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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.  

Author

Denise Glagau is a partner in the Firm's North America Employment and Compensation practice and leads the Compensation practice in the Firm's California offices. Denise has authored several articles and frequently speaks on topics of interest for legal and other professionals dealing with share plan issues. She is on the Advisory Board of the Certified Equity Professionals Institute (CEPI) of Santa Clara University and is a member of the National Association of Stock Plan Professionals (NASPP) and Global Equity Organization (GEO). She is recognized as a ranked practitioner by Chambers USA in the area of Employee Benefits & Executive Compensation. She is also a member of the Firm's Financial Institutions and Healthcare & Life Sciences Industry Groups.

Author

Barbara Klementz is the chair of Baker McKenzie’s North American Compensation Practice. She has practiced in the area of global equity and executive compensation for over 20 years. Barbara has authored several articles on global equity issues for the BNA Executive Compensation Journal, Journal of Corporate Taxation and San Francisco and Los Angeles Daily Journal, among others, and she is the author of a blog on global equity related topics called the Global Equity Equation. She is also a frequent speaker on a variety of global equity topics. Barbara is recognized as a ranked practitioner by Chambers USA. Chambers states that she "consistently delivers top-notch assistance and work product, and is a true expert in the field." Barbara is admitted to private practice in California and Düsseldorf, Germany.

Author

Brian K. Wydajewski practices in the area of compensation and employment. He also heads the Chicago Office’s Global Equity Services Practice which assists multinational corporations with the design, implementation and operation of global equity compensation plans. Mr. Wydajewski has authored numerous articles, and is a frequent speaker on employee benefits, executive compensation and global equity compensation issues. In addition, Mr. Wydajewski is past chair of the Illinois State Bar Association’s Employee Benefits Section Council, and is an adjunct professor at the Center for Tax Law and Employee Benefits at the John Marshall Law School.