The Financial Supervisory Service is set to focus on monitoring unfair transactions occurring in the stock market, prompting major shareholders and executives of listed companies to exercise greater caution during transactions. Those with access to internal company information are subject to much stricter scrutiny when trading than general investors.
In particular, to avoid misunderstandings from financial authorities, major shareholders and executives of listed companies must block the possibility of insider trading. Utilizing undisclosed information is one of the most typical forms of unfair transactions and one of the most common cases. If they have purchased company shares, they must hold them for at least six months, and if there is important information that could affect the stock price, it must be disclosed one month before the stock trading. If they must buy or sell shares on the disclosure date, they should conduct the transaction three hours later to avoid unnecessary misunderstandings. This is known as the '631 rule.'
◇ Company shares must be held for at least six months
Insider trading involves the act of company insiders trading shares using company information that could affect the stock price before it is made public.
If a major shareholder or executive of a listed company sells their shares after being informed by the accounting team that the company's profits have recently drastically decreased and anticipates a drop in stock prices before disclosing a '30% or more change in sales or profit structure,' financial authorities may impose penalty surcharges of up to twice the unjust gains obtained from insider trading.
There are also cases where individuals are unexpectedly penalized for insider trading. This is because financial authorities tend to broadly recognize this suspicion. The fundamental principle to prevent unfair cases is that company shares must be held for at least six months.
If company executives and major shareholders sell their shares within six months of purchase, they will incur a loss. Regardless of whether insider trading occurred, any profit gained from short-term (six months) trading must be returned to the company. This system for returning short-term trading profits is a regulation aimed at preventing unjust gains from insider trading in advance. Major shareholders are those who own more than 10% of voting shares or significantly influence important management matters such as the appointment or dismissal of executives. Employees in departments such as finance, accounting, disclosures, planning, and research and development, where there is a possibility of accessing undisclosed information, are included.
In 2021, an employee of NAMYANG DAIRY PRODUCTS earned 6,216,770 won by buying and selling shares within six months, but was caught the following year by the Securities and Futures Commission under the Financial Services Commission. This employee had to return all the profits made from stock trading. Since all profits from stock investments must be returned to the company, executives and major shareholders gain nothing if they sell shares within six months.
Convertible bonds and warrants for new shares are also subject to the short-term trading profit return system. Employees must return profits even if they were employed at the time of purchase but left before selling. Even if they bought and sold multiple times resulting in a final loss, only the transactions that generated profits are targeted, and they must return the profits from those transactions.
◇ Once disclosed, immediate trading is not allowed… must be done after 3 hours
If there is important information that must be disclosed to investors, greater caution in transactions is necessary. Just because a disclosure has been made does not mean that trading becomes free. Consideration must be given to the time required for the information to sufficiently spread in the market. Financial authorities view this time as three hours after disclosure. Even if a disclosure has been made, selling stocks within three hours is considered insider trading and may lead to punishment, regardless of whether the information is negative or positive.
Moreover, even if stock prices do not move as expected, it still constitutes insider trading. For instance, consider an executive of a listed company A who expects stock prices to drop before announcing a large-scale rights offering and sells their shares in advance.
Even if stock prices rise after the disclosure, this executive faces allegations of unfair trading. Insider trading is unrelated to profit and loss. If a company insider has access to important information and uses it for stock trading related to their duties, it is considered insider trading.
◇ Even if it is not obligatory, information likely to influence stock prices must be disclosed
Engaging in stock transactions without making disclosures can also pose issues, especially when the information could significantly influence an investor's judgment. The signing of a memorandum of understanding (MOU) is a representative example. Unlike mandatory quarterly reports, MOU signing is a discretionary disclosure. Companies can choose whether or not to disclose.
However, if a significant MOU affecting stock prices is signed and shares are purchased without notification, it can be deemed insider trading and might raise suspicions from financial authorities. This is because they may conclude that internal company information was used in stock transactions. There are no clear standards for what constitutes important information, but if an MOU is considered important, it is safer to disclose it.
Consider a pharmaceutical company producing drugs A, B, and C. If A accounts for 80% of total sales and C accounts for less than 1%, it is advisable to disclose information related to A concerning the MOU, as it might significantly influence stock prices. Conversely, it is less necessary to disclose information regarding C.
However, judgments regarding such important information can change depending on market conditions, so caution is advised. A financial authority representative explained, 'Matters primarily related to financial statements such as revenue and profits, as well as issues related to changes in the major shareholder's governance structure, are classified as important information.'
◇ Prior disclosure is mandatory for large stock transactions
When engaging in large stock transactions, a trading plan must be disclosed 30 days in advance. The quantity threshold is set at more than 1% of the total number of shares issued by the listed company or a transaction amount of 5 billion won, with a period of one year. Executives and major shareholders must disclose the purpose of the transaction, expected price, quantity, and intended duration of the transaction in detail 30 days prior to such transactions. Essentially, transactions are prohibited for 30 days following the disclosure.
In principle, withdrawing a disclosure is prohibited, but it is possible in cases of unavoidable circumstances such as death or bankruptcy. Transactions that do not involve significant insider trading implications or market shocks also do not need prior disclosure of trading plans.
The FSS stated, 'We will thoroughly investigate unfair trading practices by executives of listed companies and take strict measures,' and asked, 'Listed companies should pay attention to the 'main cases of unfair trading involving executives of listed companies' to prevent such occurrences.'