Korea: Domestic broker may be required to trade foreign-listed shares

In brief

On 19 June 2023, the Financial Supervisory Service of the Republic of Korea (FSS) issued a notice which states that domestic employees may be sanctioned for violating the Foreign Exchange Transaction Act if they sell foreign-listed stock through an overseas broker or deposit funds resulting from the sale of foreign-listed stock in an overseas financial institution. To comply with the applicable regulation, domestic employees are required to open an account with a domestic broker and sell foreign-listed shares through such domestic broker. 

It appears that certain Korean banks have started to decline inbound wires of proceeds from the sale of shares conducted through overseas brokers, and individual employees have been contacted by Korean authorities regarding potential penalties for their transactions in foreign-listed stock without involving a domestic broker.


In depth

Legal analysis

The Financial Investment Services and Capital Markets Act (FSCMA) sets forth the general framework for securities transactions. Among others, the FSCMA provides that any investor who intends to sell foreign currency securities in an overseas securities market must do so by selling them through a domestically licensed broker in Korea. However, the FSCMA does not set forth any statutory penalty for violation of this obligation. In the past, we have not seen the regulator taking any enforcement actions against individuals who failed to conduct securities transactions through a domestic broker in connection with their participation in an equity program offered by an overseas company. 

In light of the 19 June notice, the FSS now appears to be taking the position that the Foreign Exchange Transaction Regulation (the "Regulation") prohibits the receipt of payment in violation of Korean laws (Article 4-1 of Regulation). As such, if an employee participating in an overseas equity program receives share sale proceeds without involving a domestically-licensed broker, such conduct would be deemed a violation of Article 15(1) of the Foreign Exchange Transactions Act (FETA) and the employee could be sanctioned with an administrative fine up to KRW 50 million (approx. USD 38,000).

Next steps

As practitioners and companies further digest the FSS notice, companies may want to consider taking steps to notify their employees of, and/or to help their employees comply with, the new position.

For example, companies could try to arrange for the involvement of a domestic broker in Korea to handle Korean employees' shares (either collectively or individually). We understand it may be currently challenging to find a domestic broker willing to serve in this role, but this may well change in the near future as many companies/individuals will be trying to resolve this issue. Note that a company's plan broker likely would not qualify as a domestic broker for this purpose, even if the broker has a subsidiary or an affiliated entity in Korea, because the Korean entity would be deemed separate from the overseas broker which handles the sale. However, in case the plan broker has a Korean affiliate, it may be easier to set up a process to conduct the sale through the Korean affiliate.  Therefore, we recommend checking with your plan broker if they have (or plan to establish) a Korean affiliated broker. 

We would like to thank Sun-Ha Kweon and Yangrok Lim at the law firm Kim & Chang for their assistance with this alert.  

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