Six Securities Firms Heavily Disciplined for 'Rap and Trust Circular Transactions'... Some CEOs Likely to Face Sanctions as Well

Some Securities Firms Using PI Funds
CEOs Likely to Face Sanctions
Similar to Past Light Disciplinary Action on KB Securities CEO

Financial Supervisory Service building in Yeouido, Seoul. Photo by Huh Younghan younghan@

On the 12th, the Financial Supervisory Service (FSS) held a Disciplinary Committee meeting and is known to have discussed severe disciplinary actions, including partial business suspension, against six securities firms (Mirae Asset, Korea Investment, NH Investment, Kyobo, Eugene Investment, and SK Securities) found to have engaged in circular transactions involving bond-type wrap and trust accounts. Disciplinary measures against some CEOs of these securities firms are also expected to be discussed.

According to financial authorities and the financial investment industry, the FSS convened the Disciplinary Committee meeting on the morning of the same day to begin discussions on the disciplinary levels related to the unsound management of wrap and trust accounts by these six securities firms. The FSS had previously delivered preliminary notices of partial business suspension to the firms involved.

It is also estimated that disciplinary actions against some CEOs will be included. A financial investment industry insider stated, "I understand that firms which even utilized proprietary investment (PI) funds are included among the CEO disciplinary targets." Another industry insider hinted, "Some current CEOs are included."

Earlier, at the end of June, the FSS held a Disciplinary Committee meeting and finalized a three-month partial business suspension and severe disciplinary actions against employees responsible for wrap and trust management at KB Securities and Hana Securities. KB Securities CEO Lee Hong-gu received a mild disciplinary action in the form of a cautionary warning. As evidence emerged that KB Securities used the firm's proprietary assets to cover customer investment losses, the CEO was also included as a disciplinary target. However, the severity of the disciplinary action was reduced from severe to mild during the committee process.

Some securities firms, including KB Securities, were found to have used proprietary assets when faced with a situation where they could not guarantee returns to customers due to maturity mismatches. The method involved subscribing to their own funds with proprietary assets and purchasing corporate commercial papers (CP) incorporated into customer wrap and trust accounts at inflated prices through these funds. It is speculated that CEOs were actively involved in decision-making during this process.

The results of the FSS Disciplinary Committee will be finalized through the Financial Services Commission’s Securities and Futures Commission. Securities firms confirmed to have partial business suspensions will be prohibited from conducting new bond-related wrap trust business. Since bonds typically account for 80-90% of wrap trusts, the securities industry expects significant repercussions.

Meanwhile, Yuanta Securities, included among those subject to the circular transaction sanctions, stated that it did not receive any preliminary notice related to the sanctions from the FSS.