Z Corp. was registered with the Securities and Exchange Commission (SEC) with the primary purpose of acting as broker/agent for transactions involving, among others, foreign exchange, deposits, interest-rate instruments, or similar or derivative products, other than acting as a broker for the trading of securities. It has a secondary purpose to engage in money changing or exchanging foreign currencies.

While operating, the said corporation received a letter from the SEC requiring it to appear before the Compliance and Enforcement Department (CED), its investigative unit, for a clarificatory conference regarding its business operation. Z Corp.’s officers complied and explained before the CED the nature of its business.

After a few months and with the requisite investigative procedure, the CED issued a cease-and-desist-order (CDO). The outcome of the investigation showed that the corporation was engaged in the trading of foreign-currency futures contracts in behalf of clients without the necessary license and, therefore, such transactions are deemed direct violations of Section 11 of Republic Act 8799,  which provides that “no person shall offer, sell or enter into commodity-futures contracts except in accordance with the rules, regulations and orders the SEC may prescribe in the public interest. The commission shall promulgate rules and regulations involving commodity-futures contracts to protect investors and to ensure the development of a fair and transparent market” and related provisions of the implementing rules and regulations. It was imperative to enjoin the corporation from further operating as such in defense of the interest of the public.

Z Corp. then filed a motion praying for the lifting of the CDO, alleging that it had not violated any law or regulation in the conduct of its business; it had been operating in accordance with the purposes for which it was incorporated, it has not engaged in currency-futures contracts trading and its business involves only spot-currency trading, which is not a form of currency or commodity-futures transactions.

Thereafter, a letter-query was sent by the SEC to the Bangko Sentral ng Pilipinas (BSP) requesting for a definitive statement that the subject corporation’s business activities are a form of financial derivatives and, therefore, can only be undertaken by banks or nonbank financial intermediaries performing quasibanking functions.

Meanwhile, the SEC made the CDO permanent and Z Corp. filed a motion praying that the said order be set aside. The SEC did not act on the motion, thus, the corporation filed with the Court of Appeals (CA) a petition for certiorari. In the meantime, the BSP made a reply to the SEC’s letter-query, stating that the business activity of the subject corporation does not fall under the category of futures trading and cannot be classified as financial-derivatives transactions. Subsequently, the CA ruled that the SEC acted with grave abuse of discretion when it issued the CDO without a positive factual finding that Z Corp. had violated the SRC.

The pivotal issue before the Supreme Court (SC) now lies as to whether the CA erred in not applying the rule that factual findings of quasijudicial bodies like the SEC, which have acquired expertise because of their jurisdiction is confined to specific matters, are generally accorded not only respect but even finality. Such findings when supported by substantial evidence usually disprove that the SEC acted with grave abuse of discretion in issuing the CDO and subsequent order making the CDO permanent.

In affirming the CA decision, the Supreme Court (SC) held that there are two essential requirements that must be complied with by the SEC before it can issue a CDO. First, the SEC must conduct a proper investigation or verification; and second, there must be a finding that the act or practice, unless restrained, will operate as a fraud on investors, or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.

In this case the SC found that that the SEC did not conduct the proper investigation or verification, before it issued the CDO. The clarificatory conference made by the SEC regarding Z Corp.’s business operations cannot be considered a proper investigation or verification process to justify the issuance of the CDO. The SC clearly saw the investigation was merely an initial stage of such process, considering that after it issued the said order following the clarificatory conference, the SEC still sought verification from the BSP on the nature of the subject corporation’s business activity.

The SEC’s act of referring the matter to the BSP is an essential part of the investigation and verification process. Such a referral indicated that the SEC conceded to the BSP’s expertise in determining the nature of Z Corp.’s business. The investigation conducted by the SEC, to be proper, must be conducted before and not after the issuance of the CDO in question. The issuance of the said CDO even before it could finish the investigation on the nature of the corporation’s business contravened RA 8799. What was worse was the fact that the SEC proceeded to issue the CDO without waiting for the BSP’s action. Thus, without the BSP’s determination of the nature of Z Corp.’s business, there was no factual or legal basis to justify the issuance of such an order.

The SC elaborated that before a CDO may be issued by the SEC, there must be a showing that the act or practice sought to be restrained will operate as a fraud on investors or is likely to cause grave, irreparable injury or prejudice to the investing public. Such requirement implies that the act to be restrained has been determined after conducting the proper investigation or verification. In this situation, the nature of the act to be restrained could only be determined after the BSP submitted its findings to the SEC. The SC also held that there is nothing in the questioned orders that show how the public would be greatly prejudiced or damaged by Z Corp.’s business operation (SEC  v Performance Foreign Exchange Corporation, G.R. 154131, July 20, 2006).

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Z Corp. was registered with the Securities and Exchange Commission (SEC) with the primary purpose of acting as broker/agent for transactions involving, among others, foreign exchange, deposits, interest-rate instruments, or similar or derivative products, other than acting as a broker for the trading of securities. It has a secondary purpose to engage in money changing or exchanging foreign currencies.