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General Restrictions and Prohibitions on Business Activities

Financial Investment Services Providers

Financial services firms that offer securities and investment servicesㅡcollectively referred to as financial investment servicesㅡare regulated to protect investors and maintain fair and orderly markets.

Regulation of Business Activities Common to Financial Investment Services Providers

Conflict of Interest and Information Barriers

The Financial Investment Services and Capital Markets Act (FSCMA) establishes principles and mechanisms that are specifically designed to address conflict of interest for financial investment services providers. Among them is the assumption and expectation of good faith effort from financial investment services providers to conduct their business fairly and honestly and not to harm investors for their own or another party's benefit. To this end, financial investment services providers must be able to identify and assess all potential conflict of interest on an ongoing basis and manage them appropriately in accordance with the internal control procedures.

Because of significant potential for conflict of interest that can arise from information exchanges or communications between different financial investment services businesses within a company, financial investment services providers must take the due care to set up information barriers pertaining to the buying and selling of investment products, the ownership of such products, and other material undisclosed information. Financial investment services providers must also operate with appropriate Chinese walls to prevent their employees from assuming more than one position in multiple financial investment services businesses. They must also ensure appropriate walls for the use of office spaces and IT equipment and facilities.

Sale and Investor Solicitation
For investor protection purposes, financial investment services regulation divides investors into retail investors and institutional investors on the basis of their investment purpose, level of investment expertise, and risk appetite with a particular emphasis on protecting retail investors.
  • Know-Your-Customer Rule: When soliciting a retail investor, the financial investment services provider must comply with the so-called "know-your-customer" rule by obtaining certain investor information-such as investment objectives, asset holdings, and previous investment experiences-and maintain records of investor signature and acknowledgement. Information verified by an investor must be immediately shared with the investor.
  • Principle of Suitability: When soliciting a retail investor, the financial investment services provider must not offer any investment recommendation that is not suitable to the investor in consideration of the investor's investment objectives, asset holdings, or previous investment experience.
  • Principle of Appropriateness: When soliciting a retail investor for the sale of derivatives or other complex investment products, the financial investment services provider must promptly inform the investor when it determines that the proposed product is not appropriate for the investor in consideration of the investor's investment objectives, asset holdings, and previous investment experience.
  • Duty to Explain: When soliciting a retail investor, the financial investment services provider must take the due care to explain investment risk and other specific characteristics of the product it recommends. It must also retain records of investor acknowledgement of the product guidance from the provider. The duty to explain an investment product includes the duty not to make any deliberate omission or misrepresentation about the investment product.
  • Duty to Disclose Investor Solicitation Practices: Financial investment services providers must disclose to the general public the rules, standards, and procedures with which they must comply when soliciting an investor. In addition, differentiated information must be made available to the public when financial investment services companies solicit retail investors for derivatives and other complex investments.
  • Introducing Broker: Financial investment services providers may employ introducing brokers who solicit investors or offer investment advices to investors on behalf of financial investment services providers. Introducing brokers must register with the FSC/FSS.

General Broker/Dealer Requirements

Financial investment services providers acting as a broker/dealer for the purchase and sale of investment products must comply with certain restrictions that are designed to help protect investors.

  • Broker/dealer identification: When executing a customer order to buy or sell an investment product, the person handling the order must disclose to the customer whether he or she is a broker or a dealer.
  • Express customer order: Brokers and dealers must not engage in the buying and selling of investment products through a customer account without receiving an express order to buy or sell from the customer or an agent of the customer.
  • No abuse of information: Brokers and dealers must not exploit their superior investment and trading information to the detriment of their customers or engage in activities that undermine the integrity of the market.
  • Notification of settled transaction: When a customer order to buy or sell is executed and settled, brokers and dealers must provide the customer with detailed description of the transaction including the price at which the order was executed and the fees charged within the 20th day of the following month from the date of the settlement.
  • Segregation of proprietary and customer assets: Financial investment services providers are required to segregate their proprietary assets from customer assets at all times. All customer investment securities must be promptly deposited at the Korea Securities Depository.