"Violation of Securities Registration Submission Obligation" NH Investment and Shinhan Investment Fined

[Asia Economy Reporter Lee Seon-ae] NH Investment & Securities and Shinhan Investment Corp. were sanctioned by financial authorities for failing to submit reports despite selling overseas real estate-related funds divided into derivative financial products. Both companies argued that the relevant regulations were insufficient at the time of sale, but their claims were not accepted.

According to financial authorities on the 9th, the Securities and Futures Commission under the Financial Services Commission recently decided to impose fines of 56.8 million KRW and 33.8 million KRW on NH Investment & Securities and Shinhan Investment Corp., respectively, for violating the obligation to submit securities registration statements under the Capital Markets Act. The SFC stated as the reason for imposing the fines, "Both companies had a duty of care to recognize that if the combined number of investors exceeded 50, they would be subject to the obligation to submit a registration statement, but they failed to submit the securities registration statement and issued and sold derivative-linked securities (DLS) separately."

Under the Capital Markets Act, if a company intends to solicit subscriptions for newly issued securities to 50 or more investors, it must submit a securities registration statement to the supervisory authority. In other words, public offering regulations apply when soliciting subscriptions to 50 or more investors.

NH Investment & Securities issued DLS several times in November and December 2017 based on the "Latam Hospitality Fund" as the underlying asset. The DLS issued in each tranche was sold directly by the issuer NH Investment & Securities and also sold by the distributor Shinhan Investment Corp. in the form of a specific money trust. The financial authorities found that NH Investment & Securities raised 28.42 billion KRW from 136 investors, and Shinhan Investment Corp. raised 16.92 billion KRW from 108 investors. All were sold privately without registration statements, targeting high-net-worth individuals.

The DLS issuer NH Investment & Securities expressed the position that due to insufficient regulations at the time of issuance, it was unable to determine whether submission of a registration statement was required. In its statement to the SFC, NH Investment & Securities said, "The authorities considered the DLS directly sold by us and the DLS incorporated into the specific money trust by the trustee (Shinhan Investment Corp.) together, viewing the total as exceeding 50 investors," and added, "We understand there is no regulation requiring the number of DLS subscribers and the number of specific money trust subscribers to be combined." Furthermore, they said, "Even if the investment assets are the same, there was no clear standard at least during November to December 2017, when the DLS issued in different tranches were considered the same securities."

However, considering that the DLS sales period coincided with discussions on the Future Asset Prevention Act, the financial authorities judged that while the intentionality of failing to submit the registration statement is unknown, there was at least "gross negligence" in failing to exercise due care.