SVB Crisis Draws Attention... Will the 'Pre-Disclosure of Share Sale Bill' Pass the National Assembly?

SVB and First Republic Executives Controversially Sold Shares in Advance
Rep. Lee Yong-woo Proposes Pre-Reporting System for Insiders and Major Shareholders

As it was revealed that executives of the parent company of Silicon Valley Bank (SVB) and the management of First Republic Bank sold large amounts of stock before the stock price plummeted amid bankruptcy and crisis rumors, controversy over moral hazard is intensifying. The U.S. Department of Justice and the Securities and Exchange Commission (SEC) plan to investigate them.

Meanwhile, the 'Insider and Major Shareholder Prior Reporting System (Partial Amendment to the Act on Capital Market and Financial Investment Business)' proposed by Lee Yong-woo, a member of the Democratic Party of Korea, is drawing renewed attention. This bill includes provisions that require major shareholders to disclose in advance when selling 1% or more of their shares.

[Image source=Reuters Yonhap News]

According to Lee Yong-woo's office on the 20th, the 'Partial Amendment to the Capital Market Act' proposed by the lawmaker in February and April last year is still pending in the Legislation and Judiciary Committee's bill review subcommittee. The Financial Services Commission has also announced plans to submit a related bill as a government proposal.

According to the amendment, if a major shareholder of a listed company sells 1% or more of their shares within three months, they must report to the Securities and Futures Commission and the Korea Exchange. Additionally, the sale must occur after a period specified by presidential decree within three months. A representative from Lee Yong-woo's office explained the legislative intent, saying, "This is to mitigate the shock to the market caused by sudden sales of shares by major shareholders, protect general investors, and enhance the transparency of transactions by major shareholders."

This bill is gaining attention again due to criticism over major shareholders of U.S. regional banks selling their stakes before the stock price collapse following the SVB bankruptcy.

Greg Becker, former chairman of SVB, sold 12,451 shares of SVB Financial, SVB's parent company, worth about 4.7 billion KRW on the 27th of last month. This was about ten days before SVB's bankruptcy. Daniel Beck, the Chief Financial Officer (CFO), also sold stocks worth $575,000 (approximately 750 million KRW) on the same day.

The management of First Republic Bank also sold stocks over two months before the stock price plummeted due to the aftermath of SVB's bankruptcy. Jim Herbert, the bank's founder, sold $4.5 million (approximately 5.87 billion KRW), Robert Thornton, head of asset management, sold $3.5 million (approximately 4.57 billion KRW), and David Lichtman, Chief Credit Officer, sold $2.5 million (approximately 3.26 billion KRW) worth of shares, respectively.

In the United States, major shareholders are generally required to submit a report when selling stocks. In addition, stringent disclosure and unfair trading regulations (10b5-1 and Rule 10b5-2) are applied, including the submission of pre-trading plans. This is to prevent major shareholders from using insider information to avoid losses or maximize profits. The U.S. Department of Justice and the SEC plan to investigate the stock sales by the management of SVB and First Republic Bank.

Under current domestic law, major shareholders of listed companies are not required to disclose in advance when selling shares on the market (including block deals). Because of this, there have been ongoing criticisms that large-scale sales of shares by major shareholders on the market cause market confusion and investor damage, such as sharp stock price declines. Generally, when major shareholders or insiders of listed companies sell large amounts of stock, the market perceives the stock price as being at a peak or anticipates negative issues.

In 2021, when controversy arose over executives including former Kakao Pay CEO Ryu Young-jin making large profits by selling stock options after listing, the Financial Services Commission decided to include stocks acquired by exercising stock options received before listing as subject to mandatory holding. Although the mandatory holding system related to stock options was recently established, the system related to general stocks is still insufficient.

Kim Gap-rae of the Korea Capital Market Institute pointed out, "A prior disclosure system for controlling shareholders' stock sales should be established in the domestic capital market," adding, "Strong unfair trading regulations are needed to prevent controlling shareholders from using insider information in stock sales." He further stated, "The regulatory level on controlling shareholders' stake sales in the domestic KOSDAQ market is lower compared to major overseas markets, which weakens the 'post-listing growth' function of new markets and only activates the 'early post-listing exit' function."