The financial authorities have determined the disciplinary actions against nine securities firms caught engaging in circular transactions with customer wrap accounts and specific monetary trusts for the first time in about two years. The nine securities firms will receive institutional warnings and instructions, along with a total of 29 billion won in fines.
The Financial Services Commission (FSC) held its third regular meeting on the 19th and confirmed institutional sanctions against nine securities firms (Hana, KB, Korea Investment, NH Investment, SK, Kyobo, Eugene Investment, Mirae Asset, Yuanta Securities Korea) for violations related to bond-type wrap and trust operations.
The FSC voted to issue institutional warnings to the eight securities firms excluding SK Securities, while SK Securities received instructions. However, a one-month suspension of certain operations related to the establishment of new private equity funds was imposed on Kyobo Securities. Institutional sanctions are composed of five levels: institutional instructions, institutional warnings, corrective orders, business suspensions, and cancellation of registration or approval. Among these, only institutional instructions are classified as light sanctions, while institutional warnings and above are categorized as severe sanctions.
A senior official from the FSC noted regarding Kyobo Securities, "Unlike other securities firms, it has been identified that they mobilized funds to engage in circular transactions with wrap and trusts, resulting in more severe penalties due to their relatively extensive unhealthy business practices."
Additionally, the FSC decided to impose a total of 28 billion 972 million won in fines on the nine securities firms. (☞ Refer to the article '[Exclusive] Kyobo Securities faces serious sanctions including partial business suspension for 'wrap and trust circular transactions'... others have reduced penalties')
Wraps and trusts are financial products through which securities firms manage customer assets under one-on-one contracts. Unlike funds that invest multiple customer assets in the same underlying asset, wraps and trusts have a structure that operates individually according to the customer's investment objectives and funding needs. The typical duration is not long, usually 3 to 6 months. This is why corporate clients often seek wraps and trusts when managing short-term funds.
Earlier, the Financial Supervisory Service (FSS) initiated a focused inspection on May 9 of nine securities firms regarding the actual business practices of bond-type wraps and trusts. The FSS discovered that securities firms had rolled losses from one customer account to others to guarantee returns for specific customers or compensated some losses with the firm's own funds, leading to the imposition of sanctions over the past two years.
The FSC stated, "Actions to transfer profits and losses among customers or to compensate customer losses with the firms' own assets through illegal self-dealing and related transactions in bonds and commercial papers constitute serious violations that undermine the sound order of capital market transactions and the principle of investor self-responsibility."
However, the FSC mentioned that it took into account the uniqueness of the market conditions at the time, such as the credit crunch following the Legoland incident in the second half of 2022, the contributions of the securities industry to market stabilization, strengthened risk management efforts, and the size of the fines imposed. It was also noted that proactive post-management efforts, such as internal audits conducted in accordance with relevant laws prior to the FSS inspection and private settlements with loss-affected customers, were considered.
The FSC stated, "This violation originated from the incorrect practice of selling and managing wraps and trusts, which are performance-based products, like fixed-rate products and guaranteeing both principal and revenue upon redemption," and added, "It is necessary for the company to enhance its overall internal control efforts, including strengthening the awareness of compliance among relevant personnel and enhancing oversight by management departments such as risk, compliance, and auditing, including the Chief Executive Officer (CEO)."