Regulation to protect investors is finally made

Local brokerage firms will finally be prohibited from selling junk-rated corporate bonds and commercial paper of their affiliates starting today.

The amendment of the country’s financial investment law was supposed to go into effect in July, but was delayed by the country’s financial authorities. As a result, Tongyang Securities was able to sell high-risk corporate bonds and commercial paper of its related companies to investors, who ended up taking a bath on the investments.

Last November, the Financial Services Commission announced a change in the Financial Investment Act that prohibited securities companies from selling corporate bonds and commercial paper of affiliates with credit ratings of BB+ or lower to retail investors who are considered to have less information than institutions. The FSC also said that the change would restrict securities companies from transferring customer assets managed by them into investments of corporate bonds and commercial paper of their affiliates with low credit ratings.

“Excessive financial trading taking place between affiliates of conglomerates can cause conflict of interests with investors and could raise serious problems as to protecting financial consumers and their rights,” the FSC said in a statement last year.

The change in law was originally going to be enforced on July 24 but was delayed by three months. Financial authorities said they were worried about the effects the change would have on the country’s already frozen corporate bond market. With a prolonged economic slowdown, small and midsize companies are having trouble raising funds for their businesses. Local banks are reluctant to give loans to companies with iffy credit ratings, especially at a time when interest rates are low.

The reason for the delay was questioned by lawmakers during a parliamentary audit of the Financial Supervisory Service and the FSC. They wanted to know if the delay was to enable Tongyang Securities to sell bonds and commercial paper of related companies that ended up going into court receivership, leading to heavy losses to individual investors.

“We were able to acquire a Tongyang Group internal document that hints the enforcement of the amendment was delayed upon the request of Tongyang Group,” said Representative Lee Jong-kul of the opposition Democratic Party.

According to Lee, the report included information that if the amendment took effect in July, it would have been difficult for Tongyang Corporation to pay back its maturing debt. The FSC is known to have received the report late last year.

Lawmakers said that losses of retail investors in Tongyang Group affiliates through Tongyang Securities after July could have been prevented.

By Lee Eun-joo [angie@joongang.co.kr]