Regulator Proposes Welcome Changes To Promote Foreign Investment In Korea - Financial Services

On January 25, 2023, the Financial Services Commission of Korea ("FSC") announced certain proposed measures to promote foreign investment in the Korean capital markets. Reflecting the discussions of an earlier meeting of the FSC's Financial Regulatory Innovation Committee with the Financial Supervisory Service ("FSS") and the Korea Financial Investment Association (being the Korean securities broker-dealers' SRO), the reform measures are expected to be adopted in 2023 and the following years through amendments to the subordinate rules and regulations under the Financial Investment Service and Capital Markets Act ("FSCMA") and other relevant laws. The proposed changes consist largely of (a) lifting the requirement for foreign investors to register with the FSS prior to trading listed securities and requiring only the submission to the broker-dealer of an internationally recognized legal entity identifier for a corporate investor ("LEI") or a passport number for a natural person, (b) eliminating certain restrictive reporting requirements to encourage the foreign investors' use of omnibus accounts, (c) allowing ex-post notification for broader types of permitted OTC trades of listed securities (as opposed to current requirement for ex-ante report), and (d) scheduled introduction in phases of mandatory English public disclosure regime for certain public companies listed on the Korea Exchange ("KRX").

1. First-time foreign investors would no longer be required to register first as foreign investors prior to trading listed Korean securities

Under the proposed amendments, first-time foreign investors would no longer be required to register with the FSS and obtain an investor register certificate ("IRC") before trading listed Korean securities.

Instead, first-time foreign investors will be able to trade listed Korean securities after simply providing to their Korean securities broker their LEI (in case of corporate entities) or their passport numbers (in case of natural persons) as part of the KYC process of the broker-dealer. An LEI is a unique alphanumeric code comprised of 20 characters and is based on the ISO 17442 standard. Any foreign investors who are already registered as foreign investors and have already obtained their IRCs, however, will be permitted to continue to use their IRCs for trading purposes.

Under the amended rules, which are expected to go into effect in the second quarter of 2023, the FSC will separately request trading information of individual foreign investors from the Korean broker-dealers at the FSC's discretion, and will no longer monitor all real-time trading information of each foreign investor.

2. Omnibus accounts

An omnibus account is an account opened at a Korean broker-dealer under the name of a global asset management company or global broker-dealer to hold and maintain the listed Korean securities. An omnibus account allows the execution and settlement of the trades by multiple foreign investors at the instruction of the global asset manager or global broker-dealer in a single account. The omnibus accounts were rarely used in practice presumably because of the requirement to report the details of the transactions of each foreign investor under the omnibus account on the date of settlement (so-called a T+2 Reporting Requirement).

To note, special nominee accounts are typically used by global asset managers to hold, and execute the trades of, listed Korean securities of funds managed by the global asset managers in a single account. The key difference between a special nominee account and an omnibus account is that in a special nominee account the trade of the securities is settled in the name of each end investor rather than in the name of the global asset manager. The settlement in the name of each end investor in special nominee accounts have provoked compliance and financial burdens for global asset managers and custodian banks.

By lifting the T+2 Reporting Requirement, the regulators expects to promote the use of omnibus accounts to be held directly by the global asset managers in their own names. The amended rules are expected to become effective in the second quarter of 2023.

3. Expanded types of OTC trades requiring only ex-post notification

In principle, foreign investors are required to trade listed Korean securities through the stock exchange. Only certain types of OTC trades are exceptionally permitted as prescribed under the laws and regulations, and even when permitted, foreign investors are subject to certain reporting requirements prior to such OTC trades. Under the proposed amendments, however, foreign investors would be allowed to make ex-post notifications for an expanded range of permitted OTC trades, instead of reporting obligations prior to OTC trades. Further, in certain cases of OTC trades subject to ex-post notifications, foreign investors would even be allowed to notify more limited scope of information on the Foreign Investment Management System to report their OTC trades.

The FSC also signaled that it would consider a potential of outright elimination of the prohibition of OTC trades of listed Korean securities after observing the impact of the proposed changes in the market.

4. Phased introduction of mandatory English public disclosure regime

The FSC and the FSS will begin to introduce the mandatory English public disclosure regime in phases from 2024 for certain public companies listed on the KRX. Foreign investors should note, however, in case of any conflict or difference, the Korean disclosure will likely prevail, except under limited circumstance, and they would be well-advised to consult their legal advisors for any legal implication of English public disclosure.

During the first phase from the beginning of 2024 until the end of 2025, (i) any KOSPI-listed public company with total assets of KRW 10 trillion or more, or (ii) a KOSPI-listed company whose shares are held by foreign investors at least 30% and has total assets of at least KRW 2 trillion and less than KRW 10 trillion, will be required to make English public disclosures containing certain prescribed matters within 3 business days of Korean public disclosures of the same.

During the second phase starting in 2026, any KOSPI-listed Korean public company with total assets of at least KRW 2 trillion will be required to make English disclosures of certain prescribed matters at the same time as the Korean disclosure.

For more information for the FSC's proposed rule changes discussed in this newsletter, please visit FSC's press release at https://www.fsc.go.kr/eng/pr010101/79346.

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.