Korea seeks legal system for independent equity research firms

South Korea is set to establish a legal system for independent equity research providers this year to protect individual investors, who could be damaged by unfair trading of the analysis firms due to a lack of regulations.

The country currently restricts the trading of financial products by executives and employees of securities firms, banning their analysts from buying and selling stocks they cover. But independent research providers, which are not part of brokerage houses, are not subject to those rules.

The Financial Supervisory Service (FSS) aims to introduce a legal system for those firms specializing in stock research, according to the regulator’s task plan for this year announced on Monday.

“Once independent research firms are classified as financial investment service providers, the authorities will be able to regulate them and significantly reduce unfair trading and damage to investors,” said an FSS official.

TO PROTECT INDIVIDUAL INVESTORS

Independent research providers are currently categorized in the quasi-investment advisory business, not the financial investment business under the Capital Markets Act.

The FSS is discussing ways to create a new financial investment business approval category for independent research providers or add them to the existing classifications such as the investment brokerage business and advisory sector.

The financial investment business consists of the investment trading business, investment brokerage business, collective investment business, investment advisory business, discretionary investment business and trust business.

Independent research providers do not fall under any of them and are free from regulations for companies in the financial investment business such as securities firms.

The US and Japan classify independent research providers as investment advisory firms.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jongwoo Cheon edited this article.