Annual. Review. A dedicated jurisdictional REVIEW. Published in conjunction with:

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1 Korea Annual Review A dedicated jurisdictional REVIEW Published in conjunction with: 2012

2 market Analysis Banking & Finance INDIA Co-published feature Recent developments in Korean regulations By Stephane Park, senior foreign attorney, and Ie-Hwan Yoo, attorney, Kim & Chang In recent years, Korea has committed to liberalise its financial services industry. Beginning with the adoption of the 2007 Financial Investment Services and Capital Markets Act (FSCMA), a number of measures and pieces of legislation have been announced to that effect. Thus, in 2011, the Financial Services Commission (FSC) announced a proposed amendment to the FSCMA that would permit the establishment and operation of hedge funds in Korea 1. In parallel with such liberalisation measures, the Korean regulators (consistent with global trends) also saw the need to provide added protection to consumers of financial products. On December , the FSC also proposed two new pieces of legislation, the Act on Financial Consumer Protection (the AFCP) and an amendment to the Act on Establishment of Financial Services Commission, which were intended to strengthen the protection of consumers of financial products. Separately, the Personal Information Protection Act (PIPA) was enacted and became effective in September PIPA governs the processing and use of personal information, covering both the public and private sectors. It is intended to prevent the type of leakage, misuse and abuse of personal information, as recently experienced in Korea. For financial institutions, this will be an additional requirement to the customer data related requirements under existing laws such as the Act on Real Name Financial Transactions and Guarantee of Secrecy, the Use and Protection of Credit Information Act and Act on Promotion of Information and Communication Network Utilization and Information Protection. As PIPA provides specific requirements relating to the processing, use, storage and destruction of personal information, applies with regards to customer and employee information, and provides civil and criminal penalties, it may have a significant impact on the operation of financial institutions in Korea. Set forth below is a brief summary description of these recent changes and developments. Introduction of hedge funds and prime brokerage Until recently, funds established in Korea had to be categorised as a specific type of fund, and were subject to investment restrictions (for example, as to the types of assets) based on such classification (for example, derivative funds). The recent volatility in the securities market and the surge in demand for tailored investments beyond traditional In 2011, the Financial Services Commission (FSC) announced a proposed amendment to the FSCMA that would permit the establishment and operation of hedge funds in Korea 1 The Korean private equity fund ( PEF ) market is already at US$30 billion. Some estimate that the size of the hedge fund market may reach as much as US$40-50 billion in 3 years. ASIALAW Korea Annual Review

4 market Analysis Banking & Finance INDIA securities and bonds have called for the introduction of new players in the market, such as hedge funds and prime brokers. In this regard, a recent amendment to the Enforcement Decree of the FSCMA, which became effective on September , introduced changes intended to address such market demands, including the ability to establish hedge funds, which are able to invest in a large variety of assets. The following are some of the key points of the FSCMA amendment with respect to hedge funds and prime brokerage activity: 1) Eligible investors Certain financial institutions including banks and financial investment companies and qualified professional investors (i.e., individuals investing KRW5 billion (US$4.41 million) or more and corporate entities investing KRW10 billion or more) and high net worth individuals (investing KRW500 million (US$441,300) or more) can invest in hedge funds. 2) Management There are no restrictions on the type of assets that hedge funds may invest in. Leveraged transactions (i.e., borrowings) and investments in derivative products are also permitted, up to 400% of the net assets of the relevant hedge fund. 3) Eligibility requirements for hedge fund managers A new hedge fund management licence is available to securities companies, asset management companies and investment advisers that meet certain requirements, including: (i) a minimum capital equity requirement of KRW6 billion, (ii) an additional capital requirements or minimum track record requirement and (iii) a staffing requirement (a minimum of three (3) licensed investment managers). 4) Reporting obligation of hedge fund managers Hedge fund managers are required to file a quarterly report with the FSC containing information regarding investment strategy, types of assets for investment, leverage and any derivative transactions. 5) Prime brokerage Prime brokerage was also introduced to provide comprehensive services to hedge funds, including securities lending, funding, custody, execution and settlement services. Securities companies satisfying certain regulatory requirements (for example, minimum capital requirement, having an internal risk management system) will be qualified to act as a prime broker for hedge funds. 6) Regulations on prime brokerage business Prime brokers are permitted to engage in credit lending and securities collateralised lending with hedge funds. Securities lending and borrowing transactions between a prime broker and a hedge fund will also be allowed. In addition, prime brokers The FSC is seeking implementation of the Proposed Legislation in light of recent controversies involving improper sales of financial products may delegate their custody services for hedge funds to third parties who hold a trust business licence. 7) Chinese wall for the prime brokerage business While current rules prohibit activities relating to securities dealing or brokerage from being conducted within the same department as a trust business (for example, acting as custodian for fund assets), under the new rules, a prime brokerage business may be conducted from within the same department as a trust business, provided that, such department is segregated from all other departments through appropriate Chinese walls and procedures to prevent the sharing of personnel and information. New proposed legislation to strengthen financial consumer protection On December , the FSC proposed two new pieces of legislation, the AFCP and an amendment to the Act on Establishment of Financial Services Commission (together with the AFCP, the Proposed Legislation ). The Proposed Legislation, which remains to be passed by the National Assembly, aims to strengthen the protection of consumers of financial products. The FSC is seeking implementation of the Proposed Legislation in light of recent controversies involving improper sales of financial products, such as unsecured subordinated notes being issued to individual investors by mutual savings banks that have become insolvent. In addition to providing additional protective measures, the Proposed Legislation is intended as a unified law to govern sales activities of banks and other financial institutions. Currently, consumer protection provisions are scattered in different laws and regulations governing different sectors. The Proposed Legislation is also intended to regulate all phases of the sale of financial products, ranging from information disclosure, sales process and compensation for damages suffered by financial consumers. The Proposed Legislation also calls for the establishment of a new regulatory body for protecting financial consumers (the Consumer Agency ). The following is a summary of some of the key points of the Proposed Act: 1) Regulation based on financial product categories and seller classifications The AFCP applies identical rules to all financial products falling ASIALAW Korea Annual Review

5 Banking & Finance market Analysis under the same product category. Under the Proposed Legislation, financial products will be categorised as deposit type products, investment type, insurance type and lending type. Further, financial institutions dealing in such products will be classified as direct sellers, agent/ brokers or advisers. 2) Sales restrictions on all financial products Under the AFCP, the sale of financial products must satisfy certain requirements such as a duty to explain the product and to confirm customer suitability. The law expressly prohibits illegal solicitation, and imposes limitations on advertisement and packaged-marketing with other products. The restrictions applicable to each type of financial product will vary depending on the level of risk applicable to that product. 3) Strengthened sanctions Under the AFCP, a separate administrative penalty will be imposed for violations of the sale restrictions. This is in addition to the administrative fines and other sanctions that are available under existing laws and regulations. The new administrative penalty is intended to serve as a deterrent and ensure compliance with the sale restrictions. For example, under the AFCP, if a financial institution violates the requirement to properly explain the product to an investor, a penalty of up to three times the profit earned from the illegal sales activity may be imposed. 4) Vicarious liability of financial institutions for damages suffered by financial consumers The AFCP adopts the concept of vicarious liability for purposes of determining whether a financial institution can be held liable for damages caused by the actions of an individual sales agent or broker. Under the AFCP, once a financial consumer suffers damages due to an agent/ broker s fault, the financial institution and agent/ broker may be held liable for damages suffered by the financial consumer. In this regard, we should note that if the relevant financial institution can prove that it had exercised proper supervision of its sales agent/ broker, it may avoid being held vicariously liable. Nonetheless, the burden of proving proper supervision falls on the financial institution. 5) New establishment of the consumer agency The newly established Consumer Agency will be under the supervision of the Financial Supervisory Service (the FSS). The Consumer Agency will handle customer disputes and complaints regarding financial products, and conduct research and education programmes on issues relating to consumer protection and financial products in general. Enactment of the Personal Information Protection Act PIPA generally governs the processing of personal information, defines the rights of an information owner, and further provides for criminal, administrative and potential civil penalties for violation of the rules thereunder. Personal information subject to the requirements of PIPA will include not only customer data, but also information regarding a company s own employees. 1) Scope of application Personal information is broadly defined to include that pertaining to any living individual. This may contain information identifying an individual, such as a name or resident registration number or similar, including information in the form of an image and that, when combined with other information, may so identify a person. All companies, either for-profit or non-profit, that process personal information in connection with its business, must comply with the requirements of PIPA. About the authors Stephane Park T: E: stephane.park@kimchang.com Stephane Park is a senior foreign attorney at Kim & Chang. His practice focuses on corporate and finance matters, including general corporate, mergers and acquisitions, derivatives, and securities and capital market transactions. Park has extensive experience in a wide range of crossborder transactions, including mergers and acquisitions, joint ventures, corporate and acquisition financing. Prior to joining Kim & Chang, Park was associated with the New York firm Coudert Brothers. He has also served as director and head of Korea Legal for the Seoul branch of Credit Suisse AG. Park received his B.A. from the University of California at Berkeley and his J.D. from the University of California, Hasting College of the Law. He is admitted to practice in New York, and is fluent in English, Korean and French. Ie-Hwan Yoo T: E: ihyoo@kimchang.com Ie-Hwan Yoo is an attorney for Kim & Chang in its finance department. He has extensive experience in various financing transactions, securities and bank regulations, regulatory compliance, securities-related litigations, establishment and licensing of securities companies, and asset management companies. Throughout his career, Yoo has been actively involved in many financing transactions in Korea or those relating to Korean businesses. These include structured financing, acquisition financing, ship financing and real estate financing transactions. He represents a broad range of multinational commercial banks, investment banks, investment funds and securities companies on various financing transactions, capital markets and other projects. Yoo has extensive experience advising clients on issues relating to securities and bank regulations, as well as regulatory compliance. Yoo received his B.A. in economics from Seoul National University and his LL.M. from Georgetown University Law Center. He is a member of the Bar of Korea. 16 ASIALAW Korea Annual Review 2012

6 market Analysis Banking & Finance INDIA 2) Disclosure and prior consent requirements A key principle of PIPA is that when any personal information of a principal (i.e., owner of the personal information) is collected or used, certain disclosures must be made and consents be obtained. When seeking consents from the principal for the collection and use of his/ her information, companies are legally required to disclose certain information. This may include the purpose for, and period of, the collection/ use of the personal information. In particular, sensitive information (which includes information as to one s ideology/ faith, union membership, medical information or unique identification information (for example, one s resident registration number)) cannot be processed unless a separate consent is obtained from the principal. In addition, if personal information is to be provided to a third party, a separate disclosure must be made indicating: (i) The identity of the third party to which the personal information is to be provided; (ii) The purpose behind the use of the personal information by the third party; (iii) The specific items of personal information to be provided; and (iv) The time period of retention and use by the third party. In order to delegate the processing of personal information to an outside contractor, the delegating company must disclose the following matters in writing: (i) The outside contractor delegated to process the information and a description of the delegated work; and (ii) Technical and managerial measures to protect the personal information being delegated for processing If such delegation is intended for purposes of marketing goods or services, the company must also separately notify the principal. A key principle of PIPA is that when any personal information of a principal (i.e., owner of the personal information) is collected or used, certain disclosures must be made and consents be obtained 3) Establishment and disclosure of personal information processing guidelines and appointment of personal information protection officer Companies must appoint a Chief Privacy Officer (CPO), who shall (i) establish and implement procedures to protect personal information, (ii) establish an internal control system to prevent the leakage or misuse of personal information, and (iii) take corrective measures against any security breach (for example, leaks and hacking). Companies must establish and disclose a set of guidelines for processing personal information. Such guidelines must include: (i) the purpose for processing the information, (ii) time period during which the information will be used and retained, (iii) guidelines relating to the delegation of personal information processing or transfer of personal information to a third party, (iv) rights and obligations of the information owner and ways to exercise or satisfy such rights and obligations. 4) Technical, managerial and physical protective measures Companies must implement technical, managerial and physical measures necessary to prevent any personal information from being lost, stolen, leaked, altered or damaged. In this regard, regulatory guidance outlining such specific technical requirements was recently provided by the Ministry of Public Administration and Security (MOPAS), which is the principal government authority in charge of enforcing the PIPA. ASIALAW Korea Annual Review

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