As authorized under the Financial Investment Services and Capital Markets Act (FSCMA), the Securities and Futures Commission (SFC) is vested with the powers to investigate unfair trading and take appropriate enforcement actions. The powers specified for the SFC in the FSCMA include disgorgement of gains from short-swing profit by corporate insiders, reporting of share ownership by company officers and other insiders, prohibition on the use of material nonpublic information, prohibition on market manipulation, and prohibition on unlawful securities trading. The SFC is also granted the authority to investigate security offerings in the primary and secondary markets.
The FSCMA authorizes the SFC to delegate the power to investigate unfair trading to the FSS. As a result, it is the FSS that actually performs the investigation of unfair trading and other securities law violations under the authority of the SFC. (In addition to the SFC, the FSC delegates its broad investigation and enforcement powers to the FSS.)
The SFC may with a court-issued warrant conduct interviews, order document submission, and search the premises of individuals who are suspected of unfair trading connected with short-swing profit of a company insider, share ownership reporting, use of material nonpublic information, market manipulation, unlawful securities trading, or short-selling.
As provided under the FSCMA and the Act on Real Name Financial Transactions and Confidentiality, the FSS may perform investigation of unfair trading under the authority of the SFC in the following manner:
- Request records and other relevant documents;
- Request statements and affidavit from individuals who are involved in or connected with unfair trading;
- Summon for questioning individuals who are involved in or connected with unfair trading;
- Hold in custody documents and objects pertaining to unfair trading;
- Examine financial institution for unfair trading investigation; and
- Obtain information from government administrative agencies and from foreign supervisory authorities.
Corrective Measures and Enforcement Actions
When an investigation leads to the discovery of unfair trading, corrective measures and enforcement actions available to the FSS include:
- Refer the suspected individuals to the law enforcement authorities;
- Issue a warning or a corrective action;
- Impose an administrative fine, restrict new securities issuance, or refer to the law enforcement authorities for a disclosure violation; and
- Demand pay reduction and removal from the job for company officers and employees involved in unfair trading.
The SFC may refer some investigations to the prosecution authority as a priority under certain circumstances as follows:
- Action is needed because the SFC is unable to convene for an extended period as a result of unexpected developments and circumstances such as a natural calamity;
- Referral to the prosecution authority is needed because an unfair trading matter under FSS investigation is also being investigated by the prosecution authority;
- Violation of the securities law and regulation is recurring and threatening investors; or
- Action is needed to prevent a suspect from destroying evidence or fleeing.
Investigation and Enforcement Process
Investigation and enforcement of unfair trading is shared among the Korea Exchange, the FSS, and the prosecution authority. Whereas the Korea Exchange as a self-regulatory organization for the securities industry is charged with market monitoring and fact finding, the FSS conducts or takes charge of unfair trading investigations requiring highly technical or specialized expertise. The government prosecution authority works to impose criminal penalties for violation of the securities law. Thus, when the Korea Exchange detects a suspicious share price movement or an unusual trading activity, it forwards to the FSS information pertaining to the suspicious trading and individuals involved. The FSS then initiates additional fact finding and information collection and requests document submission and interviews from suspected individuals in order to determine whether any violation of law occurred. Where criminal penalty is warranted, the FSS refers the case to the prosecution authority on behalf or through the SFC.
The FSC may also investigate cases of unfair trading using its own broad investigation and enforcement powers on the basis of information received from the Korea Exchange and refer the cases to the prosecution authority for criminal action through the SFC.