Capital Markets Act

Korea’s securities regulation law can be found from the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”, 자본시장과 금융투자업에 관한 법률), which became effective on February 4, 2009.

By the enactment of the Capital Markets Act, Korea has undertaken a reform of its capital markets and financial investment services.

Key words
Capital Markets Act, consolidating statute, unlawful transactions, disciplinary action

Purpose of the consolidating legislation
The Capital Markets Act was intended to improve the regulation of Korean capital markets by consolidating various statutes which used to govern the financial industry by type and improving their regulation and supervision.

The new Act established a system which can regulate all financial investment products traded in the capital markets and introduced regulations classifying financial investment services, financial investment products and investors based on functions. The new legislation expanded the business scope of financial investment service companies and at the same time reinforced investor protection mechanisms. It improved the structures for maintaining the market’s integrity by reinforcing regulations against unlawful transactions. It also introduced new regulations on cross-border capital market transactions and business activities.

Although some controversial issues remain in connection with the new concepts introduced in the legislation, it is expected to be a foundation for the development of the Korean capital markets.

Gists of the Act
The Capital Markets Act consists of 10 parts, 449 articles in total and addenda.
 * Part I General Provisions
 * Part II Financial Investment Business
 * Part III Issuance and Circulation of Securities
 * Part IV Regulation of Unfair Trading
 * Part V Collective Investment Scheme
 * Part VI Financial Services-related Institutions
 * Part VII Korea Exchange
 * Part VIII Supervision and Disciplinary Action
 * Part IX Supplementary Provisions
 * Part X Penal Provisions

Proposed Amendment to the Act
It was reported that the government proposed Amendments to the Capital Markets Act in July 2011.

For further information, see the explanatory notes published by Shin & Kim and other Korean lawyers.

The Financial Services Commission (FSC 금융위원회) recently submitted a proposal to the National Assembly to amend the Capital Markets Act which discusses the following issues with respect to underwriting, disclosure and regulation of unfair trades.

With respect to underwriting, the draft amendment clarifies the concept of underwriting by prescribing that a brokerage which acquires securities is regulated as an underwriter only when it has the intent to distribute them to other investors, etc. The proposal also suggests that the same liability for damages as underwriters should be imposed on solicitors for offerings in case of misstatements or the omission of material matters in registration statements.

With respect to disclosures, the draft amendment enhances the ongoing reporting obligations and suggests that a large-scale equity or debt financing by an issuer should be included in the reporting obligations.

In addition, in response to the spot-futures linked manipulation which recently gave rise to controversies in Korea, the revised bill expands the scope of the regulation on price manipulation by stipulating that price manipulation using unlisted securities (equity linked notes, etc) and OTC derivatives is also subject to criminal punishment. Regarding the use of undisclosed information, the amendment suggests that use of undisclosed information on backdoor listing and mergers of special purpose acquisition companies, etc, should be subject to regulation.

Furthermore, regarding the expansion of the scope of derivatives held in bulk which are required to be reported, the draft amendment expands the reporting obligations to derivatives which have stock prices indices (KOSPI 200 futures options, etc) as their underlying assets, in addition to those which have ordinary products as underlying assets. The matters described in this paragraph are currently under discussion and the actual amendment may contain different contents.