Korea considers establishing SEC-style agency to address unfair trading practices

South Korea is contemplating a revamp of its financial regulatory framework, with a focus on establishing a consolidated agency to address unfair financial trading practices, reminiscent of the US Securities and Exchange Commission (SEC) model. The presidential state affairs committee, responsible for formulating key policies under the Lee Jae Myung administration, has highlighted the necessity of merging existing supervisory bodies to enhance control over unfair trading activities.

The current system, spread across the Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange, is criticized for its fragmented approach to investigating unfair trading. This results in overlapping responsibilities and delays in taking action against offenders. While the Korea Exchange is responsible for identifying suspicious trades and conducting initial reviews, the Financial Services Commission wields compulsory investigative powers such as account tracing and witness summons. On the other hand, the Financial Supervisory Service has limited investigative rights, leading to inefficiencies in the process. It often takes up to a year from the commencement of an investigation to levy sanctions on unfair trading activities, with court rulings sometimes taking up to three years to materialize.

These delays and inefficiencies can create loopholes, as seen in the case of HSBC engaging in illegal naked short selling in 2021. Despite the local finance authorities announcing the results of their investigation in September 2023, the court only reached a verdict in February 2025. In this instance, although HSBC was found to have violated short-selling regulations, the bank was acquitted due to insufficient investigation. Between 2016 and 2020, more than half of the cases related to unfair trading practices referred to the prosecution resulted in no indictment.

In response to these shortcomings, the state affairs committee is exploring the possibility of establishing a unified investigative body similar to the SEC in the United States. This new agency would integrate units from the Korea Exchange, the Financial Services Commission, and the Financial Supervisory Service responsible for probing unfair trading practices. The SEC is renowned for its “one-stop system,” holding both investigative and prosecutorial powers to swiftly address misconduct like stock manipulation and insider trading.

Experts emphasize the importance of adapting to the evolving landscape of financial activities with a unified regulatory body equipped to address risks effectively. Despite President Lee Jae Myung’s strong stance on eliminating unfair trading practices in the capital market, financial regulators remain cautious about the potential overhaul, raising concerns about reshuffling existing agencies. During a recent policy briefing, the Financial Supervisory Service focused on enhancing consumer protection without delving into organizational restructuring plans.

In conclusion, the establishment of a consolidated agency to tackle unfair trading practices aligns with South Korea’s goal of strengthening its financial regulatory framework. By learning from established models like the SEC in the US and Japan’s Securities and Exchange Surveillance Commission, South Korea aims to streamline its investigative processes and enhance its capabilities in overseeing the capital market.