Korea Capital Market Institute

In order for the unfair trading regulation prescribed in the Financial Investment Services and Capital Markets Act to function properly protecting investors and ensuring the integrity of marketplace, the enforcement entity should have capabilities necessary to investigate unfair trading cases thoroughly, and impose sanctions accordingly. In this report, we explore how advanced nations enforce unfair trading regulations, and then conduct a comparative analysis between those nations and Korea. Then, we attempt to draw implications that will expectedly enhance the effectiveness of investigations and sanctions in unfair trading cases. First, the procedures for investigations and imposing sanctions should be faster than now. Currently, each procedure is implemented by several different organizations, and hence it takes a long time to close a case. The length of time between opening and closing an unfair trading case should be shortened. Second, the types of sanctions should be diversified for strengthening the feasibility of enforcement. While other nations use monetary penalties and other types of administrative sanctions, Korean regulators lack such tools, and hence cannot flexibly respond to minor breaches. Considering that the modus operandi in financial crimes continues to evolve, it is difficult to predict it in advance. Therefore, it is necessary to introduce new administrative sanctions, such as civil penalties. Third, currently, the procedures to investigate unfair trading cases and impose sanctions are scattered throughout multiple authorities. The cooperation between these authorities should be improved in order to respond quickly to unfair trading cases, and ensure seamless regulatory operations. On the other hand, a thorough comparison with other nations should be carried out to review whether Korea’s current system properly splits up regulatory functions among different authorities. Fourth, to enhance the credibility of disciplinary decisions made by regulatory authorities, it is desirable to strengthen the due process of law, e.g., ensuring the alleged offender the quasi-judicial defense opportunity, in the course of investigation and sanction procedures. Fifth, regulatory authorities should have more power in collecting information related to unfair trading activities. The Stock Exchange needs to improve its capability to catch illegal activities at the early stage. As the modus operandi of offenders gets more sophisticated, the role of whistle blowers becomes increasingly important in a crackdown on unfair trading. Under the circumstances, the system to gather information on unfair trading should be enhanced. On top of those, we also suggest that the sanctions imposed should be disclosed to the public quickly and accurately so that market discipline works properly. Furthermore, for preventive measures, online surveillance and education should be strengthened. Last, strict monitoring is required for problem-prone areas where unfair trading cases frequently occur, e.g., the KOSDAQ market and marginal companies.