Only Officially Licensed Investment Advisory Firms Can Now Operate 'Stock Leading Rooms'

Amendment to the Capital Markets Act Passed in the National Assembly Plenary Session on the 25th
Only One-Way Channel Operations Allowed for Similar Investment Advisory Firms

From now on, only officially licensed investment advisory firms will be allowed to operate paid membership-based "stock leading rooms." The law will be amended accordingly. Unregistered investment advisory firms will only be permitted to conduct business through one-way channels, in line with their original purpose of providing non-individualized investment advice to an unspecified majority. This means that chat functions with recipients will be blocked to completely prevent opportunities to mislead investors.

The Financial Services Commission announced that the amendment to the "Financial Investment Services and Capital Markets Act" (Capital Markets Act) containing these provisions passed the National Assembly plenary session on the 25th. Going forward, stock leading rooms that communicate interactively with investors for a fee can only be operated by officially licensed investment advisory firms. The amendment will take effect six months after its promulgation.

The amendment includes provisions to revise the scope of unregistered investment advisory services, business regulations, and entry-exit regulations. First, stock leading rooms operating on a paid membership basis through online interactive channels such as social networking services (SNS) and open chat rooms will only be allowed for officially licensed investment advisory firms. These firms will be subject to regulations including suitability principles, duty to explain and liability for damages, advertising regulations, and the obligation to provide contracts.

Unregistered investment advisory firms will only be allowed to operate through one-way channels such as chat rooms where recipients cannot input chat messages, push notifications, and AlimTalk messages. Violations will be punished as unregistered investment advisory services with imprisonment of up to three years or fines of up to 100 million KRW.

Secondly, regulations have been revised to improve the disorderly business practices of unregistered investment advisory firms. Reporting to the Financial Services Commission will be mandatory even when there is a change in executives other than the representative of the unregistered investment advisory firm, preventing cases where individuals unqualified to operate such firms circumvent entry regulations by becoming executives rather than representatives.

Acts of compensating investment losses or guaranteeing profits are also prohibited. Violations will be punished with imprisonment of up to three years or fines of up to 100 million KRW. It is also prohibited to mislead investors into believing the firm is an official financial company or to present false or unrealized profit rates, with violations subject to fines of up to 100 million KRW.

Thirdly, entry and exit regulations for unregistered investment advisory firms have been revised. Entry will be prohibited not only for violations of financial laws but also consumer protection laws such as the Door-to-Door Sales Act and the Electronic Commerce Act. False or fraudulent reports will be punished with imprisonment of up to one year or fines of up to 30 million KRW.

To facilitate early exit of unqualified firms, the grounds for ex officio cancellation have been expanded. Added to the grounds are failure to comply with corrective measures under the Door-to-Door Sales Act and the Electronic Commerce Act, receiving two or more fines or surcharges under the Capital Markets Act within five years, and receiving fines for violations of consumer protection laws.

The financial authorities stated that this amendment is expected to strengthen investor protection by strictly regulating the unsound business practices of unregistered investment advisory firms. They also guided that the registration status of investment advisory firms and whether they are regulated financial companies can be checked on the Financial Supervisory Service’s financial consumer information portal, Fine.

The Financial Services Commission said, "Going forward, the Financial Services Commission and the Financial Supervisory Service will prepare thoroughly for the implementation of the amended law, including the establishment of subordinate regulations, and will strengthen efforts to prevent investor damage through undercover inspections of illegal leading rooms even before the law takes effect."