The Korean Journal of Securities Law Vol. 5 No. 2 2004 A Study on the Indirect Investment Asset Management Business Act Sung Keun-O ABSTRACT Until the end of 2003, asset management activities in Korea in sectors such as stock brokerage, trust funds, and insurance were in general regulated through the internal rules set by the industrial associations of each of these sectors, thereby ruling out any possibility of government intervention. It turned out, however, that this free market approach resulted in the issue of unfairness among different financial industries and also was cited as one of the major elements discouraging foreign investment in Korea s financial industry. This was because the system was not able to embrace the new investment opportunities or sectors that were emerging with the development of Korea s financial industry. It was within this context that the Indirect Investment Asset Management Business Act was legislated and became effective as of January 2004. The intent of the law is to regulate the various business activities of different sectors of Korea s financial industry in a more coordinated and equal way by placing numerous indirect investment firms under the single legal concept of an indirect investment organization. Also by integrating all related laws and rules into a single law so that those different sectors are all treated equally by the law it is hoped that confidence and trust will eventually be regained from foreign and domestic investors. In this regard, the law reinforced a number of safety devices for investors and also improved greatly the issue of asset management regulation by widening the concept of asset management to include more investment asset items. It is hoped that the law will reinvigorate the entire asset management industry in Korea.
This research lists the major points of the new law as a functional law that integrates all the previous related laws and examines a number of possible implementation and legal issues. Part II discusses in general the ways that asset management firms in Korea are regulated. Part III looks at actual regulatory practices on different management activities with respect to indirect asset management. Part IV reviews special rules supported by related laws that apply to financial institutions. Part V looks at rather unique indirect asset management organizations. Part VI suggests as the conclusion of this study a number of issues and possible solutions.
The Korean Journal of Securities Law Vol. 5 No. 2 2004 Current State of Investments by Foreign Funds in Korea and Related Legal Issues Hee Chul Kang ABSTRACT The Korean securities market has already been integrated to the global capital market. Currently, foreign investors hold shares of Korean companies representing more than 40 percent of the total market capital of the Korean securities market, and the amount invested by foreign funds represents at least 50 percent of the aggregate foreign investment amounts. Private equity funds such as Carlyle, New Bridge Capital and Lone Star have acquired or attempted to acquire the management control of financial institutions and other important companies of Korea. Furthermore, quite a few fund managers of mutual funds including Capital Group have acquired at least 5 percent of the shares of key companies and demanded the improvement of corporate governance and pursuit of the shareholder value. More and more foreign funds will participate in the management and acquire the management control, and the possibility that foreign funds will attempt hostile M&As in the near future cannot be precluded, as indicated by the dispute between SK and Sovereign. There are worries about such circumstances, and there exist effectively reverse discriminations against local companies in certain areas due to the regulations under the monopoly regulation and fair trade law, various finance related laws and the Indirect Investment Asset Management Business Act. In addition, the relevant system should be improved in certain areas such as the five (5) percent rule, election of the audit committee members and the application of the Foreign Investment Promotion Act. However, it is not desirable to emphasize the negative aspects of the investments by foreign funds too much or to consider the management control by foreign investors
always bad. The problems which make foreign investments difficult should be corrected. At the same time, the relevant system should continue to be improved, so that more and accurate information about the identities and the investment objectives of foreign funds and other investors can be disclosed in a timely manner and the reverse discrimination against local companies may be corrected. The recent amendment of the Indirect Investment Asset Management Business Act which will create the framework for local private equity funds competing with foreign based funds represents a very important step forward. I hope that in the future not only foreign funds but also local private equity funds will play major roles in the areas of local corporate governance improvement and the M&A market of Korea. Key words : foreign funds, private equity fund, management control, M&A, the Indirect Investment Asset Management Business Act
The Korean Journal of Securities Law Vol. 5 No. 2 2004 A Study on the Regulation FD Reform in Korea Hye-Hwal Seong ABSTRACT Korea has introduced Regulation FD since 2002 modeling after that of the United States. The main purposes of Regulation FD are to provide a level playing field for individual investors and prevent insider trading, so ultimately try to achieve information democracy through parity of information. Korea, however, has different systems in timely disclosure and insider trading regulation from those of the US. Thus, unlike Regulation FD in the US, Korean Regulation FD has some problems like conflicts with the insider trading regulation. Accordingly, this article suggests reform proposal for betterment of the current Regulation FD. The article reviews, first, the developments of Regulation FD in the US for better understanding of the philosophy of the new disclosure and insider trading regulation. Next, it analyzes the problems with the current system in Korea, which are the requirement to disclose non-material information and the conflicts with the insider trading regulation. To solve the problems, the article suggests first to avoid the conflicts with the insider trading regulation through expansion of disclosure channels. Next, it discourages disclosure of non-material information based on the cost-benefit analysis. In addition, it argues for self-regulatory organizations to operate and enforce the Regulation FD as it is. Finally, the article insists that the current regulation on analysts be continued to fill gaps in the current insider trading regulation.
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The Korean Journal of Securities Law Vol. 5 No. 2 2004 Double Derivative Suit of Shareholders of Parent Corporation Kim, Dae-Kyu ABSTRACT Business combination in Korea is increasing more and more. Accordingly, a number of korean corporations are composed of subsidiaries and subsidiaries of subsidiaries. In addition to this economical practice, it is permitted founding a holdings company after the amendment of the Korean Commercial Code(KCC) 2001. On this, the Seoul High Court in August 2003 decided for the first time that double derivative suit could be permitted under the current KCC, because it provides a method for corporation to assert legal rights and to deter directors wrongdoing of subsidiaries. However, the provision on this matter was originally designed to apply to single derivative suit. The KCC has the provision that a shareholder with at least one percent of the total outstanding shares may bring a derivative suit. For that reason, the Korean Supreme Court has interpreted strictly the KCC that double derivative suit is not permitted under existing law, because the rule of single derivative suit is not applicable to shareholder of parent corporation; the parents and subsidiaries corporation differs legal personality. In this means, the decision of the Seoul High Court and the theories permitting the double derivative suit should be here examined and analyzed critically. In conclusion, this article is purposed to demonstrate that double derivative suit is a legislation subject, because it is not enough to justify under the current Commercial Code. In my opinion, it could be permitted merely after the revise of KCC for multiple derivative suit or by the special legislation like that, Law of Parent-Subsidiary Corporation Relationship. Key Word: double derivative suit, multiple derivative suit, parent corporation, subsidiary corporation, demand requirement.
The Korean Journal of Securities Law Vol. 5 No. 2 2004 The Role and Legal Responsibility of Online-Brokers Kwak, Kwan-Hoon ABSTRACT Technological developments in recent years have profoundly affected the securities industry. One of the most dramatic changes in the way in which brokerage firms use the internet to communicate with their customers. In addition to more traditional channels of communication such as the telephone and postal mail, broker and customers now transmit information to each other through broker s web sites, e-mail, mobile phones and personal digital assistants. Brokers also use the internet to provide lower-cost, unbundled services to customers. Technological advancements have provided many benefits to investors and the brokerage industry. These technological innovations, however, also have presented new regulatory challenges. Since technology is constantly developing, it is not so easy to keep pace with the ever-growing demand of consumers to access the securities markets from their personal computers. Consequently, online brokers have been left with the difficult, and at times impossible, task of ensuring that their ability to provide adequate and reliable customer service is not diminished as their customer base continues to grow. Increased customer demand coupled with lack of sufficient technological systems has created frequent system outages and delays in brokers automated trading system (HTS). Such problems as outages and delays have resulted in investors suffering extreme financial losses or missed investment opportunities. In addition, informations which have been provided by onlinebrokers are similar to the recommendation of the traditional brokers. Therefore suitability rule should be applied to the recommendation, to customers and investors, of online-broker. And, the greater part of issuer s website offer interactive information
service, such as Internet bulletin board system (BBS). Investors can use message boards to post and obtain information and share their opinions about particular securities and investment strategies. They provide opportunities for abuse by purveyors of fraud, and they may confuse inexperienced investors, who are unable to make sense of conflicting and complicated information. In this article, with these issues in mind, I would like to explore problems of onlinebrokers about use of web site and automated trading system. On this basis, I tried to examine appropriate roles and legal responsibilities of online-brokers in the era of technological changes.
The Korean Journal of Securities Law Vol. 5 No. 2 2004 The Legal Issues on the Grant and Exercise of Stock Option Hyun Seok Yoon ABSTRACT The option to purchase new shares or shares it owns (hereinafter referred to as Stock Option ) introduced in Securities and Exchange Act, Venture Business Supporting Act and Commercial Act since 1997. The Corporation is harmonized with interests of shareholders and officers or employees, and secures the able workers by the Stock Options. Because it is only a short time since the Stock Option which the Corporations granted to officers or employees was managed, it didn t have socially any problems the while. While the granted officers or employees begin to exercise this options recently, this options become issues gradually. In particular the person who realizes a windfall profit according to economic situation irrespective of contribution of business man appears. And the case to granted several people this options enjoys raised profits of the stock prices irrelevant to each contribution. So the Stock Optionee has moral hazard, and this options are against the interested party of corporation, that is, shareholder etc.. While the corporation makes the Stock Option plan and has to be managed this option more effectively. But according to the law now in force the object and volume of stock options, stock option exercise is limited, so the problems that corporations to grant this option manage inefficiently exist. Therefore this paper examines legal issues for stock options and proposes improvement for this.
The Korean Journal of Securities Law Vol. 5 No. 2 2004 Securitization of Intellectual Property As an Alternative Form of Financing Jae Yeol Kwon ABSTRACT While securitization itself is not new, securitization of intellectual property was invented in the mid-1990 s. Such securitization can offer a variety of financing and economic opportunities to firms and individuals. It converts assets or cash flows into marketable securities which is commonly called asset-backed securities (ABS) and thus increases liquidity. In a securitization transaction, a low quality firm is able to issue high quality securities because securitization serves as a bankruptcy remote vehicle. The transaction can make the overall cost of financing reduced. In addition, it is recorded as an off balance sheet transaction which is considered an important indirect benefits to asset owners. The total known volume of securitization transactions in recent years has exploded in U.S. and Japan. However, intellectual property securitization has not been used as a source of financing in Korea. In Korea, intellectual property-backed securitization can present significant difficulties beyond securitization occurred in mortgage industry, which are as follows: First, the obsolescence of intellectual property can reduce the value of underlying assets. Second, illegal use of intellectual property can increase future revenue stream risk. Third, ownership rights and control over patent is generally bounded by the reach of national sovereignty. Fourth, universally-supported valuation techniques do not exist. Fifth, securitization is more complex than other financing techniques. Sixth, the current Securitization Law restricts qualifications for an originator within narrow limits. Lastly, intellectual property cannot be securitization subject matter under the current Trust Business Law.
The Korean Journal of Securities Law Vol. 5 No. 2 2004 What Isn t Prohibited By Insider Trading Regulation? Insider Abstention and Substitute Insider Trading Kun Young Chang ABSTRACT Insider trading is a term of art that refers to unlawful trading in securities by persons who possess material nonpublic information about the company whose shares are traded. While insider trading regulation under the Korean Securities and Exchange Act focuses on insider trading, it does not regulate all kinds of informationally advantaged act using material nonpublic information, such as insider abstention and substitute insider trading. It has been believed that insiders can profit on material nonpublic information both by trading and by abstaining from trading. This Article examines that this conventional wisdom about insider abstention can be wrong and that nonregulation of insider abstention can be efficient. Another likely type of informationally advantaged trading is by officers and directors of one corporation (Corporation A) in another corporation s (Corporation B) securities. This form of trading can be referred to as substitute insider trading. Substitute insider trading is presently legal, and it may be quite profitable. This Article discusses that substitute trading can be less socially desirable than traditional insider trading, and examines possible changes in the law that might limit substitute insider trading.
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