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South Korea

Securitization regulation

The Korean Financial Supervisory Commission (FSC) and the Financial Supervisory Service (FSS) recently announced amendments to the Regulations on Supervision of Securities Business, which came into effect on January 6 2004.

There were a number of changes to the Securities Regulations that affect foreign securities companies and other foreign entities. Foreign securities institutions will most directly be affected by an amendment to their fee-sharing ability. Before, they were only able to share customer fees with a parent or subsidiary. This has been broadened to include those entities that are equivalent to affiliated companies of the foreign securities company under Korean law.

The amendments also remove reporting requirements for foreign investors after conversion of depositary receipts to stocks; they may also execute this conversion through the Korea Securities Depositary, which will electronically notify the FSC/FSS of the conversion.

Regarding foreign equity ownership in companies that have foreign equity restrictions, the regulations concerning the reference date to determine the ratios of foreign equity ownership for these companies have changed to become the day following the date of subscription payment. The reference date had been the day the subscribed shares were listed on the Korean Stock Exchange (KSE) or Kosdaq.

Meanwhile, FSC or FSS approval is no longer needed for changes in the self-regulation of the bond brokerage business of specialized bond brokerage companies. Instead, changes must be notified after they are instituted. Customers who receive loans from securities companies may include equity-linked securities that are publicly traded on the KSE, Kosdaq, or over-the-counter markets among the marketable securities that may be used as collateral for such loans. Finally, the method of computing the net capital for securities companies has changed to more accurately reflect a material drop in risk due to changes such as a significant reduction in debt.

Securitization

Korea's Financial Supervisory Service (FSS) has announced that is looking at easing eligibility restrictions for the asset-backed securities (ABS) industry and improving the approval process for ABS issuances. The main reason for this is that the FSS recently found in a survey of the ABS industry that ABS have had a positive impact on the Korean financial markets by allowing Korean companies to dispose of distressed assets more effectively, to raise capital, and generally to improve their financial soundness.

The survey also found that more companies would benefit from relaxed eligibility requirements for asset securitization as well as a quicker regulatory approval processes. The FSS is considering lowering the rating requirements for originators to include FSS-registered originators with credit ratings of double-B. Regulators are also endeavoring to shorten the ABS registration process from 15 to 10 or fewer business days. Finally, the FSS plans to simplify and standardize the application and registration statement forms for all ABS issuers.

Public offerings

Meanwhile, the FSS plans to address several concerns regarding the disclosure rules for small public offerings (SPO). Proposals include requiring the filing of SPO disclosure documents ahead of the public offering, simplification of the SPO disclosure documentation, as well as removing disclosure items already provided in the auditor's report from the list of requirement items in the disclosure documentation.

The disclosure rules for SPOs were established in January 2000 to protect small investors by requiring that companies issuing securities of less than W2 billion ($1.68 million) submit to the FSS an auditor's report at least three days before the offering as well as disclosure statements for the SPO on the date of the offering.

While these rules have been credited with enabling investors to make more informed decisions and allowing companies to raise capital with greater transparency and scrutiny, there were concerns that the filing of the disclosure statements on the day of the SPO gave investors too little lead time. Further, there were concerns about the burden of preparing these disclosure statements, which have proved almost as burdensome to prepare as full registration statements.

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