3 trillion in share capital and satisfy criteria on risk management capacities to be determined in a presidential decree to be promulgated under the amendments. (2) Services of full-service IB In addition to extending credit to corporations, a full-service IB will be able to provide prime brokerage and internal matching services for unlisted stocks. Again, the details of how a full-service IB can provide these services will be determined in a presidential decree to be promulgated under the amendments.

2. Bolstering the Regulation on Asset Management Industry

With respect to the definition of "Solicitation" in the context of asset management business, the phrase "solicitation to 2 or more people" has been clarified as "solicitation to 2 or more investors". With respect to discretionary investment business, the requirement to "manage the account in accordance with the investors' investment objectives" has been added to better reflect the nature of discretionary investment business. The amendments also make it explicit that when an asset manager exercises voting rights on behalf of a fund, it should do so as prudent manager.

To promote merger between small-sized funds, the merger process for them will be streamlined by eliminating the general meeting of investors. Yet, at the same time, the investor protection measure has been strengthened by ensuring the appraisal right of dissenting shareholders.

The amendments would allow the types of assets that a trustee can accept under the FSCMA (currently, seven types) to be expanded under the enforcement decree.

3. Strengthening the Capital Markets Infrastructure

To promote competition and efficiency and reduce settlement risk in the securities markets, the following measures concerning the capital markets infrastructure are to be introduced.

(1)   Introduction of alternative trading system and exchange permit

To replace the current statutory monopoly of the Korea Exchange, alternative trading systems (ATS) and exchange permits will be introduced.

An ATS refers to an electronic system that provides brokerage, dealing, solicitation and agency services to a number of counterparties with regard to listed securities. An ATS can be established with the permission from the Financial Services Commission (FSC) and would provide exchange services like the Korea Exchange on the basis of competitive bidding.

In addition, new exchanges can be set up with an exchange permit from the FSC. To apply for such permit, it is necessary to have a share capital in the amount in excess of KRW 100 billion, the exact amount of which is to be determined in a presidential decree, and meet other requirements. With an exchange permit, an ATS can be turned into an exchange.

(2)   Introduction of central clearing party for over-the-market derivative transactions

In furtherance of implementing what was agreed at the G20 meeting, the amendments will introduce a new category of "financial investment products transaction clearing business" which allows for the establishment of a central clearing party for over-the-market derivative transactions. A clearing business can be set up with a permit and may provide various types of clearing services including those for over-the-counter derivatives and stock lending.

(3)   Transfer of regulation on credit rating

The regulation on credit rating will be transferred from the Use and Protection of Credit Information Act to the FSCMA. The permitted business scope of credit rating agencies will be broadened to allow for rating of investment funds. Moreover, credit agencies will be subject to certain investor protection measures, and credit agencies' reports will be required to be publicly disclosed on DART, a public disclosure database maintained by the Financial Supervisory Service (FSS).

4. Broadening of Listed Companies' Financing Sources

Listed companies will be able to issue stand-alone warrants and conditional convertible bonds in addition to the six types of bonds they are allowed to issue under the Korean Commercial Code (which are straight bonds, convertible bonds, bonds with warrants, participating bonds, exchangeable bonds and derivative-linked bonds).

5. Supplementing the Method of Offering New Shares to Existing Shareholders

The amendments restrict discretionary handling of forfeited shares in the context of offering of new shares to existing shareholders and, in principle, require a new issuance procedure in the event any share is forfeited. Moreover, if new shares are to be issued at a per share price higher than the reference price set by the FSS, it will become necessary to issue certificates of subscription rights.

6. Improving Shareholders Meetings

To make shareholders meetings more active and meaningful, the practice of shadow voting which has been abused by corporate management will be banned starting in 2015. At the same time, the regulation on proxy solicitation will be relaxed. A person appointing a proxy will have to complete and delivery the proxy form to the proxy at least two days (instead of the current five days) before reporting the appointment to the FSC.

7. Modification of Unfair Trade Regulation

To prevent unfair trading by foreign IBs and hedge funds, the regulation on price manipulation, insider trading and other types of unfair trading will be tightened. Price manipulations involving unlisted securities or derivatives such as ELS linked to listed securities will become subject to criminal punishment. Moreover, excessive order placing (scalping) and secondary tippee's use of insider information will become subject to administrative sanction.

8. Improving the Regulations on Underwriting and Disclosure

The amendments will make arrangers, in addition to underwriters, responsible to investors for any statement or omission in the securities registration statement that is materially misleading.

The amendments will also bolster public disclosure requirements. For example, a company will be required to disclose any large funding exercise it pursues. At the same time, however, the amendments will waive the securities registration statement filing requirement for a public sale, if securities registration statement for the public offering has been already filed and relevant information has been disclosed to the public.

9. Miscellaneous

To address the problems that have arisen from the broad definition of "financial investment product" in the FSCMA, the amendments will grant the FSC the power to waiver or make necessary adjustments in its application of regulation on financial investment products. Moreover, as a measure to curb the broad definition of derivative-linked securities, interest-linked derivatives are to be regulated as if they were debt securities.

10. Forecast

The regulatory authority expects that the amendments will pave way for domestic IBs, which can compete with international IBs, which is to rise in Korea. Moreover, the authority anticipate that the amendments will enhance the market competitiveness of Korea Exchange and thereby strengthen its leadership in the capital markets in Korea. The amendments are also expected to facilitate Korean companies' funding efforts and increase their transparency, which, in turn, would broaden the scope of investment opportunities for investors and raise the level of their trust in the capital markets.


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