South Korea: Korean Regulator, Encouraging Financial Institutions By Relaxing The Chinese Wall Regulations

Last Updated: 11 January 2017
Article by Jaehoon Kim, Hyunjoo Oh and Seung-A Hyun

On 28 June 2016, the Korean government enacted an amendment (the "2016 Amendment") to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the "FSCMA") which, among others, expands the exception (the "Wall-Cross exception") to the Chinese wall regulations, i.e., restriction on the communication and exchange of information between business sectors within financial institutions.1 The 2016 Amendment seeks to enhance the competitiveness of financial institutions by allowing them to integrate activities which do not - or are unlikely to - conflict with one another, and further simplifies the regulatory scheme by removing the exceptions to the Chinese wall regulations from the Regulation on Financial Investment Business and incorporating the same in the Enforcement Decree.

In order to facilitate understanding of the aforesaid enactment, we have summarized below the basic structure of the Chinese wall regulations and the status of its implementation in Korea, and conclude with a number of recommendations for compliance officers at financial institutions.

The Basic Structure of the Chinese Wall Regulations

Due to the high likelihood of conflicts of interest in the financial industry, the FSCMA (a) subjects certain business areas to the Chinese wall regulations, (b) prohibits in principle such business areas from sharing information, personnel and/or facilities, and (c) requires strict adherence to a set of Wall-Cross requirements of those business areas seeking to exchange information despite a Chinese wall.

Specifically, FSCMA requires that Chinese walls be erected between, among others, the following business areas (as between (x) and (y)):

  1. Between (x) Proprietary Trading, Dealing and Brokerage, and (y) Collective Investment and Trust Business
    This provision aims to prevent financial institutions from (a) acquiring financial investment products with proprietary and/or client's assets before such products are acquired with the assets held in a collective investment scheme or a clientetstrust, and/or (b) profiting by acquiring financial investment products with the assets held in a collective investment scheme or a client antrust.
  2. Between (x) Investment Banking Business (the "IB business") and (y) Proprietary Trading and Financial Investment (excluding IB business)
    This provision aims to prevent financial institutions from engaging in proprietary trading and/or dealing activities based upon material nonpublic information obtained while engaging in IB business.
  3. Between (x) Prime Brokerage, and (y) Proprietary Trading and Financial Investment Business (excluding Prime Brokerage desk)
    This provision aims to prevent financial institutions from engaging in proprietary trading, brokerage and/or dealings based upon information on the transaction details and investment portfolios of relevant clients (including hedge funds) obtained while engaging in prime brokerage activities.

As a departure from the foregoing, the FSCMA grants the Wall-Cross exception to certain activities for which the likelihood of conflict is perceived to be low. The details of the Wall-Cross exception are beyond the scope of this article.

The specifics of the Chinese wall regulations can be further summarized as follows:

  1. No sharing of information: Departments subject to the Chinese wall regulations cannot share information such as: information on trading or holding of financial investment products, information on the trading details and investment portfolios of clients, material nonpublic information acquired in the course of conducting IB business, information on the portfolio and asset management of collective investment schemes, trusts and/or assets under discretionary management.
  2. No sharing of personnel: Departments subject to Chinese wall must be segregated from each other, and concurrent employment of with multiple departments is not permitted.
  3. No sharing of facilities: Works pace and IT facilities must be segregated to the extent necessary to prevent sharing of information

Further, financial institutions are required to retain internal records of the meetings and communications among the employees who are subject to the Chinese wall regulations and to have such records reviewed by the compliance officer or the auditor.

While the Chinese wall regulations primarily concern the various departments within a single entity, the FSCMA also applies a certain set of rules (i.e., no sharing of information, personnel, and facilities) to the relationship between financial institutions and their affiliates. As such, a global financial institution should take caution that the information exchange and/or communication between its Korean affiliate/branch office and its overseas affiliate/main office do not to violate the Chinese wall regulations.

Relaxing of the Chinese Wall Regulations With a Focus on IB Business

There has been mounting criticism over the rigidity of the Chinese wall regulations which goes against the FSCMA a legislative aim of achieving synergy from integrating various financial services. In particular, there has been recurring criticisms of the impracticality of strictly distinguishing IB business from proprietary trading/dealing/brokerage activities2 given that IB business, for the most part, can be classified as dealing/brokerage activities and often inevitably involve the trading of proprietary assets.

Further, it is difficult to objectively categorize an act based on the purpose of a transaction, which may not be obvious at first glance. For instance, a financial institution may be seeking to acquire privately placed bonds simply for investment purposes, in which case it would constitute proprietary trading, while its service for acquisition of a client would constitute IB business. Similar ambiguity plagues the extent to which a proprietary trading/dealing/brokerage department may handle matters relating to the primary market and the extent to which an IB business department may handle matters relating to the secondary market.3

Accordingly, the Korean regulatory authorities have continually sought to ease the Chinese wall regulations in respect of IB business and to widen the work scope of IB business departments through a line of amendments and statutory interpretations, the most recent of which is the 2016 Amendment. The content of and background to the 2016 Amendment are as follows:

  • The 2016 Amendment allows IB business departments to buy securities issued by KRX-KONEX-listed companies to finance the same and to trade derivatives with KRX-KONEX-listed companies to hedge risk, whereas in the past they could perform such activities only with respect to companies which were not listed on KRX. While such activities are classified as proprietary trading/dealing activities, the 2016 Amendment takes the view that the "financing" aspect of the aforesaid activities is well suited for corporate finance departments.
  • The 2016 Amendment allows corporate finance departments to trade and/or broker "electronic short-term bonds." Previous amendment to the FSCMA also allows corporate finance departments to trade and/or broker government bonds, municipal bonds and special bonds (although such activities are classified as dealing/brokerage activities), the underlying belief being that material nonpublic information concerning such bonds are unlikely to be misappropriated.
  • The 2016 Amendment allows corporate finance departments to invest in certain privately-placed collective investment schemes (although such activities are each classified as collective investment activity and proprietary trading activity). Previous amendment to the FSCMA also allows corporate finance departments to invest in private equity funds as limited partners, whereas in the past they could make such investments only as general partners.

Recommendations in Practice

It is recommended that financial institutions spend a considerable amount of time reviewing and understanding the highly complex Chinese wall regulations before structuring their management schemes. It bears particular emphasis that the Chinese wall regulations are equally applicable to all financial institutions regardless of their size, and provides no exceptions for small branch offices/affiliates of global financial institutions. Although global financial institutions typically have in place well-organized internal conflict management systems (which are oftentimes stricter than the regulatory requirements), special attention should be paid following the reallocation of duties among departments or the introduction of new businesses/products.

Footnotes

1. The term "financial institutions" as used in this article refers to dealers, brokers, fund managers, investment advisors, discretionary investment companies and trust companies (all of which are regulated under the FSCMA) to the exclusion of all other types of financial business entities such as merchant banks.

2. Under the FSCMA, IB business comprises the following: (1) underwriting, (2) arranging public offering and/or private placement in the primary market, (3) brokering, arranging and advising on M&As, (4) arranging and advising on project finances, and (5) managing private equity funds.

3. As IB business activities encompass underwriting and arranging public offering and/or private placement in the primary market, any work relating to the primary market (whether private or public) shall constitute IB business, and any work relating to the secondary market excluding public sales shall constitute dealing/brokerage activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions