[Viewpoint] The 'Most Footnotes Ever' Thesis and the National Pension Service's Short-Swing Profits

The essence of a scholar is research, and the mode of existence of research is the thesis. The academic world is where people communicate through theses and devote themselves to them. While this may not apply to the natural sciences, in many humanities and social science fields, footnotes are considered the flower of a thesis. Unless one is a genius like John Nash or Ludwig Wittgenstein, the quality of a thesis and the author's expertise can be roughly gauged by just a few footnotes. Footnotes densely packed with tiny handwriting on every page command respect even before reading, as they vividly reflect the painstaking labor akin to hoeing and weeding until the back breaks.

In the field of law, there is a thesis with the highest number of footnotes ever recorded. Although there is no category for thesis footnotes in the Guinness Book of Records, this thesis, which appears to hold the world record with 4,824 footnotes, was published in 1987 in the academic journal "New York Law School Law Review" by Arnold S. Jacobs, a distinguished American securities law attorney. His son, Arnold J. Jacobs, is also an extraordinary Jewish lawyer who boasts expertise frequently cited in U.S. Supreme Court rulings through 25 specialized books and numerous papers.

Jacobs' thesis spans 491 pages analyzing Section 16 of the U.S. Securities Exchange Act, which corresponds to Articles 172 and 173 of Korea's Capital Markets Act. It covers reporting requirements for major shareholders and executives of public companies, the return of short-swing profits, and the prohibition of short selling. All three are mechanisms to prevent insider trading, with the return of short-swing profits accounting for over 70% of the thesis, representing the core issue. This is a prime example illustrating the strictness and complexity of insider trading regulations.

Last March, the National Pension Service (NPS) actively exercised shareholder rights regarding Hanjin KAL, in which it holds a 7.16% stake, but refrained from doing so for Korean Air, where it holds 11.56%. The reason was the issue of returning short-swing profits. Specifically, since NPS becomes a major shareholder when its stake exceeds 10% in Korean Air, if it actively exercises shareholder rights and engages in "management participation," it must return all profits gained from transactions within six months. According to data from the Ministry of Health and Welfare, short-swing profits amounted to 46.9 billion KRW over three years from 2016 to 2018. If NPS maintains a "passive investment" status without management participation, the obligation to return short-swing profits is waived.

The exemption of NPS from returning short-swing profits was first recognized in 2012 through Financial Services Commission regulations, along with the Government Employees Pension Service and the Teachers' Pension Service, on the premise of "passive investment" without management involvement, emphasizing their public nature. However, after NPS officially adopted shareholder rights exercise guidelines under the Stewardship Code last year and began actively exercising shareholder rights this year, the short-swing profit return system and the 5% reporting requirement became obstacles. Consequently, in February this year, the government amended the Enforcement Decree of the Capital Markets Act regarding the 5% reporting system by introducing a new category called "general investment" between "management participation" and "passive investment," allowing pension funds to actively exercise shareholder rights. The Financial Services Commission also revised regulations on short-swing profit returns to exempt the three major public pension funds, including NPS, from the obligation even when their purpose is "general investment."

Now, as a major shareholder in about 100 listed companies, NPS can engage in substantial management intervention while frequently conducting short-term trades. This raises at least two issues. First, the Stewardship Code aims to improve medium- to long-term corporate value through governance enhancement, which is fundamentally incompatible with short-term trading that seeks quick profits. Second, whether through direct or delegated management, since performance bonuses or incentives are linked to returns, unrestricted short-term trading increases the risk of using insider information acquired during active shareholder activities. Considering these points, while NPS's management involvement under the Stewardship Code is already controversial, short-term trading should definitely be avoided.

Sung Hee-Hwal, Professor, Inha University Law School