NongHyup Bank Opposes '2 Billion Won OEM Fund Fine'

First Case of Seller Punishment
"Controversial but Enforcement Proceeding
Financial Services Commission Will Actively Explain"

NH Nonghyup Bank logo

[Asia Economy Reporter Kim Min-young] NH Nonghyup Bank is facing controversy after being fined 2 billion KRW by financial authorities for selling funds through an Original Equipment Manufacturer (OEM) method. This marks the first penalty imposed on a seller that had been in a regulatory blind spot regarding OEM funds. While Nonghyup strongly opposes the sanction, stating it cannot accept the penalty, it plans to actively present its case at the Financial Services Commission (FSC) meeting scheduled for the 10th. The final outcome of the FSC meeting is expected to set the standard for the intensity of private equity fund OEM regulations.

According to the financial sector on the 4th, the Securities and Futures Commission (SFC) under the FSC decided at its regular meeting the previous day to impose a fine of 2 billion KRW on Nonghyup Bank. See the front page of the May 12 issue for details.

The SFC found that from 2016 to 2018, Nonghyup Bank ordered funds from Pine Asia Asset Management and Aram Asset Management using the OEM method, then split and sold them as private equity funds with fewer than 49 investors to avoid public fund regulations. OEM funds refer to funds created by asset management companies based on orders, instructions, or requests from fund sellers such as banks or securities firms. This practice is prohibited under the current Capital Markets Act.

This is the first time sanctions have been imposed on a seller. Previously, only asset management companies that created OEM funds were subject to penalties, with no cases of sanctions against sellers. Pine Asia Asset Management and Aram Asset Management, the asset managers involved, were heavily penalized last November with partial business suspensions and fines.

Nonghyup Bank maintains that it cannot accept the sanctions. The bank stated, “It is difficult to accept the sanctions as they were enforced despite significant legal controversies regarding the application of the law in this matter.”

The sanction has sparked debate in legal and academic circles. The controversy centers on whether it is legitimate under the Capital Markets Act to impose fines on sellers solely because they did not submit securities registration statements. The legal community has reportedly continued to express opinions that sanctioning sellers on such grounds is difficult under current capital market regulations.

The legal basis has also become unclear. The securities law provisions of the U.S. Securities and Exchange Commission (SEC), which served as the basis for this sanction, were recently completely revised. The law the financial authorities rely on is known as the “Mirae Asset Prevention Act” (Article 119, Paragraph 8 of the Capital Markets Act). It stipulates that if a single security is split into two or more, it should be regarded as the same security, and in such cases, public fund regulations should apply even to private equity funds. The obligation to submit securities registration statements lies with the issuer, i.e., the asset management company. However, the SEC’s “Integration Guidelines” were abolished in March.

The Integration Guidelines referred to the criteria for treating securities split into two or more as a single issuance and were the foundation of the Mirae Asset Prevention Act. The SEC’s revised rules state that if disclosure obligations were met for each individual security issuance, responsibility for securities law violations cannot be imposed through integration.

Another major point of contention is that there were no investor losses. Nonghyup Bank argued, “The series funds were sold before the relevant law was enacted, there were no investor losses at all, and they were stable bond-type products that investors could easily understand.” It is reported that the SFC recognized these concerns, as the initial penalty proposal from the Financial Supervisory Service was around 10 billion KRW, but the fine was reduced to about 2 billion KRW considering that the original amount was excessive.

The final decision on whether to impose the fine will be made at the FSC meeting attended by FSC Chairman Eun Sung-soo and Financial Supervisory Service Governor Yoon Seok-heon. Nonghyup Bank stated, “We plan to actively present our position at the upcoming FSC meeting.”