The Financial Supervisory Service will conduct a regulatory inquiry into KDB Daewoo Securities, a brokerage unit of the state-controlled KDB Financial Group, for the next three weeks.

The financial regulator said it has dispatched about 20 inspectors to the Yeouido, Seoul, headquarters of KDB Daewoo Securities, which holds the No. 1 position in Korea’s securities market.

This marks the first time in about three years for the brokerage house to be subject to a sector-wide probe by the FSS.

A key regulatory inquiry target may include the allegation that KDB Daewoo carried out a lax audit on China Gaoxian Fiber Fabric Holdings when the securities firm took the brokerage role for the Chinese company’s local stock market listing.

While China Gaoxian Fiber Fabric Holdings was listed on the Korea Exchange in 2011, trading of its shares was suspended after only several months as allegations of irregular accounting surfaced.

Over the past two years, accounting inspectors at the FSS have been investigating whether the polyester yarn producer had fabricated its financial statements.

The regulator also plans to look into reportedly irregular practices of some KDB Daewoo employees. The Board of Audit & Inspection recently alleged that the employees engaged in illegal insider trading.

By Kim Yon-se (kys@heraldcorp.com)