[Viewpoint] Regulation Paradigm for "Stock Leading Rooms" and Quasi-Investment Advisory Businesses

The movie "Operation" is a masterpiece that vividly depicts the reality of stock price manipulation (legally termed "market manipulation") occurring in our securities market. It centers on reverse mergers, utilizes foreign nationals with black hair, and employs sophisticated techniques such as matched orders and fictitious orders for market manipulation, mirroring actual cases. One scene in the film also shows a stock price manipulation method using securities broadcasts. The renowned analyst Kim Seung-beom actively recommends the listed company Daesan Construction, which is the target of manipulation, on the broadcast and conducts an interview featuring Daesan Construction’s president Park Chang-joo. Of course, Kim Seung-beom and Park Chang-joo are accomplices in the stock price manipulation.

Providing paid investment advice to an unspecified large number of people through securities broadcasts, SNS, securities websites, and the like is called "quasi-investment advisory business." Since its introduction as a notification system under the Securities Exchange Act in 1997 to legitimize private investment advisors, the number of such businesses was only 48 at the end of 2000 and 94 at the end of 2005, but it surged after 2010, reaching 573 at the end of 2012, 1,218 at the end of 2016, and currently 1,847 as of the end of June this year, all registered with the Financial Services Commission. Recently, so-called "stock leading rooms" have rapidly increased solicitation activities through YouTube. Membership fees or commissions vary widely from tens of thousands to millions of won per month.

The reason they are called "quasi" operators is that they are not officially recognized investment advisory businesses under the Capital Markets Act. The Capital Markets Act classifies financial investment businesses into six types and applies strict regulations by industry. Among the six types, official investment advisory businesses respond to individual client requests and have individual contractual relationships, whereas quasi-investment advisory businesses provide unilateral investment advice to an unspecified large number of people and can operate with notification only, without additional regulation.

Which carries greater legal risk and need for investor protection, official investment advisory or quasi-investment advisory? Obviously, quasi-investment advisory is much greater. Official investment advisory businesses mostly serve professional investors under strict regulation on a small scale, while quasi-investment advisory businesses operate on a large scale targeting general investors with weak self-protection capabilities and are outside regulatory scope. According to the consumer alert issued by the Financial Supervisory Service on June 23 regarding quasi-investment advisory businesses, various illegal activities such as unregistered investment advisory operations, unauthorized investment trading and brokerage, and false or exaggerated advertising are occurring. There are also risks not pointed out by the FSS; given the enormous scale of quasi-investment advisory businesses, their real-time large-scale advice could directly disrupt market order.

However, legal regulations are structured in the opposite way. Official investment advisory businesses under the Capital Markets Act are subject to various and strict legal regulations regarding entry and business conduct, but quasi-investment advisory businesses are only subject to notification to the Financial Services Commission and face no other regulations. The Financial Consumer Protection Act, enacted in March 2021 as an integrated law regulating financial product sales and advice from the consumer perspective, also excludes quasi-investment advisory businesses from regulation. This is nothing short of a puzzling phenomenon. In July 2012, when there were fewer than 600 quasi-investment advisory businesses, the Financial Services Commission announced a policy direction titled "Comprehensive Policy Direction for the Sound Growth of Investment Advisory Firms," stating its intention to abolish the quasi-investment advisory system and regulate areas with potential for individual investment consultation as investment advisory businesses, aiming for unification of investment advisory regulation, but this has not been realized.

Despite the unprecedented COVID-19 crisis, our securities market has seen daily trading volumes and subscription amounts for a single public offering stock, which were around 10 trillion won each until last year, now exceeding 30 trillion won, and nearly all trading-related indicators such as investor deposits, net purchases by individual investors, and active accounts are hitting record highs. Amid globally pessimistic economic forecasts, this unprecedented investment fever feels unrealistic and even bizarre. If the "irrational overheating" of general investors combines with quasi-investment advisory businesses that exploit it, significant investor damage and market shocks are anticipated. With quasi-investment advisory businesses approaching 2,000 in number, a paradigm shift in investment advisory regulation is urgently needed, and I urge the Financial Services Commission to re-pursue the policy of unifying investment advisory regulation.

Seong Hee-hwal, Professor, Inha University School of Law