In the event that a financial investment business entity solicits an investor to make an investment in a corporate bond, the content of the duty to explain that it owes to the investor / In addition to the credit rating of the corporate bond, the meaning of the credit rating at issue and the location in which it is in total credit rating is explained to the investor so that the investor can understand it, whether it can be deemed that the investor provided an explanation about the credit risk of the issuer (affirmative in principle), and whether it should be explained to the financial situation,

The risk that an investor bears in relation to the acquisition of corporate bonds, which are debt securities, under Article 4(3) of the Financial Investment Services and Capital Markets Act, is likely to cause changes in the market price of corporate bonds at a market interest rate and the risk that principal and interest will not be paid at maturity, i.e., loss of the issuer’s credit risk and principal and interest. Therefore, when recommending investors to make an investment in corporate bonds, a financial investment business entity must explain to investors the risk of investment in the corporate bonds, the risk of changes in the market price of corporate bonds, the risk of credit risk of the issuer’s credit risk, and the risk of loss in the principal and interest. Furthermore, the credit rating of corporate bonds is indicated by a credit rating company authorized by the Financial Services Commission by using marks, numbers, etc. with respect to the results of the corporate bonds’ credit assessment and indicated by the credit rating company with a view to the ability or risk of paying principal and interest of the company issued corporate bonds. Thus, if the financial investment business entity explained to an investor as well as the credit rating of the issuer’s credit risk affecting the principal and interest in the entire credit rating, barring special circumstances.

Articles 4(3), 47(1) and (3), 48(1), 119, and 123 of the Financial Investment Services and Capital Markets Act

Supreme Court Decision 2013Da17674 Decided April 23, 2015

See Attached List of Plaintiffs (Law Firm Hannuri, Attorneys Kim Jong-Un et al., Counsel for the plaintiff-appellant)

Hyundai Securities Co., Ltd. (Law Firm LLC, Attorneys Kim Nung-hwan et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2013Na2021183 decided February 12, 2015, and Decision 2013Na202183-1 decided April 23, 2015

The part of the lower judgment against the Defendant regarding the ancillary claim is reversed, and that part of the case is remanded to the Seoul High Court.

The grounds of appeal are examined.

1. In recommending an ordinary investor to make an investment, a financial investment business entity shall explain to the ordinary investor the content of the financial investment instrument, the risks involved in the investment, and other matters prescribed by Presidential Decree so that the ordinary investor can understand such information. No financial investment business entity shall make a false or distorted explanation or omit any material fact that may have a significant impact on the investor’s reasonable judgment of investment or the value of the relevant financial investment instrument, and shall be liable for damages to the ordinary investor caused by its violation (Article 47(1) and (3), and Article 48(1) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”).

In this case, whether a financial investment business entity must explain to an investor shall be determined by comprehensively taking into account the characteristics and risk level of the relevant financial investment instrument, investor’s investment experience and ability, etc. However, if an investor or his/her agent is sufficiently aware of the details of the investment, it cannot be said that the obligation to explain to the financial investment business entity is not recognized until it comes to such matters (see Supreme Court Decision 2013Da17674, Apr. 23, 2015).

2. According to the reasoning of the judgment below and the evidence duly admitted, ① Korea Shipping Co., Ltd. (hereinafter “Korea Shipping Co., Ltd.”) received credit assessment on the corporate bonds of this case from two credit rating companies in order to issue the corporate bonds of this case, which are guaranteed bonds. All the two companies evaluated the credit rating as “B+” which is an investment grade, ② the Defendant, a financial investment business entity, acquired the corporate bonds of this case amounting to KRW 20 billion and sold them to the Plaintiffs who are ordinary investors. The Defendant’s employees informed the Plaintiffs that the credit rating of the corporate bonds of this case was “BB+” and the principal loss was incurred. ③ Most of the Plaintiffs submitted a written confirmation refusing to receive the investment prospectus to the Defendant, and received the credit rating on the corporate bonds of this case in lieu of the Defendant’s investment prospectus. In addition, the facts that the Korea Shipping Co., Ltd.’s business risks and financial risks were specifically stated, ④ some of the Plaintiffs had invested in the corporate bonds before.

3. We examine these facts in light of the legal principles as seen earlier.

The risk that an investor bears in relation to the acquisition of corporate bonds of this case, which are debt securities under Article 4(3) of the Financial Investment Services and Capital Markets Act, is the risk of changing the market price of corporate bonds at a market interest rate and the risk that the principal and interest will not be paid at maturity, i.e., the risk of causing loss to the principal and interest of the issuing company, i.e., marine transportation’s credit risk of the issuing company and its principal and interest. Therefore, when soliciting the Plaintiffs to make an investment in the corporate bonds of this case, the Defendant, a financial investment business entity, must explain to the Plaintiffs that there is a risk of changing the market price of the corporate bonds of this case in relation to the risks resulting from the investment, and that there is a risk of loss to the principal and interest of the issuing company, and that a credit rating company authorized by the Financial Services Commission, assessed the credit standing of the corporate bonds by using marks, numbers, etc. of the results, and explained the investment prospectus of the issuing company, barring any special circumstance, to the extent that an investor can understand the meaning of the principal and interest of the issuing company.

In this case, Defendant employees explained to the Plaintiffs that the credit rating of the company bond of this case is “BB+” and that there was possibility of original loss, and most of the Plaintiffs issued a credit rating statement specifying the business risk and financial risk of Korea Shipping. In such a case, it is reasonable to deem that there was a provision of information about the credit rating of the company bond of this case, which is necessary for the judgment on investment in the company bonds of this case, and there is a reasonable ground to view that some of the Plaintiffs, who had invested in the company bonds of this case, was aware of the meaning of

In light of these circumstances, it is difficult to conclude that Defendant employees’ failure to specifically explain the business environment and financial status of Korea Shipping listed in the instant registration statement or the investment prospectus against the Plaintiffs, or failed to deliver the investment prospectus without demanding separate attention as to the investment risks listed in the investment prospectus, thereby making reasonable investment decisions by failing to explain to the Plaintiffs, who are ordinary investors, about the important matters related to the investment in the instant corporate bonds. Therefore, the lower court should have determined whether Defendant fulfilled its duty to explain by examining specifically whether Defendant explained the credit rating “B+” to the Plaintiffs at the time of soliciting investment in the instant corporate bonds, and even if not, whether the Plaintiffs had already been aware of it due to previous investment experience.

4. Nevertheless, the lower court’s determination that the Defendant violated the duty to explain under Article 47 of the Financial Investment Services and Capital Markets Act solely on the grounds stated in its reasoning without examining the above circumstances. In so doing, it erred by misapprehending the legal doctrine on the duty to explain under Article 47 of the said Act and failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment

5. Therefore, without further proceeding to decide on the remainder of the grounds of appeal, the part against the Defendant regarding the conjunctive claim of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating

[Attachment] List of Plaintiffs: Omitted

Justices Kim Yong-deok (Presiding Justice)