The Financial Dispute Mediation Committee of the Financial Supervisory Service (FSS) ruled on June 30 that C Securities violated its duty of care and fiduciary duty in managing two client-commissioned bond-type portfolio products, and must compensate Applicant A Company for 70% of its loss (KRW 1.26 billion) and Applicant B Company for 60% of its loss (KRW 390 million).
Three Management Violations Identified by the Committee
The Mediation Committee found the following three violations by C Securities in managing client assets:
Purchasing Assets at High Prices: Purchasing commercial paper and bonds at above-market prices, directly causing client losses; the committee found that some high-price purchases were intended to benefit third parties by meeting other clients' target returns
Maturity Mismatch: Increasing holdings of long-term bonds and commercial paper that do not match the product's maturity, constituting a structural management flaw
Neglecting Interest Rate Risk: Failing to fulfill the duty of active management of interest rate fluctuation risk
Compensation Amounts, Calculation Method, and Basis for Ruling in the Two Cases
Company A signed a KRW 80 billion (target return 4.3%) mandate contract with C Securities, with an actual loss of KRW 460 million; the committee ruled compensation of 70%, i.e., KRW 1.26 billion. Company B signed a KRW 15 billion (target returns 3.6% and 3.8%) mandate contract, with an actual loss of KRW 450 million; the committee ruled compensation of 60%, i.e., KRW 390 million.
The loss amount is calculated as the difference between the amount the client would have received if the target return had been achieved under normal circumstances and the actual repayment amount. FSS explained that securities companies have historically repaid most bond-type portfolios at the target return level, and clients subscribed based on that trust, so the responsibility for failing to meet the target return lies with C Securities. This ruling cites a recent first-instance court decision that securities companies are liable for losses from managing bond-type portfolios.
Regulatory Precedent Significance and Existing Administrative Fines Background
FSS stated regarding this ruling that its significance lies in "clearly indicating that if client assets are mismanaged, the firm may face not only administrative penalties but also civil liability." FSS had previously issued institutional warnings and cautions to nine securities companies for mismanagement of bond-type portfolios and trusts, and imposed a total of KRW 28.97 billion in fines. This is the first time FSS has ruled on a compensation ratio among the mediation applications it has accepted; related civil lawsuits and compensation disputes under negotiation by some companies are still ongoing.
Frequently Asked Questions
What is a bond-type portfolio, and what was C Securities' fiduciary duty in this case?
A bond-type portfolio is a one-on-one customized asset management product where the securities company selects and manages corresponding bonds and commercial paper on behalf of the client according to the mandate contract, and sets a target return. C Securities' duty in this case was to select and manage assets for Company A and Company B under the agreed conditions, and to fulfill its duty of care and fiduciary duty according to law.
What is the reference significance of FSS's first ruling for other similar civil lawsuits under trial?
FSS clearly stated that this ruling establishes a legal precedent under the Financial Investment Services and Capital Markets Act for determining violations in investment mandate management, clarifying the basis that mismanagement can simultaneously incur civil liability in addition to administrative penalties. There are currently other civil lawsuits and mediation applications related to securities companies underway, and the specific impact of this ruling remains to be seen through subsequent cases.
How did the 2022 LEGOLAND Korea crisis become the background cause of this dispute?
In 2022, market panic triggered by a funding issue related to LEGOLAND Korea led to a sharp rise in market interest rates and a plunge in bond and commercial paper prices, directly causing losses in bond-type portfolios of multiple securities companies. Some securities companies then offered compensation on their own, but due to disputes over C Securities' compensation amount, Companies A and B ultimately filed mediation applications with FSS.
