WORDS can hurt and sentences can spark a conflict that puts the entire Philippine market at risk. Apparently, some of these are found in the 2015 implementing rules and regulations (IRR) of the Securities Regulation Code (SRC). Certain provisions in the 280-page-long document have started a feud between select stockbrokers and dealers and the corporate regulator.
As external factors shook share prices to lower levels early in the new year, the Philippine Association of Securities Brokers and Dealers Inc. (Pasbdi) went to court to stop the Securities and Exchange Commission (SEC) from implementing several provisions of the IRR.
Officials of Pasbdi, the umbrella organization of dealers and brokers, went to the Regional Trial Court in Mandaluyong City Branch 212 on January 12 and asked for a declaratory relief. They also applied for a temporary restraining order (TRO) and possibly an injunction against the IRR.
Eight days later, the lower court on January 20 junked Pasbdi’s petition for a TRO and stop the implementation of many provisions of the 2015 IRR of the SRC.
After amending its petition, the Pasbdi secured a 20-day TRO against the IRR. The SEC received the order on February 19.
Puzzling
A petition for declaratory relief gives a practical remedy for ending controversies that have not reached a state where another relief is immediately available. It supplies the need for a form of action that will set controversies at rest even before they happen, such as leading to a repudiation of obligations, an invasion of rights and a commission of wrongs.
In this case, Pasbdi claimed the new IRR “violate[d] [its] right to due process and impair[ed] the obligations of contracts,” among others.
What puzzled regulators is that Pasbdi was able to secure a reprieve on dozens of the rules that do not concern the brokers themselves. Also, many of the provisions the group assailed are already in place and being implemented for years now, according to a ranking SEC official.
These provisions include Rule 12.1.1, which called on issuers of registered securities to enter an underwriting agreement with a universal bank, investment house or any financial institution. There is also Rule 24.1, which refers to manipulative practices, and Rule 33, on the Registration of Exchange. The latter refers to the requirement of the SEC for the creation of a self-regulatory organization (SRO), such as the Philippine Stock Exchange (PSE) and the Philippine Dealing & Exchange Corp., which operates the bond market-trading platform. Another provision is Rule 39.1.1.10.4, which refers to the submission by the SRO of annual reports.
The SEC official said while the TRO may be in effect by only 20 days, this may be placing the entire market in jeopardy, as the provisions that were stopped include the operations of the Exchange.
For instance, the TRO included Rule 39.1.1.3, which refers to the monitoring of the market and the access to information for market surveillance.
It states:
“The Commission may, on its own initiative, monitor the market to ensure that the SRO is fulfilling its functions and to ensure further that each activity or potential problem area in the market is adequately covered and being reasonably addressed. For this purpose, SROs, exchanges, operators of trading markets, trading participants and other market participants shall, upon request, provide the Commission or its authorized representatives direct access to their trading systems, platforms, repositories and databases for information about particular accounts, orders, trades, positions, clearing data, trading-account codes and the names of clients corresponding to such codes, or any other information reasonably needed for effective market surveillance, reconstruction of trade events and conduct of trade analysis.”
“The rule [39] is an important function of the SEC, in case of suspicious activities,” the SEC official said. “With the TRO, the PSE can now withhold such information to us.”
Disclosure
THE Pasbdi placed a half-a-million-peso bond to answer for any damages that the SEC may sustain as a result of the TRO.
However, the SEC said it would no longer wait for the TRO to expire. Instead, it would, through the Office of the Solicitor General, move for reconsideration to lift and present evidence that will oppose another impending order, which is the issuance of a writ of preliminary injunction.
If issued, the writ of preliminary injunction would prevent the SEC from enforcing the 2015 IRR, until the final disposition of the petition for declaratory relief case filed by Pasbdi.
Another broker, who declined to be named, said at the heart of the matter is the requirement that asks brokers to disclose the beneficial owner of the stock. The government has not required this provision before, despite a provision at the SRC that brokers should disclose the beneficial ownership.
A stock exchange such as the PSE mainly facilitates the exchange or trading of securities between buyers and sellers, among its other functions. Investors wishing to invest, however, cannot just enter the exchange and purchase shares. They must go to a registered stockbroker, which will trade their money on their behalf.
Brokers earn through commission and fees for the transactions.
The investors who own the money have rights over that stock. They are the beneficial owners of the stock they purchased, even though the stock is under the name of another, usually the broker or a dealer.
Tabs
A broker has his own system of keeping tabs on who owns what and how much.
A stockbroker told the BusinessMirror he normally keeps these files in his filing cabinet; never sharing it with anyone, not even his peers or the regulators, as these are confidential papers. Previously, stockbrokers are not required by the government to submit them.
The umbrella organization of brokers, however, were up and arms when the 2015 IRR of the SRC required stockbrokers to release beneficial owners to the government, and, in this case, the SEC.
Rule 18.1.2 of the 2015 IRR reads: “If the equity securities under the name of the legal owner are beneficially owned by another person/s, the legal owner and beneficial owner shall individually or jointly, within five business days after such acquisition, submit to the Issuer, the Exchange where the security is traded, and to the Commission a sworn statement containing the information required by SEC Form 18-A.”
The rule was not present in the old IRR, released in 2004 and which took effect during that year.
The rule covers those who are beneficial owners of 5 percent of any class of securities.
BIR-like
THE Pasbdi likened the move of the SEC on the similar efforts of the Bureau of Internal Revenue requiring companies, mainly the banking and financial sectors, to disclose the alpha list (alphabetical list), which contains the names of the portfolio investors receiving income payments and dividends.
Those efforts were stopped by the Supreme Court (SC) in 2014.
Pasbdi claimed that certain provisions of the IRR are “contrary to the Constitution, as they denied them due process, and even impair the obligation of contracts” already entered into by its member-brokers and clients.
In the Philippines those who put money in the stock market are mainly institutional investors. Only a handful of the amount invested come from individual investors, PSE data shows.
Institutional investors are usually large firms with hefty cash for investments in markets where they believe the returns are high.
The issue of beneficial ownership has been the main topic in many legal circles, as it is commonly believed to be used as a means to circumvent the law on limiting foreign equity to just 40 percent on partly nationalized industries. That limit to foreign ownership was enshrined in the 1987 Constitution.
These industries include operation and management of public utilities, advertising, mining activities and exploration, development and utilization of natural resources.
In an earlier ruling that took effect in 2015, the SC ordered the SEC, in the case of Gamboa v. Teves, to look into the beneficial ownership of corporations and ensure compliance with the limit on foreign ownership.
Complicated
A more complicated structure of beneficial ownership is when the money is being held by a corporation or an entity, like a mutual fund. The latter lumps all the money of individual investors and are traded by stockbrokers while still under the name of one company.
The beneficial owner goes at so many layers below the levels of ownership they are very difficult to track, especially to untrained eyes. Identifying the beneficial owner through this thick layer spells more work for the PSE.
PSE President and CEO Hans B. Sicat said the current system on beneficial ownership already “works fine,” as this system is already in place to track the ownership structure.
“The structure where client shares are indirectly lodged with the broker in the depository is a globally accepted practice,” he said in an e-mailed statement to the BusinessMirror. “[The structure] is designed as such to help facilitate the transfer of ownership from one client to another for stock-market transactions.”
Sicat further said the system at the Exchange is “equipped with tools to help track foreign-ownership levels.”
“It even has mechanisms to prevent trades that will cause a breach in foreign-ownership limits. Information on foreign-ownership is also readily available real time in the trading terminals, as well as the regular submissions of the listed companies.”
Powers
SEC Chairman Teresita J. Herbosa said the agency is acting within its regulatory powers when it issued the amended IRR of the SRC to disclose the beneficial owners of stocks.
“We stand by our position. The issuance of the 2015 IRR of the SRC is well within the exercise of our regulatory function,” Herbosa said. “There is no reason for them to seek relief claiming injustice, when we are only performing what is mandated by law.”
Herbosa cited a section of the SRC IRR, which states, among others, that “the State shall ensure full and fair disclosure about securities.”
Section 18 of the SRC IRR also states: “any person who acquires directly or indirectly the beneficial ownership of more than 5 percent of certain equity shall report the true identity and citizenship of said owners to the Commission.”
The amendment, however, only forms part of an overarching rule to make trading more transparent and placed several new requirements to the brokers.
“It is perfectly legal to have the stocks registered under the name of a person other than the true owner. But these brokers and dealers should, by law, disclose the real identity of the investors to whom the stocks truly belong,” Herbosa said. “That is the meaning of the disclosure requirement of beneficial ownership of stocks.”
“How can we protect them [stockholders], if their identity is unknown? How do we know if the foreign-equity limitation is not violated, if we do not know who the true owners are?” she added.
Mandate
ASIDE from the disclosure of beneficial owners, the IRR also mandates stockbrokers and dealers the submission of detailed description of organizational and functional charts, the names and designations of the officers, including branch offices; risk-management manual and internal control procedures; and business continuity and disaster-recovery plan.
It also requires stockbrokers, dealers and trading participants to submit a comprehensive information-technology plan.
They were also ordered to submit an updated written supervision and control procedures, including procedures for establishing and segregating transactions, taking into consideration the requirements of the Anti-Money Laundering Act of 2001 (Republic Act 9160, as amended) and the Revised Code of Corporate Governance.
The majority of these new requirements were included in the TRO.
Despite the legal case that Pasbdi filed, the SEC said 88 (66 percent) of the 133 broker dealers and trading participants of the PSE have already submitted the new requirements. The SEC, however, declined to give out the list of those compliant brokers.
Two broker dealers requested and were granted extension of time to comply with the new IRR of the SRC, which took effect on November 9, 2015.
Under the rules, brokers should comply with the new requirements by February 9.
SEC officials said they are still waiting how things pan out the next few weeks. The agency implores brokers to view the 2015 IRR as government’s move for greater transparency in transactions at the stock market.