[Opinion] Insider Trading Regulations in Real Estate Much Weaker Compared to Securities Market

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

While studying securities law, I have long wondered why the law imposes such severe penalties for insider trading using non-public information in the securities market, yet is so lenient regarding the use of real estate information. In fact, compared to securities information, real estate information holds much greater value, and since insiders are mainly public officials, the potential for conflicts of interest and public criticism is much higher. Moreover, the victims are the entire nation, so regulation should be even stricter than that for securities insider trading.

After the Korea Land and Housing Corporation (LH) scandal broke out on the 2nd of last month, laws regulating insider trading related to real estate information by public officials and others were swiftly passed by the National Assembly and enacted within just one month. Now that these laws have been implemented, I would like to review their validity and explore directions for future supplementation or improvement.

The laws amended this time to regulate insider trading related to real estate information are the Special Act on Public Housing, the Urban Development Act, and the Korea Land and Housing Corporation Act. The insider trading regulations introduced in these three laws were compared with insider trading regulations under the Capital Markets Act.

First, the similarities include the scale of fines and criminal penalties for primary recipients of information. Both impose fines ranging from three to five times the amount of unjust gains, aiming not only to recover unjust profits but also to achieve a severe punitive effect. Furthermore, criminal penalties apply not only to insiders such as public officials but also to the primary recipients who directly receive information from them. Therefore, primary recipients are punished not only when they use the information themselves but also when they provide it to secondary recipients. However, the Korea Land and Housing Corporation Act regulates only the use of information by primary recipients and does not regulate the act of providing information.

There are more differences than similarities. First, there is a significant difference in the basic sentencing. For securities insider trading, the Capital Markets Act imposes a heavy sentence of imprisonment for one year or more, whereas real estate insider trading is punishable by imprisonment of up to five years. Second, regulations on secondary and further recipients differ greatly. Under the Capital Markets Act, the use of information by secondary or further recipients is considered market disorder conduct, and the financial authorities can impose surcharges up to 1.5 times the unjust gains. In fact, in the 2016 Hanmi Pharmaceutical disclosure case, surcharges were imposed up to the fifth recipient. However, the newly enacted real estate information laws have no sanctions for secondary or further recipients. Third, there is a difference in the concurrent imposition of imprisonment and fines. The Capital Markets Act mandates the concurrent imposition of imprisonment and fines for insider trading, whereas the real estate-related laws allow judges discretion to impose imprisonment and fines concurrently. Fourth, there is the issue of the public notice period. The Capital Markets Act prohibits insiders from trading until the expiration of a notice period, which ranges from three hours to one day after information is publicly disclosed through various media to ensure that general investors are sufficiently informed. The real estate information laws do not mention any notice period.

In conclusion, while the laws related to insider trading using real estate information have adopted many aspects of the Capital Markets Act, their regulatory level remains relatively low compared to securities insider trading. Considering the seriousness of real estate information, the ethical standards required of public officials, and the impact on the entire nation, it is desirable to at least align regulations with the level of the Capital Markets Act.

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