Joon Park, Loss Compensation Agreement relating to Financial Investment Products and Violation of Mandatory Law or Social Order, Commercial Cases Review, Vol. 32, No. 4 (2019), pp. 3-52.
<Abstract>
The Financial Investment Services and Capital Markets Act prohibits financial investment service companies such as securities companies and their officers and employees from agreeing to compensate losses suffered by an investor. The Supreme Court of Korea has held that the prohibition is mandatory and thus a loss compensation agreement in violation of this prohibition is null and void. The most important rationale of the Supreme Court Decisions is that such an agreement runs counter to the principle that an investment must be made at the investor’s own risk. However, when an investor takes a risk on a certain investment, it is quite natural for her/him to engage in activities to transfer or reduce the risk she/he has taken or plans to take on. OTC derivative transactions are a typical means investors use to transfer or reduce risks they are exposed to. The rationale that the prohibition is based on the principle that an investment must be made at the investor’s own risk is no longer persuasive in the light of the changes in legal and regulatory environment where financial investment service companies such as securities companies can obtain a license to engage in derivative transactions with its customers. An OTC derivatives transaction between a duly licensed securities company and an investor in compliance with the applicable laws and regulations should be treated as legitimate and not violating the said prohibition, even if the derivatives transaction has the same economic function as a loss compensation agreement. It is also submitted that the policy considerations underlying said prohibition are the prevention of the following: (i) illegal or improper taking of investment risk by financial investment service companies, (ii) the negative impact of such risk taking on the financial soundness of such financial investment service companies and the loss of confidence due to unequal treatment among investors through such risk taking. If said prohibition are based on the above-mentioned policy considerations rather than the principle that investors must make investment for their own risk, the provision providing for said prohibition should not be regarded as mandatory law making a loss compensation agreement null and void.
<Keywords>
loss compensation, yield protection, financial investment service company, securities company, risk transfer, mandatory law, social order, public policy
Joon Park, Loss Compensation Agreement relating to Financial Investment Products and Violation of Mandatory Law or Social Order, Commercial Cases Review, Vol. 32, No. 4 (2019), pp. 3-52.
<Abstract>
The Financial Investment Services and Capital Markets Act prohibits financial investment service companies such as securities companies and their officers and employees from agreeing to compensate losses suffered by an investor. The Supreme Court of Korea has held that the prohibition is mandatory and thus a loss compensation agreement in violation of this prohibition is null and void. The most important rationale of the Supreme Court Decisions is that such an agreement runs counter to the principle that an investment must be made at the investor’s own risk. However, when an investor takes a risk on a certain investment, it is quite natural for her/him to engage in activities to transfer or reduce the risk she/he has taken or plans to take on. OTC derivative transactions are a typical means investors use to transfer or reduce risks they are exposed to. The rationale that the prohibition is based on the principle that an investment must be made at the investor’s own risk is no longer persuasive in the light of the changes in legal and regulatory environment where financial investment service companies such as securities companies can obtain a license to engage in derivative transactions with its customers. An OTC derivatives transaction between a duly licensed securities company and an investor in compliance with the applicable laws and regulations should be treated as legitimate and not violating the said prohibition, even if the derivatives transaction has the same economic function as a loss compensation agreement. It is also submitted that the policy considerations underlying said prohibition are the prevention of the following: (i) illegal or improper taking of investment risk by financial investment service companies, (ii) the negative impact of such risk taking on the financial soundness of such financial investment service companies and the loss of confidence due to unequal treatment among investors through such risk taking. If said prohibition are based on the above-mentioned policy considerations rather than the principle that investors must make investment for their own risk, the provision providing for said prohibition should not be regarded as mandatory law making a loss compensation agreement null and void.
<Keywords>
loss compensation, yield protection, financial investment service company, securities company, risk transfer, mandatory law, social order, public policy