Illegal Short Selling to Face Maximum Life Sentence with Amended Capital Markets Act

Illegal Short Selling to Face Maximum Life Sentence with Amended Capital Markets Act

The amendment to the Capital Markets Act, which strengthens criminal penalties and administrative sanctions for illegal short selling, has passed the National Assembly’s plenary session on Sept. 26. (Photo source: capital.com)
The amendment to the Capital Markets Act, which strengthens criminal penalties and administrative sanctions for illegal short selling, has passed the National Assembly’s plenary session on Sept. 26. (Photo source: capital.com)


The amendment to the Capital Markets Act, which strengthens criminal penalties and administrative sanctions for illegal short selling, has passed the National Assembly’s plenary session. Under the new law, individuals who make illicit gains of more than 5 billion won (approximately $3.79 million) through illegal short selling will face aggravated penalties, with prison sentences of up to life imprisonment.


According to financial authorities on September 27, the amendment to improve the short selling system passed the National Assembly on September 26. As part of the amendment, institutional investors will now be legally required to establish an electronic short selling system, and both institutional and corporate investors must implement internal control standards as a legal obligation.


Approximately 101 companies, which account for 92 percent of domestic short selling transactions, will be required to establish these electronic systems. These firms will also have to report stock balance information and over-the-counter (OTC) transactions to the exchange, adding to their compliance obligations for the newly implemented central monitoring system.


Securities firms will be required to verify the internal control standards and electronic short selling systems for institutional and corporate investors once a year, according to a checklist, and report the results to the Financial Supervisory Service (FSS), as stipulated by the presidential decree. Institutional and corporate investors, as well as securities firms, who fail to comply will be fined up to 100 million won.


In order to standardize the conditions for short selling between individual and institutional investors, the repayment period for loan transactions used for short selling will also be limited. Non-compliance with this regulation will also be subject to fines of up to 100 million won, with the loan term to be extended in 90-day intervals for a maximum of 12 months, as stipulated by presidential decree.


In addition, the amendment includes measures to prevent repeated illegal short selling by increasing administrative sanctions and penalties. Fines for unfair trading and illegal short selling will be raised from 3 to 5 times the illicit profit to 4 to 6 times, and illegal short selling will now face the same enhanced prison terms as unfair trading. Offenders who generate illicit profits of over 5 billion won can face sentences of up to life imprisonment.


Administrative sanctions will also be diversified, allowing authorities to restrict the trading of financial investment products for up to five years and limit the appointment or reappointment of executives at listed companies. This is intended to reduce the high recidivism rate for financial crimes by effectively expelling offenders from the market for a set period.


To prevent illegal concealment of profits, accounts suspected of being used for unfair trading or illegal short selling can now be frozen for up to six months, with the possibility of an additional six-month extension.


The amended law will come into effect on March 31 next year, allowing time for the establishment of the electronic short selling system, which is scheduled to be operational by then. However, the restrictions on financial product trading and executive appointments and reappointments will come into force six months after the law is enacted, following thorough public consultation and before the amendments to the lower legislative provisions.


The upcoming revisions to the enforcement decree and regulations, which will lower the short selling disclosure threshold from 0.5 percent to 0.01 percent of outstanding shares and reduce the collateral ratio for individual short sellers to the level of institutional investors, are expected to be completed by next month.


A representative from the Financial Services Commission (FSC) stated, “Once the loan repayment period for short selling transactions and lending stocks is limited to 12 months and the ongoing amendments to the Regulations on the Financial Investment Business are finalized, the collateral ratio for individual short sellers will be lowered from 120 percent to 105 percent, leveling the playing field between individuals and institutions.”


The FSC official added, “The FSC official added, ‘With the electronic short selling system set to go live in March and the implementation of the amended law, the improvements to the short selling system will be fully completed. We aim to restore investor confidence and strengthen the competitiveness of the South Korean stock market.”

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