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Amendment to the Financial Investment Services and Capital Markets Act: Mandatory Prior Disclosure of Insider Trading for Listed Companies

2024.02.05

A proposed amendment to the Financial Investment Services and Capital Markets Act (the “FSCMA”) introducing a mandatory prior disclosure of insider trading for listed companies was passed by Korea’s National Assembly on December 28, 2023 (the “Amendment”).  The Amendment primarily requires insiders (such as major shareholders1 and executives2, “Insiders”) of a listed company to disclose any large trading of shares in the listed company in advance.  The Amendment is expected to be implemented in July, 2024. 
 
 
Major Amendments 
 
While the current FSCMA has in place a number of measures to address and deter illicit Insider trades (including ex-post disclosure of trading of shares in listed companies by Insiders), they have proven to be inadequate to strengthen investor protection and to help shareholders understand more about the nature and timing of Insider trades.  With increasing demands to mitigate market volatility created by large trading of shares in listed companies by Insiders (especially by using non-public inside information made readily available to them), the Korean financial regulators have set an eye on proceeding with the Amendment since September 2022.  The Amendment will include the following features: 
 
 
1. Mandatory Prior Disclosure 
 
Any transfer by an Insider of securities (including equity securities, convertible bonds and bonds with warrants) issued by a listed company is required to be disclosed within the period falling between 30 and 90 days (as further prescribed in the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “Enforcement Decree”)) prior to the expected closing date.  In this prior disclosure, Insiders must disclose the purpose, price, quantity, and expected trading period of the subject transaction. 
 
To avoid split transactions, (i) quantities and prices of trading for the immediately preceding 6 months will be aggregated, and (ii) the submission of trading plans with overlapping trading periods will not be permitted under the Amendment. 
 
Further, any breach of the measures, such as failing to disclose trading plans, making false disclosures and/or failing to implement trading plans, as set forth in the FSCMA may result in a penalty of (i) 0.02% of the total market capitalization of the listed company or (ii) KRW2 billion, whichever is lower.  It is also worth noting that such breach can be criminally sanctioned by imprisonment of a maximum period of 1 year or a maximum fine of KRW 30 million. 
 
 
2. Exemptions 
 
To ensure that the Amendment does not create an excessive burden, the following are exceptions under the Amendment: 
 
(a) certain events (such as inheritance, as to be further provided under the Enforcement Decree) will be exempted from the mandatory prior disclosure obligation; 
 
(b) deviation from the submitted trading plan in an amount not exceeding 30% (as to be further provided under the Enforcement Decree) of the pre-disclosed trading price may be allowed as necessary by considering the then-current market conditions; and 
 
(c) upon the occurrence and continuation of certain events (such as death, bankruptcy and any other unforeseeable events, as to be further provided under the Enforcement Decree), withdrawal of the submitted trading plan may be allowed upon reporting to the Securities and Futures Commission and the Korea Exchange. 
 
Although specific thresholds and details will be further set out in the Enforcement Decree and other regulations and decrees, the Financial Services Commission has provided the following amendment examples:

<div style="background:#eeeeee;border:1px solid #cccccc;padding:30px;">(a) Trading Quantity Subject to Mandatory Prior Disclosure: 1% or more of the total issued and outstanding shares or trading price exceeding KRW 5 billion 
 
(b) Exempted Insider: Local and foreign financial investors (including pension funds) 
 
(c) Disclosure Period: 30 days prior to the expected closing date</div>
 
 
Conclusion 
 
By promoting transparency and predictability with respect to Insiders’ trades, the Amendment will strengthen investor protection and deter illicit and unfair transactions involving Insiders.  Further, prompt disclosure of the shareholdings of Insiders which can materially affect the share prices will work to ease market volatility.  Although some may argue that the Amendment may overly restrict Insider rights, the exemptions to the requirements can mitigate such concerns. 
 
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<div style="line-height: 110%;">1  A major shareholder means (i) a holder of 10% or more of the total issued and outstanding shares (with voting rights) of a listed company or (ii) a person with de facto influence over material management and business matters of a listed company. 
2  Executives shall include directors, auditors, and de facto officers of the listed company.</div>
 
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