The Financial Supervisory Service's Dispute Mediation Committee said Tuesday it ordered investors to be reimbursed for 60 percent to 70 percent of losses stemming from the management of bond wrap accounts.
The committee concluded that the brokerage breached its fiduciary duty by purchasing commercial paper and corporate bonds above market prices and investing in securities with maturities that exceeded those of the wrap accounts it was managing, exposing clients to unnecessary risks.
Under South Korea's Capital Markets Act, investment managers are required to act in their clients' best interests and manage their money responsibly. The committee said this was the first mediation decision to find that a brokerage had failed to meet those obligations.
Bond wrap accounts are investment products in which a brokerage manages money for a client under a one-on-one contract. Unlike mutual funds, which combine money from many investors, wrap accounts are managed separately for each client based on their investment goals and cash needs, making them a popular short-term cash management tool for corporate investors.
According to the committee, one investor lost 4.6 billion won after investing 80 billion won ($58.8 million) in a bond wrap account in 2023. The brokerage postponed redemption one day before maturity, citing an internal audit into losses caused by its portfolio manager.
Another investor was notified of a paper loss of about 450 million won after investing 15 billion won in the product. The investor later discovered that the brokerage had bought commercial paper above market prices and adopted maturity-mismatched investment strategies, eventually recovering the principal only after holding the investment beyond its maturity date.
The committee also noted that the brokerage continued investing in securities with maturities of up to 10 months even as the wrap accounts neared maturity, without properly managing market risks. It further found that many of the overpriced trades were carried out to benefit other clients rather than the affected investors, and that the brokerage had previously been penalized for similar misconduct but failed to prevent their recurrence.
It therefore ordered the firm to compensate the first investor for 70 percent of the recognized damages, equivalent to 1.26 billion won, and the second investor for 60 percent, or 390 million won.
The compensation ratios were determined with reference to a related lower court ruling, which also assigned 70 percent liability, as well as previous dispute resolution cases. Damages were based on the difference between the principal and expected returns the investors should have received at maturity and the amount ultimately recovered.
The mediation will become legally binding if both parties accept it within 20 days.
"This ruling makes clear that firms can face not only regulatory sanctions but also civil liability if they unlawfully manage client assets," the committee said. "We will continue to encourage responsible bond investment practices among brokerages."
Copyright ⓒ Aju Press All rights reserved.
