## _cr0462 ## Source details **Canonical URL:** [_cr0462](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr0462.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr0462.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr0462.pdf.json) --- ### Summary of Main Findings (FSAP IOSCO Assessment) - Joint World Bank/IMF mission visited the Republic of the Philippines: October 8–23 and November 19–December 6, 2001. - IOSCO assessment conducted by Noritaka Akamatsu, Lead Financial Economist of the World Bank. - SEC is the primary securities regulator; BSP supervises NBFIs with bank links and quasi-banking/trust operations. - Securities Regulation Code (SRC) is main legal basis; SRC mandated PSE demutualization and narrowed SEC responsibilities to focus on regulation and enforcement. ### Market Structure, Participants and Key Statistics - Market infrastructure: Philippine Stock Exchange (PSE), Philippine Central Depository (PCD), Securities Clearing Corporation of the Philippines (SCCP). - Licensed intermediaries and counts (as reported): - Investment Houses: 44; (breakdown elsewhere: 7 with quasi-banking function, 37 without) - Financing Companies: 174 (elsewhere 7:167) - Broker-Dealer firms: 176 - Mutual Funds: 19 - Investment Management Companies: 15 - Capital requirements: - Investment House required capital base: P300 million. - Broker Dealers required capital base: P100 million. - Mutual funds total assets as of end-September 2001: slightly less than P10 billion. - PSE listings and capitalization: - PSE lists 231 companies and one series of Small Denomination Government bonds (as of end-August 2001). - Market capitalization at end-August 2001 (excluding government bonds): P2,429 billion (US$47 billion). - Pre-crisis peak market capitalization in 1996: P2,122 billion. - Ratio of market capitalization to GDP as of end 2000: 78.1 percent; pre-crisis peak in 1996: 97.8 percent. - Market turnover and volume: - Market turnover for 2001 (annualized): P173 billion. - Peak market turnover in 1999: P781 billion. - Annualized number of shares traded for 2001: 192 billion shares. - Hay days volume in 1996: 2,274 billion shares. - Market turnover ratio for this year: 7.1 percent. - Market turnover ratio for 1999: 40 percent. - Free float portion of corporate shares: about 15 percent. - Domestic debt market: - Market capitalization including GOCCs and LGUs as of end July 2001: P1,128 billion (about 30 percent of GDP). - National government debt: P1,118 billion. - Commercial papers (CPs) capitalization as of October 15, 2001: P35 billion (declined from P44 billion at end 2000). - CPs annual turnover ratio: around 500 percent. - Government securities turnover: roughly 40 percent; short-term T-bills annual turnover ratio: about 90 percent. - Commercial banks account for said to be 70–80 percent of trading in government securities. ### General Preconditions, Pending Legislation and Tax Reform - Pending House Bills (in reading): - revised Investment Company Act of 2001 (House Bill No. 2814) - Securitization (House Bill No. 2759) - Special Purpose Asset Vehicle (House Bill No. 3236) - Personal Equity and Retirement Account (PERA) (House Bill No. 1665) - Financial Sector Tax Reform Bill - Financial Sector Tax Reform Bill components (described variably): - introduction of Financial Institutions Tax (FIT) on banks and nonbanks; - introduction of Thin Capitalization Rule (TCR) or Maximum Debt Funding Percentage Rule; - rationalization of taxation of foreign currency deposit units (FCDUs); - rationalization of the documentary stamp taxes (DST). - Expected effects: - Elimination of DST on secondary market trading and securities lending and borrowing transactions expected to positively impact market liquidity. - Revised Investment Company Act expected to allow foreign investors board representation in mutual funds. - Financial Sector Tax Reform Bill expected to reduce or eliminate privileges currently enjoyed by foreign banks through Maximum Debt Funding Percentage Rule. ### IOSCO Principles — Implementation Summary (selected groupings) - Principles relating to the regulator (CPs 1–5): Implemented. - SRC made SEC more enforcement-oriented and operationally independent; SEC empowered with broad powers (rulemaking, inspection, investigation, sanctions, market intervention). - SEC ability to retain P100 million from fees and income (Section 75) enhances resources. - Principles of self-regulation (CPs 6–7): Partially [nearly] implemented. - PSE corporatized and Board reformed; full implementation dependent on diversification of PSE ownership (PSE remains 100 percent owned by participating brokers). - Enhancements needed in market surveillance and Net Capital reporting systems; consideration of spinning out CSG as independent SRO. - Principles for enforcement (CPs 8–10): Partially [nearly] implemented. - SRC provided inspection, investigation, surveillance and enforcement powers (Sections 5, 53, etc.). - SEC still needs capacity building: staff skills, electronic information management, direct access to PSE surveillance. - Principles for cooperation in regulation (CPs 11–13): Implemented (with some partial elements). - SEC authorized to share public and non-public information; AMLA facilitates overcoming Bank Secrecy Law obstacles. - MOUs with counterparts (e.g., BAPEPAM) under finalization; DFA endorsement obtained to enter into MOUs. - Principles for issuers (CPs 14–16): Implemented. - Disclosure regime high standard (Sections 8, 12, 17, 18); SEC approved Code of Corporate Governance to be mandatory for listed/public companies. - SEC committed to adoption of International Accounting Standards by 2005. - Principles for collective investment schemes (CPs 17–20): Partially implemented. - Investment Company Act (ICA, 1960) provides core elements but outdated; does not accept foreigners on boards; leaves investment advisors unregulated. - Passage of Revised Investment Company Act (RICA) awaited; expected to bring investment advisers under SEC authority. - Principles for market intermediaries (CPs 21–24): Implemented. - Entry, capital and prudential requirements clearly established (Investment House P300 million; Broker Dealer P100 million; Net Capital rules). - Net Capital monitoring to be computerized for daily surveillance. - Principles for the secondary market (CPs 25–30): Partially implemented. - PSE demutualized and operating as for-profit SRO; competition from new FIE and CFE may challenge SRO credibility. - SEC encouraged to define market design benchmarks through Rules/Orders for multi-exchange environment. ### Detailed Regulatory Powers and Processes (selected) - SEC statutory powers include: - market participant authorization, direct surveillance, information collection, investigations, subpoenas, search and seizure (Section 5; Section 53; Section 5.(l)). - power to issue cease-and-desist orders (Section 64) and to compel companies to call general shareholders’ meetings (Section 5.(k)). - authority to supervise SROs and Exchanges (Sections 36, 39, 40, 42, 49, 52, 53, 64). - Rulemaking and procedures: - SRC empowered SEC to issue IRR (SRC Rules) in January 2001; SEC has a draft Manual of Procedures. - On April 16, 2002, SEC operationalized on-line filing for company registration; reportorial requirements to be filed electronically; Net-capital filings to be electronically analyzed by MRD. - Confidentiality and cooperation: - Section 66 and SRC Rule 66.3 protect commercially sensitive information; Section 66.5 permits disclosure to foreign enforcement authorities under reciprocal conditions. - MOA with BSP (June 2001) clarified supervisory roles for NBFIs and conglomerates. - Anti-Money Laundering Act (AMLA) passed October 2001; SEC preparing IRR with AMLC. ### PSE, SROs, Compliance and Surveillance - PSE Compliance and Surveillance Group (CSG) components: - Compliance Audit Dept. (CAD), Special Investigation Dept. (SID), Market Surveillance Dept. (MSD). - CSG functions: - CAD audits member brokers; supervises Net Capital compliance. - SID investigates complaints and builds case database. - MSD monitors market activity and upgrading surveillance systems (new price-banding, volume and concentration analytics). - Governance and ownership issues: - PSE SRO status restored after demutualization steps, but ownership still concentrated with brokers; recommendation to diversify ownership (go public) and to consider spinning off CSG as independent SRO or creating a combined “super SRO” for small market efficiency. - Surveillance and access: - PSE is upgrading surveillance (single price bands replaced by issuer-specific bands); SEC currently lacks direct access to PSE surveillance system and is encouraged to obtain terminals for monitoring. ### Clearing, Settlement, Risk Management and SIPF - Legal framework and operational measures: - Section 42.2(f) requires Clearing Agency to establish guarantee fund based on member contributions and exposure measures. - SCCP uses Trade Clearing and Guarantee Fund (TCGF); has fails management system and “credit ring agreement” among participants. - Settlement cycles: T+3 settlement; allocation to clearing members in T+4. - Risk controls: mark-to-market collateralization (implemented 01 May 2000), intra-day settlements for derivatives, DVP on net-net basis, margin rules (SRC Rule 48.1-1), Net Capital Rule (SRC Rule 49.1-1). - SIPF (Securities Investor Protection Fund): - Funded by monthly member contributions of P10,000 plus one 0.0002 percent of each member’s gross trading volume. - SIPF coverage: up to P100,000 per customer. - SIPF has not yet been mobilized for a broker dealer insolvency. ### Corporate Governance, Issuer Reporting and Minority Protection - Disclosure framework: - Registration/disclosure modeled after U.S. system: Section 8 registration; Section 17 periodic and current reports; SEC Forms 17-A, 17-Q, 17-C. - Section 18 requires reporting for holdings/acquisitions of 5 percent or more; Section 23 requires statements of beneficial ownership above 10 percent. - Shareholder rights: - Corporation Code and SRC Sections 19–23 provide dissenter’s right, pre-emptive rights, right to extraordinary meetings, cumulative voting, super majority (2/3) for major restructurings. - Section 38 requires at least two independent directors for listed/public companies. - SEC power to compel general shareholders’ meetings (Section 5.(k)) described as “extraordinarily strong.” - Accounting and auditing: - Annual reports audited by independent CPA; SEC adopting IAS by 2005; SEC revising SRC Rule 68 to incorporate SFAS and IAS convergence. - Oversight of accountants by Board of Accountancy; SEC can impose administrative sanctions and refer cases to Board of Accountancy. ### Investment Companies (CIS) — Key Gaps and RICA - Current ICA (1960) provisions: - Defines open-end and closed-end companies; requires prospectus, daily NAV publication (ICA Rule 35-1.(e).(3)), redemption payment within seven business days (ICA Rule 35.(e).(5)). - Custodian must be a bank with trust functions (ICA Rule 35-1.(h).(1)); segregation of assets implied in Section 16.(f) but IRR lacking specific rules. - Gaps and issues: - ICA does not allow foreigners to be board members; investment advisors are unregulated (not supervised by SEC except corporate registration). - No explicit detailed standards for valuation, pricing controls, procedures for pricing errors, or limits on deferred redemptions. - Independent external auditing required for annual reports but not for daily NAV valuation. - Reform: - Revised Investment Company Act (RICA) drafted (House Bill No. 2814) expected to address related party transactions, bring investment advisers under SEC, clarify segregation and valuation rules; SEC hopes RICA will be passed "by this year" (as stated in source). ### Enforcement Capacity, Inspections and Casework - Inspection and investigation authorities: - SEC has broad powers (Section 5, Section 53, Section 5.(l)) including subpoenas, search and seizure, and referral to law enforcement. - Bank Secrecy Law requires court order for bank records; AMLA enables account freezes and reporting of suspicious transactions regardless of amount. - Operational capacity and constraints: - SEC reorganized and staffing targets: planned staff 428; SEC had halved staff from 708 and working to fill about 70 positions. - SEC successful in administrative sanctions (21 cease-and-desist orders) and referrals to DOJ; no successful criminal securities prosecution reported despite numerous investigations. - SEC forged cooperation agreement with National Bureau of Investigation (NBI) to tackle boiler room activities. - Assessment: - Principle 10 (effective inspections, investigations, surveillance and enforcement): Partially implemented (near “Implemented” pending staffing and MIS completion). - Principle 12 (information sharing): Partially implemented (finalization of MOUs pending). ### Authorities’ Response and Recommended Next Steps (selected) - Strengthen SEC capacity: - Intensify in-house training to enhance market surveillance, investigation and enforcement skills. - Continue full computerization of data (SEC-iRegister) and reporting; complete Manual of Operations and Procedures revisions. - Use P100 million retained income to build human and system capacity. - PSE governance and SRO reforms: - Complete PSE demutualization second phase (listing) to diversify ownership away from broker dealers; SEC directed PSE to offer shares to institutional investors and suggested ADB and IFC consider taking stakes. - Study and decide on independence and operationalization of CSG-PSE as independent SRO. - Ensure SEC direct access to PSE surveillance systems; consider providing a terminal to SEC. - Legal and market structure reforms: - Finalize MOUs with foreign counterparts (e.g., BAPEPAM) and pursue additional agreements. - Passage of RICA urgently needed to regulate investment advisers and clarify CIS rules. - Implement electronic Net Capital reporting and monitoring for broker dealers to enable daily surveillance. - SEC to provide key benchmarks through Rules/Orders to define Philippine capital market design in multi-exchange for-profit environment; develop a specific supervision program for trading market operators and SROs. - Market development and investor protection: - SEC and PSE to conduct investor education campaigns. - Adopt IAS by 2005 and continue strengthening audit quality and enforcement against accounting fraud. - Rationalize taxation (elimination of DST on secondary trading and securities lending) expected to enhance liquidity. *Source: IMF/World Bank FSAP assessment document (_cr0462) — Summary of findings, market statistics, IOSCO Principles assessment, authorities’ response and recommended next steps.* ### 1. Summary of Main Findings of Assessment of Implementation of the IOSCO Objectives ### 1. Summary of Main Findings of Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation ### General - A joint World Bank/International Monetary Fund mission visited the Republic of the Philippines during the period October 8–23 and November 19–December 6, 2001 as part of the Financial Sector Assessment Program (FSAP). - The aim was to assess the effectiveness of securities regulation, soundness of market intermediaries, and development prospects for the capital markets, including observance of the IOSCO Objectives and Principles of Securities Regulation. - The IOSCO assessment was conducted by Noritaka Akamatsu, Lead Financial Economist of the World Bank. ### Institutional and Macroprudential Setting, Market Structure—Overview - Supervisory framework - The SEC is the primary regulatory authority over the capital markets and their participants. - The BSP also supervises NBFIs to the extent they have ownership links with banks, are permitted to have quasi-banking function and trust operations and offer foreign exchange products and services. - The Securities Regulation Code (SRC) is the main legal basis for the regulation of the markets; it narrowed and redefined the scope of responsibilities of the SEC to enable focus on regulation and enforcement. - The SRC provided for demutualization of the Philippine Stock Exchange (PSE) to address PSE’s conflicts of interest as a self-regulatory organization (SRO). - Other legal bases: Corporation Code; Presidential Decree 129 on Investment Houses; Financing Company Act of 1998; Investment Company Act of 1960; General Banking Law of 2000; BSP Manual of Regulations for NBFIs. - The Investment Company Act is due to be amended to bring investment advisers under SEC supervision. - Market structure - Market infrastructure: Philippine Stock Exchange (PSE), Philippine Central Depository (PCD), Securities Clearing Corporation of the Philippines (SCCP). - Key market intermediaries listed: - 44 Investment Houses - 44, 174 Financing Companies, 176 Broker-Dealer firms, 19 Mutual Funds and 15 Investment Management Companies (as reported in source text). - Seven Investment Houses and seven Financing Companies can have quasi-banking function (ability to raise financing from more than 19 creditors). - Capital requirements: P300 million for Investment House; P100 million for Broker Dealers. - Mutual funds total assets as of end-September 2001: slightly less than P10 billion. - Most NBFIs are owned or affiliated to commercial banks. - PSE listings: 231 companies and one series of Small Denomination Government bonds. - Market capitalization at end-August 2001: P2,429 billion (US$47 billion), representing nearly 80 percent of the GDP. - Annualized market turnover in 2001: P173 billion (7.1 percent turnover); peak in 1999: P781 billion (40 percent turnover). - Free float portion of corporate shares: about 15 percent. - Debt market: - Total capitalization of government securities including GOCCs and LGUs as of July 2001: P1,128 billion (about 30 percent of GDP). - National government debt: P1,118 billion. - 40 percent of national government debt was in the form of treasury bills. - Turnover: 40 percent turnover for all government securities and 90 percent for T-bills. - Commercial papers (CPs) capitalization as of October 15, 2001: P35 billion; annual turnover ratio: 500 percent. - Trading concentrated: government securities trading dominated by commercial banks; investment houses trade CPs actively. ### General Preconditions for Effective Securities Regulation - Legislative bills under consideration aim to rationalize taxation of financial instruments and services. - Elimination of Documentary Stamp Tax on secondary market trading and securities lending and borrowing transactions is expected to positively impact market liquidity. - Rationalization expected to provide more equal treatment and fairer market access for domestic and foreign investors and market participants. - SEC and PSE implementing reforms mandated by the SRC: - SEC has restructured organization and is renewing staffing to strengthen enforcement capacity. - Computerization of data administration has recently achieved significant progress; further organizational changes and capacity building need completion before full SRC functioning. - PSE corporatized, reformed its board, and is due to go public to restructure ownership. ### Main Findings Summary (by IOSCO Principles) - Principles relating to the regulator (CPs 1–5): Implemented. - SRC made the SEC more enforcement-oriented and operationally independent with clear objectives and procedures. - SEC better empowered to enforce the law and given adequate budgetary resources relative to narrowed responsibilities. - Computerization of data administration has progressed; further enhancement of enforcement skills and clarification of accountability needed. - Principles of self-regulation (CPs 6–7): Partially [nearly] implemented. - PSE corporatized and Board reformed to be more independent of member broker dealers. - PSE needs to go public to diversify ownership away from broker dealer dominance. - Needs enhancements to market surveillance and Net Capital reporting systems. - PSE and SEC considering spinning out Compliance and Surveillance Group to make it a dedicated self-regulator. - Principles for the enforcement of securities regulation (CPs 8–10): Partially [nearly] implemented. - SRC provided comprehensive inspection, investigation, surveillance and enforcement powers for SEC. - SEC needs to continue enhancing staff skill in using these powers and further enhance electronic information management. - Principles for cooperation in regulation (CPs 11–13): Implemented. - SEC has authority to share public and non-public information with domestic and foreign counterparts. - Rules of confidentiality of information are sound; MOUs with willing counterparts needed. - Anti-Money Laundering Act (AMLA) facilitates overcoming obstacles created by the Bank Secrecy Law. - Principles for issuers (CPs 14–16): Implemented. - Disclosure regime is up to high standards. - SEC plays significant role to protect minority shareholders, though strong founder family ownerships make protection difficult. - SEC committed to completing adoption of the International Accounting Standards by 2005. - Principles for collective investment schemes (CPs 17–20): Partially implemented. - Existing Investment Company Act provides core elements for CIS regulation but is outdated and requires clarification and rationalization. - Act does not accept foreigners as members of boards of directors, discouraging foreign investment. - Leaves investment advisors unregulated. - Passage of the Revised Investment Company Act is awaited. - Principles for market intermediaries (CPs 21–24): Implemented. - Eligibility criteria and registration procedures are clear and sound. - Capital and other prudential requirements are clearly established. - Model Internal Supervision, Control and Compliance Procedures and SRC Rules are sound. - Procedures to deal with failure of market intermediaries are clearly established. - System to monitor Net Capital may be computerized to achieve daily monitoring. - Principles for the secondary market (CPs 25–30): Partially implemented. - PSE is a highly autonomous market operator; demutualized and a for-profit corporation which is self-regulating. - Fixed Income Exchange and/or Commodity Futures Exchange likely to be introduced soon. - Emerging competition among exchanges may raise doubts about credibility of their self-regulatory functions. - SEC encouraged to provide key benchmarks through SRC Rules and/or SEC Orders to define the envisioned design of Philippine capital markets where multiple exchanges compete. ### Authorities' Response and Recommended Next Steps - Principles relating to the regulators (CPs1–5) - SEC to intensify in-house training to enhance market surveillance, investigation and enforcement skills. - Full computerization of data ongoing. - Manual of Operations and Procedures being reviewed and revised for simplicity and clarity. - Principles of self-regulation (CPs 6–7) - Listing of the PSE is the second phase of demutualization; Board awaiting right time to go public. - To implement SRC 20 percent ownership cap for broker dealers, SEC directed PSE to offer shares to institutional investors and suggested ADB and IFC consider taking a stake. - Discussions on ensuring independence of the PSE Compliance and Surveillance Group (CSG-PSE) are underway; CSG-PSE has been incorporated as separate entity but operationalization as independent SRO delayed pending study of independence options. - Principles for enforcement of securities regulations (CPs 8–10) - On April 16, 2002, SEC operationalized on-line filing for registration of companies; reportorial requirements to be filed electronically. - Net-capital requirements from broker dealers to be electronically filed and analyzed by the Market Regulation Department (MRD). - Principles for cooperation in regulation (CPs 11–13) - SEC received favorable endorsement from Department of Foreign Affairs (DFA) to enter into MOUs with counterparts. - Finalizing an MOU with Indonesia’s BAPEPAM; similar agreements with other regulators being considered. - Principles for issuers (CPs 14–16) - SEC approved the Code of Corporate Governance which shall be “mandatory” for all corporations whose securities are registered or listed, corporations which are grantees of permits/licenses and secondary franchise from the SEC and public companies. - Principles for collective investment schemes (CPs 17–20) - SEC hopes the Revised Investment Company Act will be passed into law "by this year"; SEC ready to appear before Congressional hearings but cannot control legislative priority and schedule. - Principles for market intermediaries (CPs 21–24) - System to monitor Net Capital of broker dealers is being prepared by MIS in cooperation with MRD; system testing hoped to be ready before the end of the second quarter. - Principles for the secondary market (CPs 25–30) - With establishment and operationalization of Fixed Income Exchange (FIE) and revival of the Futures Exchange, mission raised concerns about competition among markets and credibility of self-regulatory functions. - Mission suggested SEC provide key benchmarks through Rules and/or Orders to define the concept of Philippine capital markets in a multi-exchange, for-profit environment; SEC will address the suggestion. ### Information and Methodology Used for Assessment (summary) - Assessment based on extensive hearings with SEC, BSP, Bureau of Treasury (BOT), PSE, PCD, SCCP, industry associations (IHAP, ICAP, SBDAP), BAP, LGU Guarantee Corporation, Philippine Rating Services, and other private institutions. - SEC provided thorough responses to IOSCO High Level Survey Questionnaire and five Self-Assessment Methodologies. - Focused primarily on regulatory capacity of the SEC and the PSE to avoid duplication with Basle Core Principles assessment of BSP. *Source: 1. Summary of Main Findings of Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation* ### 22. Currently, investment advisors are not regulated and supervised by the SEC except ### _cr0462 - 22. Currently, investment advisors are not regulated and supervised by the SEC except ### Regulatory scope and supervisory responsibilities - Investment advisors: not regulated and supervised by the SEC except for the requirement of registration with the SEC as corporation. The Revised Investment Company Act of 2001 now being read in the Congress is expected to bring them under the authority of the SEC. - Pre-Need Plans: by the nature of the business, similar to an insurance company; regulatory and supervisory responsibility is expected to be transferred out of the SEC to the Insurance Commission of the DOF. - Lending investors: not securities market participants; large in number (said to be 4,000 to 7,000), mostly small single proprietorships and not registered as corporation nor as partnership with the SEC; registered with the Department of Trade and Industry (DTI). If some upgrade to financing companies, they will formally come under SEC supervision. - For lending investors unable to upgrade: a Lending Company Act being considered as part of the Micro Finance Program may transfer their supervisory responsibility out of the SEC to the DTI or local authorities. ### Legal framework and implementing rules - Applicable laws and acts: - Securities Regulation Code July 2000 (SRC) - Corporation Code of May 1980 - Presidential Decree 129 on Investment Houses (PD 129) - Financing Company Act of 1998 - Investment Company Act of 1960 - For each law, the SEC issued Implementing Rules and Regulations (IRR) to substantiate the law with specific standards, forms and procedures. - The General Banking Law of 2000 and the BSP Manual of Regulations for NBFIs: - provide rules for quasi-banking and trust functions of NBFIs; - provide rules for Universal Banks and Commercial Banks to engage in securities business and to own NBFI subsidiaries including Investment Houses and Broker Dealers; - empower the BSP to supervise them. - Memorandum of Agreement (MOA) between the SEC and the BSP signed in June 2001: - clarified each regulator’s role and helped avoid confusions, overlaps and overlooked loopholes in supervising financial conglomerates and universal banks. - Anti-Money Laundering Act passed in October 2001; the SEC is preparing its IRR for the Act in consultation with the Anti-Money Laundering Council (BSP participates). ### Pending legislation expected to affect market structure and taxation - House Bills currently in reading: - revised Investment Company Act of 2001 (House Bill No. 2814) - Securitization (House Bill No. 2759) - Special Purpose Asset Vehicle (House Bill No. 3236 intended for off-loading non-performing assets of banks) - Personal Equity and Retirement Account (PERA) (House Bill No. 1665) - Financial Sector Tax Reform Bill - Financial Sector Tax Reform Bill components (described variably as four components and elsewhere as three additional components): - introduction of Financial Institutions Tax (FIT) on banks and nonbanks; - introduction of Thin Capitalization Rule (TCR) or Maximum Debt Funding Percentage Rule; - rationalization of taxation of foreign currency deposit units (FCDUs); - rationalization of the documentary stamp taxes (DST). - Expected effects: - Elimination of DST on secondary market trading and securities lending and borrowing transactions is expected to have a significant positive impact on liquidity of the securities market. - Revised Investment Company Act of 2001 (House Bill No. 2814) expected to allow foreign investors to have representation in the board of directors of mutual funds. - Financial Sector Tax Reform Bill expected to reduce or eliminate privileges currently enjoyed by foreign banks through the introduction of Maximum Debt Funding Percentage Rule. ### Market structure, participants, and liquidity metrics - Key market institutions: Philippine Stock Exchange (PSE), Philippine Central Depository (PCD), Securities Clearing Corporation of the Philippines (SCCP). - Key market intermediaries and licensed numbers: - Investment Houses (7:37) — first number: those with a quasi-banking function; second number: those without. - Financing Companies (7:167) - Broker-Dealer firms (176) - Mutual Funds (19) - Investment Management Companies (15) - Quasi-banking function: defined by the General Banking Law as an ability to raise financing from more than 19 creditors. - Capital requirements: - Investment House required capital base: P300 million. - Broker Dealers required capital base: P100 million. - Mutual funds total assets: as of the end of September 2001, slightly less than P10 billion. - Ownership: most NBFIs are owned or affiliated to commercial banks; some commercial banks licensed as Universal Banks. - PSE listings and capitalization: - PSE lists 231 companies including one small and medium size company as of end August 2001; also lists one series of Small Denomination Government Bonds. - Total market capitalization as of end August 2001 (excluding government bonds): P2,429 billion (US$47 billion). - Pre-crisis peak market capitalization in 1996: P2,122 billion. - Ratio of market capitalization to GDP as of end 2000: 78.1 percent; pre-crisis peak in 1996: 97.8 percent. - Market turnover and volume (annualized): - Market turnover for 2001: P173 billion. - Peak market turnover in 1999: P781 billion. - Annualized number of shares traded for 2001: 192 billion shares. - Hay days volume in 1996: 2,274 billion shares. - Market turnover ratio for this year: 7.1 percent. - Market turnover ratio for 1999 (year of recovery): 40 percent. - Free float: about 15 percent of corporate shares. - Domestic debt market: - Market capitalization including GOCCs and LGUs as of end July 2001: P1,128 billion (about 30 percent of the GDP). - Of that amount, national government debt (including government-guaranteed debt of GOCCs, LGUs, etc.): P1,118 billion. - Commercial papers (CPs) capitalization as of October 15 this year: P35 billion (declined from P44 billion at end 2000). - Annual turnover ratio: - CPs: around 500 percent. - Government securities: roughly 40 percent. - Short-term T-bills: account for over 40 percent of total capitalization of domestic government securities and have an annual turnover ratio of about 90 percent. - Trading dominance: commercial banks account for said to be 70–80 percent of trading in government securities. - Observation: liquidity of government securities low compared to developed markets (which can surpass 1,000 percent annual turnover); long-term bonds including Treasury bonds are rarely traded. ### Reforms, SEC capacity building, and governance issues - SRC (Securities Regulation Code) reforms: - redefined SEC’s regulatory responsibility, transferring out the quasi-judiciary function to rule on intra-corporate disputes and corporate rehabilitation. - SRC mandated SEC reorganization and capacity building; SEC reorganized as of the end of 2000 but still building enforcement capacity. - Example staffing: SEC once almost halved number of staff from 708 and is now trying to fill about 70 positions to bring up the number to the planned 428. - SEC needs staff training to enhance enforcement skills. - SRC provisions strengthening SEC: - enhanced salary standards to attract and retain highly qualified staff; - enhanced financial resources to improve MIS and provide salary; - indemnification of commissioners and staff from law suits in the bona fide discharge of their functions and powers. - Demutualization of the PSE: - required by SRC; majority of directors must be non-brokers. - PSE implemented demutualization and board reform in August last year and had its SRO status restored by the SEC. - Ownership of the PSE still remains 100 percent with participating brokers, raising doubts about PSE’s credibility to act in investors’ interest rather than brokers’. - SCCP is majority controlled subsidiary of the PSE; concentration of ownership may impede SCCP’s ability to impose disciplines, penalties, or sanctions on participating brokers. - Recommendation: diversification of the PSE’s ownership by going public needs to be carried out as soon as possible as required by the SRC. - Investor base and corporate governance: - Investor base is thin; public understanding of securities investment is very limited. - Damage to public image from the Best World Resources (BW) scandal complicates efforts to broaden investor base. - Thin free float (about 15 percent) of listed equity makes it difficult to attract individual investors. - Recommendations: - SEC and the PSE need to conduct an educational campaign to enhance investor understanding of securities investment, their rights, ways to protect those rights, and means available to do so. - Work on enhancing corporate governance of listed companies predominantly owned and controlled by founding families. *Source: _cr0462 - 22. Currently, investment advisors are not regulated and supervised by the SEC except* ### 36. Section 2 of the SRC provides the State Policy as the objectives which the SRC is ### _cr0462 - 36. Section 2 of the SRC provides the State Policy as the objectives which the SRC is ### State Policy and IOSCO objectives - The State Policy (Section 2 of the SRC) expressly includes investor protection as an objective. - The IOSCO objective of ensuring the market is "fair, efficient and transparent" is covered implicitly by the SRC objective "to eliminate or minimize fraudulent or manipulative devices and practices which create distortions in the free market." - The IOSCO objective of reduction of systemic risk is not expressly recognized in the State Policy. - The State Policy emphasizes promotion of market development and its role to achieve social equity. - The State Policy explicitly recognizes self-regulation. - Overall: these emphases are consistent with the actual regulatory standards and practices of the SEC. ### Principle 1 — Responsibilities of the regulator should be clear and objectively stated - Description: - "The regulator" consists of the SEC, the BSP and the PSE as an SRO. - Section 5 of the SRC states responsibilities and powers of the SEC under the SRC, PD 902-A, the Corporation Code, PD 129, the Financing Company Act and other laws. - SEC powers include broad rulemaking (Section 72) and IRR implementing provisions (e.g., SRC Rules 5.1(e) and 40.5.1). - SEC issued: i) SEC Circular No. 4, 2001; ii) Model Internal Supervision, Control and Compliance Procedures; iii) Basic Rules and Regulations to Implement PD No. 129; iv) Rules and Regulations to Implement Republic Act 8556; v) New Rules on the Registration and Sale of Pre-Need Plans under Section 16 of the SRC. - SEC preparing an IRR for the Money Laundering Law (passed in September 2001). - Section 4: procedures for appointment, terms, removal of chairman and commissioners. - Section 40: powers and responsibilities of an authorized SRO (the PSE). - BSP responsibilities set in the New Central Bank Act of June 1993, including regulation and supervision of NBFIs. - A Memorandum of Agreement (MOA) signed in June this year between the SEC and the BSP clarified supervisory responsibilities for universal banks and NBFIs in financial conglomerates. - Assessment: Implemented - Comments: - MOA, SRC, and New Central Bank Act filled loopholes and clarified responsibility-sharing. - SEC regulatory responsibility over Pre-Need Plans (Section 16) may be transferred to the Insurance Supervisory Commission; transfer is being discussed in Congress. - Transfer, if it occurs, should rationalize SEC responsibilities. ### Principle 2 — Operational independence and accountability - Description: - Section 4 charges the SEC as Administrative Agency to implement the SRC. - Executive Order 192 (January 2000) transferred the SEC from the Office of the President to the Department of Finance (DOF) where DOF assumes "administrative supervision". - Section 38 of the Administrative Code defines "administrative supervision" and specifies DOF oversight "without interference with day-to-day activities". - Section 6 provides indemnification for commissioners and staff; Section 6.2 handles confidential information; SRC Rule 6.2 supplements conduct rules. - Section 66 and SRC Rule 66 govern disclosure of commercially sensitive information. - Under DOF supervision the SEC is accountable to DOF; may submit reports and be subject to management audit, performance evaluation and inspection. - Commission of Audit financially audits the SEC on behalf of Congress; Department of Budget and Management (DBM) holds SEC financially accountable. - Congress can summon the SEC for hearings; SEC issues annual report (does not include a financial statement). - Section 70: Court of Appeals reviews SEC decisions by petition. - Assessment: Implemented - Comments: - Section 75 allows SEC to retain P100 million from its fee and other income "in addition to its annual budget." - DBM control of budget allocation could influence SEC operations; Sections 4.4 and 7.2 require salary standards comparable to BSP but SEC remains a government agency. - Presidential appointment of Chairman and Commissioners; appointment of Directors, General Counsel and General Accountant needs President approval as per the Career Executive Services Officers Act. - Executive Order 192 notes DOF role in capital market development and savings mobilization policy; DOF meets with SEC monthly and acts as SEC's channel to Cabinet/Congress/President. - Currently SEC is accountable to four bodies: the President, the Congress, the DBM, and the DOF. - Recommendation: rationalize and clarify SEC operational independence and accountability — e.g., make SEC accountable directly to the Cabinet to increase transparency of influence. ### Principle 3 — Adequate powers, resources and capacity - Description: - Section 5 authorizes SEC powers including: - market participant authorization (Section 5.1.c and m), - direct surveillance (Section 5.1.e), - information collection (Section 5.1.d, g and l), - communication with other regulators (Section 5.1.h), - investigations including criminal cases (Section 5.1.l) — cases must be referred to law enforcement for prosecution, - sanctions (Section 5.1.f), - market intervention (Section 5.1.i). - Section 6 indemnifies commissioners and staff. - Sections 36, 40 and 47 provide SEC powers regarding exchanges and trading markets, SROs, and securities ownership. - Section 75 authorizes SEC to retain and utilize P100 million from its income (registration fees, penalties, etc.) "in addition to its annual budget." - SRC reorganized SEC to focus more on enforcement rather than corporate disputes and rehabilitation, requiring new expertise mix. - Assessment: Implemented - Comments: - Basis for budget allocation clarified (salary comparability to BSP - sections 4 and 7). - P100 million additional income can be used to build human and system capacity. - SEC-iRegister, an on-line electronic filing system for company registration, introduced to reduce paper processing; to be extended to other filings. - The online system may be made self-sustainable by charging fees; benefits include time and cost savings for companies. - Staff training has been ad hoc; SEC now has resources to establish systematic in-house training. - Premises need enhancement for safety (fire escapes, sprinklers) and adequate computer system security. ### Principle 4 — Clear and consistent regulatory processes - Description: - Sections 5(g) and 72 empowered SEC to issue IRR (SRC Rules) in January 2001 providing standards, forms and procedures. - IRR Annexes include forms for registration and authorization. - SRC and SRC Rules and other NBFI laws set grounds for rejection or suspension/revocation of registrations/licenses (e.g., SRC Sections 13, 15, 29). - SEC must give due notice and hearing before actions (Section 54); Section 4.5 and SRC Rule 4.5 set decision-making procedures. - SEC preparing a Manual of Procedures (draft exists; not designed for public circulation). - Rulemaking process: SEC circulates memo circulars for consultation, posts consultative rules on website, publishes final rules in two newspapers; 15 days after publication rules become effective (Section 72.4). - SEC issued Circular No. 4 on Procedures in the Enforcement of the Corporation Code, the SRC and other laws. - MOA between SEC and BSP (issued in June this year) clarified lead roles for regulating NBFIs. - Section 53 grants investigative authority; subpoenas require written notice of purpose. - SEC issues Annual Report and Quarterly Bulletin; holds weekly press conferences. - Section 70 provides right to appeal SEC orders to Court. - SEC conducts educational campaigns for issuers, intermediaries and investors. - Assessment: Implemented - Comments: - New procedures established after SRC issuance; market participants need familiarization; SEC should continue education. - SEC is encouraged to disclose the Manual of Procedures if content is administrative rather than strategic. - Consultation procedures could be more formally defined in the Manual. - Specific regulatory process formulation for Pre-Need Plans allegedly lacked clarity; regulatory authority over Pre-Need Plans may be transferred to Insurance Supervisory Commission. - Lending Investors (said to number 6,000) were informally made SEC responsibility; no law governs their business and most are unregistered single proprietorships. - SEC offered lending investors option to transform into Financing Companies (requires P10 million capital in Metro Manila); they are largely unable/unwilling. - A Lending Company Act bill is in reading in the Congress; if passed, responsibility may transfer to the Department of Trade and Industry (DTI). ### Principle 5 — Professional standards and confidentiality - Description: - SRC Rule 6.2 provides Rules of Conduct for Commissioners, Officers and Employees covering conflict of interest and disclosure of financial interest; positions with discretion must be free from "any" conflict of interest. - Section 66 provides rules for handling commercially sensitive information; SRC Rule 66.3 provides confidential treatment; Section 66.5 allows disclosure to foreign enforcement authorities for regulatory cooperation. - Section 6.1 indemnifies commissioners and staff for bona fide actions; Section 6.2 holds them responsible for negligence, abuse or malfeasance. - Judicial review under Section 70 promotes adherence to Rules of Conduct. - Commissioners and staff are subject to Chapter 9 General Principles Governing Public Officers of the Administrative Code. - Assessment: Implemented - Comments: - Additional clarification may be useful on indemnification when disclosing confidential information to other regulators if disclosure leads to damages and litigation. - MOUs with other regulators (domestic or foreign) should reference handling of confidential information to control potential liabilities. ### Principle 6 — Appropriate use of Self-Regulatory Organizations (SROs) - Description: - Building a self-regulating market is an expressly stated SRC objective. - Section 39 defines role of SROs and eligibility; currently the PSE is the only formally recognized SRO under Section 39. - Section 33.1.a) requires an Exchange to "enforce compliance by its members with the provision of the SRC, the SRC Rules, and rules of the Exchange." - Section 33.2.d) (imposition of sanctions on members) and 33.2.e) (fair rules of entry and access) are essential SRO requirements. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr0462.pdf* ### section 42.2 of the SRC effectively requires any authorized clearing agency to be an SRO. SRC ### _cr0462 - section 42.2 of the SRC effectively requires any authorized clearing agency to be an SRO. SRC ### SRC framework for Exchanges, Clearing Agencies and SROs - Section 42.2 effectively requires any authorized clearing agency to be an SRO. - Rules 33 and 42 as well as 39 and 40 provide detailed provisions for an Exchange and a Clearing Agency and other SROs, respectively. - Section 5, Section 36, Section 37, Section 39, Section 40, Section 42, Section 49, Section 52, Section 53, and Section 64 are cited as central legal authorities for supervision, inspection, enforcement, and SRO governance in the SRC and SRC Rules. ### PSE self-regulatory arrangements and Compliance and Surveillance Group (CSG) - The PSE assumes primary oversight responsibilities over its member brokers and dealers and stipulates: - Rules and Regulations Affecting Members - Code of Conduct and Professional Ethics for Traders and Salesmen - Rules and Regulations on Trading, Clearing and Settlement, Fees and Commissions and Listing - Clearing and Settlement rules are included under PSE rules to comply with Section 42 of the SRC because the PSE currently owns a controlling stake in the Securities Clearing Corporation of the Philippines (SCCP). - The SEC assumes primary responsibility for enforcement of disclosure obligations under the SRC while the PSE oversees compliance with PSE rules. - The PSE’s Compliance and Surveillance Group (CSG) comprises three departments: - Compliance Audit Dept. (CAD) - Special Investigation Dept. (SID) - Market Surveillance Dept. (MSD) - Key CSG functions and practices: - CAD conducts special and annual audit of member brokers and dealers and supervises operations of suspended member brokers and dealers. - CAD supervises members’ compliance with its Net Capital Rule on the basis of section 30.2 and 49 of the SRC and SRC Rule 49.1-1. - SRC 49.1-1 requires daily calculation of net capital; results are currently reported monthly (except where a broker dealer falls short of a required level, in which case it is required to report daily). - SID investigates investor complaints and other suspected abuses and violations, participates in rule formulation and interpretation, and builds and manages a database of past investigated cases. - MSD surveys and monitors market activities and is upgrading its stock watch system. - When MSD detects abnormal market movements, SID requests member brokers and dealers to report the beneficiary buyers and sellers of the shares within three days. - Systemic enforcement and sanctioning examples: - The SCCP imposes fines on broker dealers for failed trades. - Habitually erring or high-risk brokers are referred by the SCCP to the PSE’s CSG. - The PSE imposed a trading limit on the activity of a referred broker. ### Assessment, implementation status, and governance reforms - Assessment: Partially implemented (with recommendation to change to “Implemented” once ownership diversification of the PSE is implemented). - Historical context and governance actions: - The PSE’s SRO status was suspended by the SEC in March 2000 due to alleged trading irregularities arising from the BW scandal. - Massive resignation of the staff of its Compliance and Surveillance Group occurred over protests on the investigation of the BW case. - Section 33 includes provisions requiring demutualization of the PSE and associated restructuring of governance. - Recommended structural reforms and options: - Diversification of the PSE ownership to ensure sound self-regulatory motivation and proper incentives. - Separation of the CSG from the PSE to become an independent SRO (idea analogous to separating NASD Regulation Inc. from the Nasdaq). - Creation of a combined “super SRO” covering PSE, expected Fixed Income Exchange (FIE), and Commodity Futures Exchange (CFE) as a potentially cost-effective option for a small market. - CSG capability enhancements and system changes: - MSD tested and debugged its new automated market surveillance system. - Corrected arbitrary price band and now sets bands for each individual company to detect abnormal share price movements. - New system analyzes trading volumes, cross sales, trade concentration and accumulation in conjunction with price movements. - CAD hopes to increase frequency of net capital reporting; some members can report daily while many smaller firms cannot. - Suggested use of the PCD’s computation and account management capability by smaller brokers through outsourcing to enable daily monitoring. - SID potential development of an interactive system to register profiles of individual licensed professionals (similar to the Central Depository of Registry of the United States and comparable systems). ### Principle 7 — Oversight of SROs; fairness and confidentiality - Legal provisions: - Section 39: SEC power to register, license and regulate an SRO and supervise, examine, suspend or discontinue its operations; governance, contestable membership, fair representation, fair treatment, and application procedures. - SRC Rules 39.1-1.11: reporting requirements of an SRO to the SEC. - SRC Rule 39.1-1.10: rules for SEC disciplining an SRO. - Section 40: empowers the SEC to supervise operations of registered SROs; Section 40.3 requires SEC approval of SRO rules or amendments; Section 40.4 empowers the SEC to require changes; Section 40.5 empowers suspension/revocation of SRO status and removal of directors or officers; Sections 40.6–40.7 authorize SRO discipline of members and require notification to the SEC; aggrieved members may appeal to the SEC. - Section 53 and SEC Circular No. 4, 2001: SEC may order PSE to provide investigative materials and take control of an investigation if PSE is unable to adequately fulfill its enforcement duties. - SRC Rule 39.1-1.12: SEC and SROs must meet at least monthly to discuss coordination. - PSE Rules: Chapter IV on Rules and Regulations Affecting Members generally designed to be fair; Section 17, Article IX of Book V provides for confidentiality of information. - Assessment: Implemented. - Comments and supervisory challenges: - SRC and Rules are well elaborated regarding SEC oversight of SROs. - Monthly meetings between SEC and PSE are attended by SEC Chairman and/or commissioners and high level staff and all members of the PSE board; meetings address demutualization, election of a new PSE president, spin-out of the CSG, business plan for SCCP, etc. - Emerging competition among Exchanges (CFE reopening, FIE establishment, emergence of ATSs/ECNs, overseas competition) may pressure Exchanges to lower self-regulatory standards or make members reluctant to commit to self-regulation. - SEC should consider differences between a “trade association” and an SRO when defining feasible self-regulatory responsibilities for for-profit Exchanges. - SEC and PSE are encouraged to ensure SEC’s direct access to market surveillance information when PSE develops a new surveillance system. - PSE is encouraged to establish fair and transparent internal rules for PSE staff, especially CSG staff, in addition to rules for members. ### Principle 8 — Inspection, investigation and surveillance powers of the regulator - Legal authorities and powers: - Section 5 of the SRC provides SEC with comprehensive powers including inspection, investigation and surveillance. - Section 5.(d) power to regulate, investigate or supervise activities of persons to ensure compliance. - Section 5.(e) empowers SEC to supervise, monitor, suspend or take over activities of exchanges, clearing agencies and other SROs. - Section 53: discretionary authority to initiate and conduct investigations of any violation or potential violation of SRC, IRR, SEC orders or SRO rules. - Section 52 and SRC Rules: require registered market participants to keep records of assets, liabilities, transactions, contracts, etc. and make those available to inspection by the SEC. - Section 5.(l): empowers SEC to issue subpoenas and summon witnesses and, in appropriate cases, order examination, search and seizure of documents, tax returns, and books of accounts of “any entity or person” under investigation. - Limits and interactions: - Exception: books and records of banks protected under the Bank Secrecy Law; MOA between SEC and BSP enables cooperation in inspection of NBFIs and their banks, but the Bank Secrecy Law also binds BSP. - Anti-Money Laundering Law adopted in September (year not specified in excerpt) now prohibits anonymous accounts; Anti-Money Laundering Council prepared IRR with SEC participation. - SRC Rule 52.1-6 permits numbered accounts without customer names but requires broker dealers to keep names on file with a written statement signed by the customer; SEC can verify beneficiary owners “anytime”. - The IRR may require amendments to the SRC and its Rules (example: SRC Rule 30.2-6 on Supervision). - Model Internal Supervision, Control and Compliance Procedures (issued August 2001) contains procedures to detect and handle money laundering in Chapter III, Section H.4. - Assessment: Implemented. - Comments on systems and capacity: - SEC’s ongoing effort to upgrade MIS capacity for electronic filing (SEC-iRegister) and market surveillance should continue. - PSE upgrading surveillance and monitoring system; SEC should require PSE to provide a terminal to access the surveillance system. - Currently, SEC has a trading terminal of MakTrade and manually analyzes price and volume movements using Technistock. - Market intermediaries enhancing internal account management systems will facilitate SEC and PSE surveillance and investigation. - PCD discussions with participants on creation of sub-accounts to ensure a name registry despite current nominee accounts. - Philippine Association of Stock Transfer Agents (PASTRA) working on Automated Direct Registry (ADR) system. ### Principle 9 — Comprehensive enforcement powers of the regulator - Legal authorities and powers: - Section 5 provides the SEC with comprehensive enforcement powers across market participants and markets, including those governed by other NBFI laws. - Section 5.(c): power to approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications. - Section 5.(f): power to impose sanctions for violation of laws, rules, regulations and orders. - Section 5.(g): power to issue, approve, amend and repeal rules and regulations and supervise compliance. - Section 5.(i): power to issue cease-and-desist orders to prevent fraud or injury to the investing public. - Section 64: provides the manner in which the SEC may issue cease-and-desist orders; SEC can issue such an order “without a prior hearing” if after investigation it judges the act or practice will be fraudulent or cause grave or irreparable damages to the investing public. - Section 36: powers of the SEC specifically with respect to Exchanges and other trading markets including a power to suspend trading. - Section 5.(j): empowers the SEC to punish for contempt of the SEC. - Assessment: Implemented (description and assessment presented; further operational detail appears in other sections of the source). *Source: _cr0462 - section 42.2 of the SRC effectively requires any authorized clearing agency to be an SRO. SRC* ### Section 5.(k), the SEC can compel any registered company to call a general shareholders’ ### _cr0462 - Section 5.(k), the SEC can compel any registered company to call a general shareholders’ ### Enforcement powers and legal framework - Section 5.(k) empowers the SEC to compel any registered company to call a general shareholders’ meeting under its supervision. - Sections 24 to 27 define and prohibit fraud, manipulation and insider trading. - Section 54 defines Administrative Sanctions. - Sections 56 to 61 define Civil Liabilities in connection with: - a) False Registration Statement - b) Prospectus, Communications and Reports - c) Fraud in Securities Transactions - d) Manipulation of Securities Price - e) Commodity Futures Contracts and Pre-need Plans - f) Insider Trading - Bank Secrecy law requires a court order for the SEC to obtain bank records; the Anti-Money Laundering Law (AMLA) provides the SEC power to freeze bank accounts linked to securities transactions under investigation. - Assessment: Implemented. - Comment: The Anti-Money Laundering Law provided an important addition to make the SEC’s enforcement power fully comprehensive; further substantiation of SEC enforcement powers is to be provided in IRR prepared by the SEC, BSP and the Insurance Commission for approval by the Congressional Oversight Committee. ### Inspections, investigations, surveillance and enforcement capacity (Principle 10) - Description of SEC activities: - Routine and special inspections of brokers and dealers, investment houses, financing companies, mutual funds, Pre-Need Plans, exchanges (PSE), central depositories (PCD) and the clearing house (SCCP). - Whether to give advance notice for a special inspection depends on purpose; inspection priorities set by perceived risks and/or complaints; inspection records are maintained. - PSE as SRO inspects all PSE members on a 2 year cycle; SEC carries out selective inspections to: - a) affirm results of SRO examinations, and - b) affirm reliability of the SRO’s inspection work. - Expected transfer of supervision of Pre-need Plans to the Insurance Commission to allow SEC focus on remaining institutions. - SEC adopted Circular No. 4, 2001 clarifying internal investigation procedures and CED roles. - SEC can take a variety of administrative corrective actions, initiate investigations where fraud is suspected and refer to Department of Justice for prosecution. - Indemnification under section 6 of the SRC provides commissioners and staff confidence in enforcement. - Ongoing computerization in the SEC is partially completed; should reduce documentary burden and improve monitoring. - SEC is yet to gain direct access to the PSE surveillance system. - Capacity constraints and enforcement record: - There are a total of over 450 registered NBFIs to supervise (excluding lending investors) in addition to issuers. - SEC has difficulty gathering sufficient information to prove intent in violations that may appear to comply with rules but violate their spirit — a common issue in civil code jurisdictions. - SEC has successfully imposed fines in administrative procedures (e.g., 21 cease-and-desist orders issued) and referred cases to DOJ; however, it is yet to successfully prosecute criminally a securities enforcement case despite many investigations (e.g., six suspected boiler room operations involving officers of Mendez Prior, Dukes and Co. Inc., Evergreen, the Barclays Group, Goldberg and Price Richardson Corp). - SEC forged cooperation agreement with the National Bureau of Investigation (NBI) in April (year not specified in source) to intensify enforcement against boiler room activities. - Assessment: Partially implemented. - Comments and planned improvements: - Progress in on-line electronic filing of company registration is encouraging; further computerization for electronic filing of reports and disclosure documents is awaited. - Extra budgetary allocation may enable creation of systematic in-house training and trading program for staff skills in inspection, investigation and enforcement. - Inspection and investigation manuals developed with donor assistance will support in-house training. - SEC plans to work with two international donor agencies for hands-on enforcement assistance and training. - Need to strengthen securities jurisprudence and issue more interpretative releases and comprehensive rules; educate public on market practices constituting manipulation. ### Information sharing, AMLA and inter-agency cooperation (Principles 11–13) - Legal authorities and mechanisms: - Section 5.(h) empowers the SEC to request assistance of government enforcement agencies and private persons. - Section 66 defines commercially sensitive and non-public information and Section 66.4 prohibits disclosure; Section 66.5 empowers disclosure to foreign enforcement authorities empowered to provide reciprocal assistance, including disclosure of any information filed with or transmitted to the SEC for securities- or commodity-related investigations. - Indemnity under Section 6.1 applies to good faith discharge of duties; Section 6.2 makes willful violators or negligent staff liable for loss or injury (applicable to inappropriate disclosure or conflicts of interest). - SEC is member of Inter-Agency Task Force (BSP, Bureau of Internal Revenue, Department of Justice) facilitating domestic information sharing. - AMLA enables the Anti-Money Laundering Council (AMLC), in which the SEC participates, to freeze bank accounts related to suspicious securities transactions or securities fraud; suspicious securities transactions are required to be reported to the SEC regardless of their size. Chairman of the SEC, as AMLC member, can advise the AMLC to freeze related bank accounts. - Operational points and limitations: - Bank Secrecy Law still requires a court order for SEC to obtain bank account information; AMLA IRR requires reports of suspicious transactions “regardless of the amount.” - AMLA can protect bank officers against liabilities under Bank Secrecy Law if they disclose account information to the SEC. - PCD’s account structure currently identifies individual investor accounts held by member broker dealers as nominees; identities are not disclosed unless investigative needs arise. PCD provides backoffice support for small broker dealers; whether to require recording identities of every investor in the PCD is under consideration. - Assessment: Implemented (Principle 11); Partially implemented (Principle 12); Implemented (Principle 13). - Comments on MOUs and foreign cooperation: - SEC signed MOA with BSP clarifying regulatory responsibilities and lead roles. - Model MOU drafted to permit broad assistance subject to legal constraints; SEC received clearance from Department of Foreign Affairs to enter into MOUs and is finalizing an MOU with BAPEPAM of Indonesia; finalization awaited. - Taiwanese regulator approached SEC to agree on an MOU; MAS in Singapore seen as important counterpart given Philippine companies listed and traded in Singapore. - SEC has been informally providing assistance even without reciprocity clauses. - SEC and PSE plan to clarify in writing (MOU) how regulator and SRO communicate and cooperate in investigations. ### Disclosure requirements and investor remedies (Principle 14) - Legal disclosure framework: - SRC disclosure requirements modeled after the United States; Section 8 requires registration and disclosure of information about securities prior to public sale. - Section 9 defines exempted securities (e.g., government-issued or guaranteed), but bank shares are not exempted. - Section 10 provides registration exemptions (issuance to existing shareholders without payments, conversion of existing securities, private placement to fewer than 20 persons or to any number of professional institutional investors as defined by Section 10.(l)). SRC Rule 8 and SRC Rule 8.1-1 govern prospectus delivery and filing of Preliminary Prospectus; SRC Rule 8.3-1 regulates advertisement and road shows prior to registration effectiveness. - Section 12 and Annex C of SRC Rule 12 detail registration and disclosure requirements including: - i) description of the business (company formation and by-laws), - ii) description of the securities, - iii) financial information, - iv) management and certain security holders (directors, officers, compensations, shareholdings, related transactions), - v) registration statement and prospectus provisions, - vi) exhibits to be included. - Specific instrument disclosures: options must disclose terms of the plan, names/beneficiaries/eligible participants; preferred shares must disclose sinking fund and rights/preferences; debt issuers must state satisfaction of net worth exceeding P25 million and have been in business at least three years and note whether unsecured bonds are to be issued. - Section 17 requires periodic reports and current reports on material events by issuers required to be registered, except those with less than 100 shareholders or assets less than P50 million. Issuers whose securities are listed on the Exchange must meet reporting requirements; listed companies must file with the Exchange all reports filed with the SEC (Section 17.3). - Annual report must contain balance sheet, profit and loss statement and statement of cash flow and be audited by an independent certified public accountant; interim fiscal (quarterly) reports and current reports on material events also required. SRC Rules provide forms (SEC Form 17-A, 17-Q, 17-C). - Section 18 requires reporting of holding or acquisition of 5 percent or more equity securities. - Section 66 and SRC Rule 66.3 permit issuers to request confidential treatment of trade secrets or sensitive strategic business information, subject to SEC review. - SEC enforcement and investor remedies: - SEC may reject or revoke registration, refuse registration after due notice and hearing for false or misleading representation (Section 13); may review, approve and order amendments to registration statement (Section 14); may suspend registration if information is materially misleading, incorrect, inadequate or incomplete or fraudulent (Section 15) and request further information; Section 13.4 allows confidential suspension orders binding on issuer and broker dealers. - Section 56 provides private rights of action for investors against underwriter, auditor, issuer and/or directors for damages from inadequate/misleading disclosure. - Section 57 holds issuer, underwriter and auditor civilly liable to investors who suffered damages. - PSE Rules hold the lead underwriter (a PSE member) responsible for conducting due diligence to ensure issuer’s compliance with disclosure contents and procedures. - Assessment: Implemented. - Comments and planned actions: - Legal and regulatory requirements are sound; SEC needs to improve enforcement and education of regulated persons to implement full disclosure regime. - Staff skills need improvement to detect financial fraud. - SEC plans brochures, guidelines and seminars (one successful first seminar on full disclosure documented) to enhance issuer and underwriter understanding of SRC and IRR requirements. - SRC Rules may clarify circumstances under which issuer, underwriter or auditor may not be liable for investor damages when fault lies solely with another party. ### Shareholder rights and treatment (Principle 15) - Legal protections: - Corporation Code and Chapter VI (Sections 19 through 23) of the SRC provide shareholder protections and rights including: - i) dissenter’s right of appraisal, - ii) pre-emptive rights, - iii) right to require an extraordinary shareholders’ meeting, - iv) right to bring legal actions against directors, - v) cumulative voting of shares, - vi) requirement of super majority votes (2/3) for certain significant corporate actions such as major corporate restructuring, - v) right to appoint an external auditor or legal counsel. - Section 38 of the SRC requires any listed or publicly held company to have at least two independent directors. - SRC empowers the SEC to require a registered exchange to adopt rules governing duties of officers and directors of listed companies to all shareholders including minority shareholders. - Intended effect: - Cumulative voting is intended to give minority shareholders a better chance to appoint a director to represent their interests. *Source: _cr0462 - Section 5.(k), the SEC can compel any registered company to call a general shareholders’ meeting (IMF content unit).* ### Section 19 of the SRC and SRC Rule 19.1 provide rules for mandatory tender offer for publicly ### _cr0462 - Section 19 of the SRC and SRC Rule 19.1 provide rules for mandatory tender offer for publicly ### Mandatory tender offer rules (Section 19, SRC Rule 19.1) - Trigger thresholds for mandatory tender offer: - acquire or intend to acquire at least 15 percent at one time - acquire or intend to acquire 30 percent in a 12 months period - acquire or intend to acquire more than 50 percent in any time span - Price requirements: - Price must be "firmly offered" and be better than the current market or the highest price at which the bidder acquired the shares in the past six months. - Offer timing and duration: - Tender offer must be kept open at least 20 business days. - Tender offer should be closed in 60 days. - Disclosure and solicitation: - Bidder required to make a public announcement of intention with terms of the offer through two newspapers of general circulation or other mass media. - Letters of solicitation may be sent directly to existing holders of the securities. - Allocation and price improvement rules: - If more than solicited number of shares are tendered, bidder required to buy on a pro rata basis. - If bidder increases the price while the offer is open, the higher price must be offered even to those who already tendered at the previous lower price. - Restrictions before announcement: - When a tender offer becomes imminent, target company prohibited from taking pre-emptive actions unless approved by its general shareholders’ meeting. - Any investor aware of a potential tender offer before announcement is prohibited from buying or selling the securities prior to announcement; otherwise it is considered insider trading. ### Shareholder meetings, change-of-control transactions, and notification requirements - Decisions on negotiated corporate mergers or acquisitions resulting in change of control: - Need to be made on the basis of super majority vote at the general shareholders’ meeting. - Agenda and notification timing (SRC 17.1(b), Section 20, SRC Rule 20): - Agenda must be communicated to the SEC 25 working days before the meeting. - Agenda must be communicated to shareholders by proxy and information statement 15 working days before the meeting. - Proxy statement and required disclosures: - Shareholders must be notified by means of proxy statement explaining terms of proposals on which voting is required. - Other events requiring notification include acquisition or disposition of significant assets, changes in the issuer’s certified accountant, resignation/removal/election of directors or officers, legal proceedings, changes in securities, default upon senior securities, change in fiscal year, etc. (SEC Form 17-C). - Pro forma financial statement and information statement required to be filed with the SEC and distributed to shareholders in case of an acquisition regardless of whether transaction is cash or exchange of securities (SRC Rule 17.1(b), SRC Rule 68.7). - Disclosure of major shareholders and insiders: - Issuers required to publicly disclose identity and ownership position of major shareholders in: - registration statement/prospectus - annual report - proxy statement information - report of more than 5 percent shareholder (Section 18 and SEC Form 18-A) - statement of beneficial ownership (more than 10 percent as required by Section 23 and SEC Forms 23A/B) - Shareholders owning more than 5 percent required to disclose identities publicly and at shareholders’ meetings. - Incumbent directors, nominees and top four most highly compensated executive officers required to disclose their identities at director elections. - SEC enforcement powers: - Section 5.(k) of the SRC empowers the SEC to compel any registered company to call a general shareholders’ meeting under its supervision to protect minority shareholders’ interest. - SEC can sue a registered company, directors, underwriter, auditor, etc. on behalf of shareholders upon receipt of appropriate complaints. - Based on Section 63 of the SRC, court can award attorney’s fee when a small shareholder(s) wishes to sue the issuer, providing effect similar to class action. ### Accounting and auditing standards (Principle 16) - Registration and listing audit requirements: - SEC Form 12-1 for registration requires inclusion of consolidated balance sheets of the past two years and income and cash flow statements of the past three years audited by an independent CPA(s). - PSE requires at listing financial statements for the last three years audited by “independent auditor”. - Section 17 requires companies that sold securities requiring registration or public companies to file annual report including balance sheet, income statement and statement of cash flow all audited by independent CPA. - Standards, scope and responsibilities: - SFAS, SRC Rule 68 and Annexes J and K address financial statement requirements including: balance sheet, income statement and cash flow statement; consolidated financial information; business combinations; intangible and tangible assets; leases; income taxes; employee benefits; provisions and contingencies; financial instruments (including derivatives); EPS, interim reporting and related party transactions. - SFAS set by Accounting Standard Council (ASC) of PICPA and approved by Board of Accountancy of PRC. - Section 68 of the SRC empowers the SEC to make, amend and rescind accounting rules; SRC Rule 68 recognizes four sets of accounting rules in descending order of authority: i) SEC, ii) ASC (SFAS), iii) International Accounting Standards Committee, iv) historical practices in the Philippine. - SEC recently issued Memo Circular approving adoption of seven SFASs to SRC Rule 68. - Oversight and enforcement: - Oversight over accountants and accounting firms is responsibility of Board of Accountancy of PRC; SEC does not have authority to directly regulate or supervise accountants. - SEC can review financial statements filed by public companies, challenge application of accounting standards, and directly impose administrative sanctions on accountants under Section 54 of the SRC for misrepresentation or failure of due diligence; SEC can refer cases to Board of Accountancy for further penalties including license revocation. - ASC publishes comments on pronouncements; Code of Corporate Governance specifies responsibilities of external and internal auditors and stipulates auditor independence measures. - SFAS includes Code of Ethics for CPAs addressing independence, authorization of auditors, due professional care, planning and supervision of audit, understanding internal control, and requirement to obtain evidence that financial statements are free of material misstatements. - Auditor’s report required to disclose in footnotes: exceptions to application of accounting standards, material uncertainties and going concern issues. - A requirement of continuous auditing education has been eliminated this year. - Assessment and gaps: - Assessment: Implemented. - SEC is in process to implement the International Accounting Standards (IASs) with plan by year 2005. - SEC currently revising SRC Rule 68 to incorporate seven revised SFASs which adopted six IASs. - Improvements needed in enforcement of compliance with standards, quality of audits, and coordination between SEC and Board of Accountancy in detecting and disciplining accountants. - Concern: requirement of audited financial statements at time of registration and issuance of securities is hard to find in SRC and IRR; explicit requirement is provided in SRC Rule 68.2.b. and c., but SRC Rule 12 and SRC Rule 12-2 are not explicit. Recommendation: amend Section 12 of the SRC and corresponding Rules to clarify requirement. ### Investment company regulation (Principles 17 and 18) - Eligibility and conduct standards (ICA, 1960): - Operator fitness and properness, honesty and integrity, human and technical competence, adequacy of financial capacity, capacity to discharge powers and duties, adequacy of internal management and control. - Employees of operator/marketer required to pass qualifying examination given by CMD and satisfy fitness and properness standards. - Operator required to publicly disclose qualifications and eligibility of employees and itself; operator subject to fine and suspension for breaches; required to report periodically and currently on material changes. - Conflicts of interest and related-party controls: - ICA addresses principal/agency conflicts: principal transactions between CIS and affiliates, joint participation, soft commissions, lending/borrowing to/from affiliates, purchase of affiliate’s securities, employees transacting for own accounts. - ICA expressly prohibits particular transactions; SEC reviews and approves certain transactions and activities. - Operator required to keep records and disclose permitted transactions; investors have right to approve certain transactions before execution; independent custodian/trustee can review such transactions. - Delegation and custody: - Operator allowed to delegate administrative matters and custody to competent delegates; operator remains responsible for delegate actions or omissions. - Delegation and sub-delegation require disclosure and SEC approval for sub-delegation; changes require prior SEC approval. - Legal form, classification and asset segregation (Principle 18): - ICA Section 4 defines investment company; Section 5 classifies investment companies. - Investment company is a corporation issuing securities engaged primarily in investing, reinvesting or trading in securities; treated as Public Company and subject to Sections 8 and 12 of SRC and registration with SEC (Form 12-1). - Investment companies now subject to Section 38 of SRC and required to have at least two independent directors. - Two types: Open-end company (redeemable securities) and Closed-end company (non-redeemable securities traded in secondary market). Most investment companies (there are 19 currently) are open end companies. - Prospectus required to classify company by risk/growth objectives (aggressive, growth-oriented or conservative), terms of debt securities (short, medium or long term), area of focus, and mode of investment. - Rights and limitations of shareholders required to be set out in Prospectus (SRC Rule 12) and Articles of Incorporation and By-Laws (Corporation Code); Articles of open-end companies to provide for waiver of pre-emptive rights (IRR 35-1.(b).(1).(D)). - Segregation of assets and independent custodian: - Requirement of segregation of assets from operator and affiliates and use of independent custodian implied in Section 16.(f) of the ICA. - Custodian must be a bank with trust functions (ICA Rule 35-1.(h).(1)). - Custodian’s responsibility to supervise activities of the investment company is not expressly stipulated. - Delegation of custodian function may be permitted but must be disclosed in registration statement and prospectus and approved by SEC; delegator remains responsible. - Assessment and reform needs: - Assessment: Partially implemented. - ICA provides most necessary elements but requires clarification and rationalization to meet sound international practices. - ICA does not allow foreign investors in investment companies to elect their representative(s) for the Board of Directors, discouraging foreign participation. - Proposed Revised Investment Company Act (RICA) drafted and under consideration to group affiliated party transaction provisions under Chapter IV, strengthen controls, and bring Investment Advisor within related party regulation. - Full implementation of this Principle dependent upon passage of RICA and issuance of corresponding IRR by the SEC. ### Cross-cutting observations and enforcement - SEC powers and minority protection: - SEC’s power to compel a general shareholders’ meeting is described as "extraordinarily strong" relative to other jurisdictions and gives the SEC ability to act to protect minority shareholders. - Overall, SRC and Rules provide adequate protection to shareholders, but enforcement may be enhanced by the SEC and particularly the PSE. - Market structure constraint: - Limited public float of securities in the Philippines is a main impediment to improving minority shareholders rights. - Majority of companies listed on the PSE are controlled by a small number of shareholders, most of whom comprise family members, making it difficult for minority shareholders to influence decision making. - Recent developments: - SEC has approved Code of Corporate Governance which is mandatory for all corporations whose securities are registered or listed. - PSE’s MakTrade reconfigured to ensure execution of customer orders ahead of proprietary orders of the same broker dealer as part of Customer First Policy (Section 34 of SRC) to prevent front running. *IMF staff report content.* ### Section 28 requires maintenance of accounting records. The register of shareholders of an ### _cr0462 - Section 28 requires maintenance of accounting records. The register of shareholders of an ### Accounting records, register of shareholders, and audit requirements - Section 28 requires maintenance of accounting records. - The register of shareholders of an investment company is maintained by a transfer agent which may be the custodian bank. - Every investment company is required to issue and file Annual and Quarterly reports with the SEC (Section 27.(d) of the ICA). - The annual report must be audited. However, the auditors are not to be held responsible for reporting to the SEC any irregularities or non-compliance. - Assessment: Partially implemented - Comments: - The ICA needs tightening and fine tuning; the requirement of segregation is not entirely clear. - Section 16.(f) reads as the SEC is to issue IRR or Order to provide a specific segregation requirement, but no such IRR or Order is found. - The requirement for the transfer agent to maintain a register of shareholders is not entirely clear; rules for delegation of functions are not provided. - RICA will address segregation of client assets; its passage by Congress is awaited. - The SEC is encouraged to provide further detailed provisions after issuance of RICA; many detailed rules may be provided by the SEC even based on the existing ICA. ### Principle 19 — Disclosure to evaluate suitability and value - Description: - Section 24 of the ICA and Section 12 of the SRC and corresponding IRR require disclosure to investors of all matters material to the value of an investment company in the prospectus. - ICA Rule 35-1.(d) requires statement of types of investment companies in terms of risks, growth potential, terms, etc. in the prospectus which needs SEC approval as part of the registration statement. - Section 21 of the ICA prohibits investment company’s guaranteeing obligations. - The SEC can refuse to register and suspend an offering if the registration statement or prospectus is unsatisfactory (Sections 13 and 15 of the SRC). - Prospectus is required for offering of investment company shares (Section 24 of the ICA and Section 12 of the SRC); disclosure requirements apply irrespective of whether offering is made through the internet. - Prospectus language: Either English or Tagalog or both may be used; no specific requirement as to language. - Brochures and/or advertisement documents are permitted for marketing; same disclosure standards apply as to the prospectus. - Prospectus should include conventional public issue information plus investment company-specific information (legal constitution, investment policy, fees and charges, independent third parties and their responsibilities), although these are not specifically and expressly required in the ICA or IRR. - SRC Rule 8.1-1 (Prospectus Delivery Rule): prospective investors must be offered the prospectus before completion of an application form or conclusion of a contract to purchase shares. - Use of an application form without prior provision of an offering document is subject to SEC sanctions under Sections 13, 15 and 54 of the SRC. - SRC Rule 17 requires the prospectus be kept up-to-date; prior notification to the SEC is required of changes to information in the prospectus (SRC Rule 14 and Section 12 of the ICA). - Changes in investment policy must be voted for by shareholders; for changes not requiring prior shareholder approval, there is no specific requirement of sufficient advance notice. - Section 27 of the ICA, Section 17 of the SRC and SRC Rule 17 require filing annual and quarterly reports with the SEC and making them available to shareholders and prospective investors. - Annual report must be audited by independent auditor; both annual and quarterly reports required to contain certain information including accounting information, interests redeemed or repurchased. - Key accounting standards stipulated in SRC Rule 68. - ICA Rule 35-1.(e).(3) requires daily publication of net asset value in two newspapers of general circulation; ICA Rule 35-1.(e).(4) provides rules for valuation of net assets. - Section 17 of the SRC and SRC Rule 17 require timely and accurate disclosure of material events to shareholders within five days from occurrence (e.g., merger, restructuring, termination, changes of operating parties). - Assessment: Partially implemented - Comments: - Improvements needed in requirements for disclosure of sufficient information to evaluate investments and powers to enforce disclosure requirements; expected to be addressed by RICA. - While items for disclosure are well specified in SRC Rule 17, the ICA and the IRR do not expressly provide investment company-specific information requirements. - Proposed RICA will incorporate the concept of full disclosure to complement the SRC. - The SEC received TA in mid-June last year to upgrade the law. ### Principle 20 — Asset valuation, pricing, and redemption of units - Description: - ICA Rule 35-1.(e).(4) provides basic rules for net asset valuation. - ICA Rule 35-1.(e).(3) requires daily publication of net asset value in two newspapers of general circulation. - Prospectus must specify redemption policy and fees. - CIS operator is responsible for valuation of the assets and its publication. - Independent external auditing is required only for the annual report but not for the daily valuation. - ICA Rule 35.(e).(5) requires that payments for redemption be made within seven business days. - Fees and charges are disclosed in the prospectus although there is no specific and explicit regulatory requirement as such. - There are no specific rules or mechanisms of pricing control (e.g., regular reconciliation, periodic audit) to identify and rectify error, omissions or misplacement of assets. - No specific rules for addressing pricing errors (materiality benchmarks, benchmark triggering compensation, circumstances calling for enforcement actions, dispute resolution mechanism). - ICA Rule 35-1.(e).(6) provides that the SEC may suspend or defer the redemption of open-end companies whenever necessary or appropriate in the public interest or for the protection of investors. - Investment company can apply for suspension or deferral by the SEC although there is no specific provision in the ICA or its IRR. - No limit imposed by regulation on amount of redemption allowed to be deferred on a daily or periodic basis. - The SEC has power to demand, delay or stop the deferral or suspension of redemption rights. - Assessment: Partially implemented - Comments: - More detailed standards for asset valuation need to be developed; existing Investment Company Act addresses the issue but accounting practices need standardization (e.g., amortization). - Improvements needed for valuation and disclosure of the value of interests in a CIS, capacity to enforce disclosure requirement, and requirements for pricing and redemption of units. - The custodian bank may be required to control pricing and valuation by providing its net asset valuation to check accuracy of the operator’s valuation. - Some rules may specify circumstances under which closed end funds may repurchase shares. - The SEC is waiting for passage of the RICA. - In addition to the TA received in June 2000, the SEC is working with the investment company industry to develop standards for net asset value calculation. - Exchange trading of open-end investment companies may be considered (not a criterion of IOSCO Principles assessment). ### Principle 21 — Minimum entry standards for market intermediaries - Description: - Legal infrastructure enhanced in the SRC: raises capital requirements (initial and ongoing), provides a disciplinary bar to registration, provides for indefinite registration, and clarifies that all regulated intermediaries must register under the new law. - Primary NBFIs authorized and regulated by the SEC: Investment Houses (Presidential Decree 129), Broker Dealers (SRC), Financing Companies (Financing Company Act of 1998). - Investment Houses and Broker Dealers are primary securities market intermediaries; Financing Companies are essentially credit institutions without deposit taking. - Investment Houses and Financing Companies are eligible for quasi-banking and trust licenses from the BSP; quasi-banking defined as borrowing from the public (i.e., more than 19 creditors). - If licensed by the BSP for quasi-banking functions, they are supervised by the BSP; borrowing from the public considered a “deposit substitute” and subject to reserve requirement. - NBFIs can be owned by or affiliated to Universal Banks or Commercial Banks, which can be grounds for BSP supervisory authority. - Universal Banks have the power of Investment Houses (Section 23 of the General Banking Law) and can conduct securities business if registered with the SEC; most Universal Banks use subsidiaries Investment Houses or Broker Dealers. - Objectives of licensing implicit in PD 129 and SRC IRRs (SRC Rules 28, 29 and 30; PD 129 Rules and Regulation Section 3). - PD 129 requires minimum paid-in capital of P300 million to establish an Investment House; SRC Rule 28 requires P100 million for a Broker Dealer. - Entry standards beyond capital include adequate net capitals (SRC Rules 28.1-1 and 49.1-1), adequate operational system, proper book and records (Section 52 and SRC Rules 52.1-1 to 52.1-10), internal control, risk management and supervisory systems (SRC Rule 30.2-6), fit and proper directors, and professional qualification requirements for “Associated Person.” - Salesmen and Associated Person must pass qualifying examinations (Certified Securities Representative Exam and Certified Associated Person Exam) and meet other fit and proper tests including minimum 3 years of experience. - Registered information is available for public view at SEC premises: names and addresses of registered Broker Dealers, Salesmen and Associated Person and orders of the SEC recorded in the Register of Securities Market Professional. - Sections 28.8 and 29 of the SRC allow the SEC, after due notice and hearing, to refuse to license an applicant if conditions are not satisfied; conditions for refusal include violation of SRO rules or conviction of fraudulent acts or financial laws in other jurisdictions (though SEC does not generally depend on foreign judgments). - Entry standards must be met on an on-going basis; SEC can suspend or revoke license or impose limitations or sanctions if licensee falls short. - SEC issued Model Internal Supervision, Control and Compliance Procedures for Broker Dealers, Investment Houses and Universal Banks to comply with SRC Rules 30.2-6. - Section 28.10 of the SRC and SRC Rule 28.1-1.5.n requires every broker dealer or person registered to report to the SEC on any changes (SEC Form 28-BDA) and keep the record current. - Assessment: Implemented - Comments: - Scope of SEC regulatory responsibility is somewhat overly broad relative to its capacity and resources (e.g., Pre-Need Plans, Lending Investors, Money Changers). - Lending Investors often single proprietorships registered at the Department of Trade and Industry (DTI); no law governs Lending Investors. - SEC’s power to regulate Pre-Needs is given by Section 16 of the SRC; rules issued, but business of Pre-Need Plans similar to insurance companies; authority expected to be transferred to the Insurance Commission. - Financing Companies are essentially credit institutions and not important securities intermediaries; Money Changers and Money Transmitters may be considered “banking functions.” - Further rationalization of SEC’s scope is recommended to focus on core securities market supervision unless an integrated financial sector supervisor is created. - SEC encouraged to ensure public’s easy access to information regarding eligibility and qualification of intermediaries and to make the Register of Securities Market professionals available through the internet. - Clarification recommended regarding SRC Rule 28.1-1.5 reference to SRO and membership obligations. ### Principle 22 — Initial and ongoing capital and prudential requirements - Description: - Section 4 of PD 129 and Section 3 of Basic Rules to implement PD 129 provide minimum entry standards for Investment Houses including unimpaired paid-in capital of P300 million. - SRC Rule 28 provides that P100 million unimpaired paid-in capital is required of PSE member Broker Dealers which conduct market making. - Brokerage-only PSE members given time to meet P100 million requirement until demutualization; non-PSE member Broker Dealers dealing only in proprietary shares are required to have P5 million. - Government Securities Eligible Dealers (GSEDs) are also licensed by the SEC. - SRC Rule 28.1-1.5 requires Broker Dealers to maintain Net Capital of P5 million or 5 percent of aggregate indebtedness whichever higher. - “Net capital” defined in SRC Rule 49.1-1.4 as net worth based on mark-to-market valuation adjusted for: unrealized gains/losses, subordinated debt, revocable deposit for future equity subscription, fixed/illiquid assets, short positions in securities, etc. - Deductions: 15 percent of surplus or indebtedness in proprietary securities accounts and 100 percent of carrying value of securities/indebtedness without market provide a buffer for risk. - “Aggregate indebtedness” defined as total money liabilities including money borrowed, money payable against securities borrowed and those failed to receive, market value of securities borrowed, customers’ and non-customers’ free credit balances, and credit balances in accounts having short positions with some exceptions. - Net Capital Rule does not take into account activities of affiliated companies. - Broker Dealers required to calculate Net Capital positions daily (SRC Rule 49.1-1); PSE members required to report monthly in writing (FINOP report) to the SEC and PSE. - When a Broker Dealer falls short of 120 percent of required Net Capital or aggregate indebtedness exceeds 1,700 percent of adjusted Net Capital, firm must report to SEC within 24 hours and daily. - When a firm falls short of required level, it must cease operation and infuse capital by equity capital or subordinated loan agreement. - Examination of PSE member Broker Dealers conducted by the PSE; SEC selectively examines some of them. Investment Houses examined by the SEC. - Assessment: Implemented - Comments: - Net Capital Rule is based on balance sheet items reflecting concerns for both solvency and liquidity; mark-to-market valuation applied; liquidity of certain assets and off-balance sheet items taken into account. - Hair cuts applied to illiquid assets, including shares and securities of affiliates held for strategic purposes. - SEC plans to improve monitoring of net capital positions by computerization to achieve daily reporting/monitoring; committed to enforcement actions. - Reviewing rules and procedures of Securities Investor Protection Fund (SIPF) to ensure adequacy and timely compensation. - SEC mandated the Securities Clearing Corporation of the Philippines (SCCP) to execute a “credit ring agreement (see Principle 24)” with its participants. - Recommendation that Net Capital Rule account for activities of affiliated companies as well as securities holdings. ### Principle 23 — Internal organization and operational conduct standards - Description: - SRC clarified protection by requiring associated persons (e.g., supervisory personnel) of brokers and dealers to register with the SEC, imposed attendant liability, provided SEC rulemaking power, and expanded sanctions for violations. *Source: _cr0462 - Section 28 requires maintenance of accounting records. The register of shareholders of an* ### Section 30 of the SRC and SRC Rule 30.2-6 provide a requirement and basic rules for sound ### _cr0462 - Section 30 of the SRC and SRC Rule 30.2-6 provide a requirement and basic rules for sound ### Internal control, supervision, and Associated Person requirements - Section 30 of the SRC and SRC Rule 30.2-6 require sound internal control and supervision. - Every licensed Broker Dealer must have an Associated Person responsible for supervising compliance with such rules and procedures (“Compliance Officer” in case of Investment Houses without broker dealer functions). - This requirement will soon be extended to other market intermediaries. - SRC Rule 28.1-4 requires registration of “Associated Person”. - Associated Person must: - pass qualifying examinations (i.e., Certified Associated Person Exam), - meet other fit and proper tests including minimum 3 years of experience. - The SEC issued Model Internal Supervision, Control and Compliance Procedures (August of the referenced year) to be adopted by Broker Dealers, Investment Houses and Universal Banks to comply with SRC Rules 30.2-6. - Internal control systems and procedures: - are required to be evaluated periodically by the Associated Person, - are evaluated as part of the PSE member inspection and as part of the supplementary SEC oversight audit. - Reporting lines: - Associated Person reports to the management of the firm. - PSE’s Compliance Audit Department (CAD) reports to the Business Conduct and Ethics Committee and to the Market Regulation Department of the SEC. - Frequency and coverage: - Associated Person is to conduct internal assessment daily. - The PSE inspects all its members (200 Seats though not all filled) in an about two year cycle. - The PSE submits to the SEC its examination calendar of the year by January 15 every year. - The Model Internal Supervision, Control and Compliance Procedures include rules for Detection of Money Laundering. ### Client account protection, segregation, and execution rules - SRC Rules 28.1-1.5 and 52.1-10 require segregated accounts for clients and the firm and safekeeping of client’s assets. - SRC Rule 32.2(a)-2 requires Best Execution of customer orders. - Section 34 of the SRC and SEC Order on Customer First Rule prohibit front running by Broker Dealers. - PSE MakTrade system design ensures priority execution of customer order ahead of the member’s proprietary orders; having ensured effectiveness, the SEC permits dealing operations by brokers under the SRC. - Section 34 of the SRC and SRC Rule 34.1-2 require segregation of broker and dealer functions. - SRC Rule 34.1-3 requires a “Chinese Wall” to segregate functions and control information flows between broker and dealer; Model Internal Procedures include further details for the Chinese Wall. - Ethical Standards Rule includes rules for handling of conflicts of interest including those among clients as well as with the Broker Dealer. - Other intermediary rules (selected): - SRC Rule 30.1 Monitoring of Affiliated Transactions by Broker Dealer. - SRC Rule 30.2-1 Ethical Standards Rule. - SRC Rule 30.2-2 Confirmation of Customer Orders. - SRC Rule 30.2-3 Client Agreement. - SRC Rule 30.2-4 Suitability Rule and SRC Rule 30.2-1.2.d Know-Your-Client rule. - SRC Rule 30.2-5 Commissions and Charges for Services Performed by Broker Dealer. - SRC Rule 24 sub-rules: 24.1(b)-1 Manipulative Practices, 24.1(d)-1 Advertisements and Communications with the Public, 24.2-3 Prohibition of Guarantees against Loss. - SRC Rule 52 sub-rules: 52.1-8 Customer Account Statements, 52.1-9 Customer Complaint Rule. - Specific procedural requirements: - SRC Rule 30.2-3: Client Agreement specifying contract terms, identities, services, fees, risk disclosure must be signed before transacting or providing any services; in public offering subscriptions, the prospectus must be provided. - SRC Rule 30.2-2: executed transactions be reported immediately to clients and followed by a Confirmation Advice the following day. - SRC Rule 52.1-8: quarterly statements of accounts be sent to clients. - SRC Rule 30.2-1.d together with SRC Rule 30.2-4: obligation to obtain client information including financial circumstances and investment objectives; Customer Account Information Form (CAIF) and Client Agreement (CA) include information on intermediary proprietary trading, businesses, overall risk profile (position limit), margin trading, principal trading with customer (counterparty exposure), etc. ### Assessment, audits, and compliance findings - Assessment status: Implemented. - August 2001 CAD audit of 23 member broker dealers found: - 2 firms fully compliant with all requirements. - Rules most often violated (count of violations as found in the audit): - SRC Rule 50-1 Purchases and Sales in Cash Account: 11 violations - SRC Rule 52.1-6 Customer Account Information Rule: 9 violations - SRC Rule 52.1-7 Order Ticket Rule: 9 violations - SRC Rule 30.2-2 Confirmation of Customer Orders: 8 violations - SRC Rule 34.1-2 Segregation of Broker and Dealer Function Affiliation and Practices: 7 violations - SRC Rule 52.1-1 Books and Records Rule: 4 violations - SRC Rule 30.2-3 Client Agreement: 3 violations - SRC Rule 49.2-1 Customer Protection Reserves and Custody of Securities: 3 violations - SRC Rule 52.1-8 Customer Account Statement: 3 violations - SRC Rule 49.2-1 Net Capital Rule: 2 violations - SRC Rule 52.1-10 Quarterly Securities Counts by Broker Dealers: 2 violations - SRC Rule 24(b)-1 Manipulative Practices: 1 violation - SRC Rule 28.1-4 Registration of Salesmen and Associated Persons of Broker Dealer: 1 violation - SRC Rule 48.1-1 Margin Rule: 1 violation - SRC Rule 30.2-6 Supervision: 1 violation - Commentary: Due to the depressed market, many broker dealers are struggling to survive and losing attention to their internal control. The SEC and the PSE are taking corrective actions against those. ### Failure of intermediaries, insolvency procedures, and SIPF - Principle 24: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. - SRC provisions and procedures: - Section 33.1.(d) of the SRC and SRC Rule 33.2(d)-1 provide for Protection of Customer Accounts in Case of Business Failure of an Exchange Member. - Under SRC Rule 33.2(d)-1, upon an SEC order the Exchange must: - suspend failed intermediary’s membership, - immediately arrange for another member to take over outstanding contracts relating to securities, - simultaneously notify the SEC of such suspension and take-over, - notify customers of the failed member that their accounts have been transferred and provide customers the opportunity to re-transfer their accounts to another member of their choice. - The Exchange is to settle the failed member’s liabilities to customers through the sale of the member’s seat or trading rights, liquidation of the paid up capital, etc. - If outstanding liabilities remain after such settlement, the Exchange transfers those to the Securities Investor Protection Fund (established under Section 36.5 of the SRC), informs customers, and advises on procedures for claiming compensation for the uncovered losses. The Rules and Regulations for the Implementation of the SIPF provide such procedures. - Where the SEC suspends or revokes registration of a broker dealer (Section 29 of the SRC and SRC Rule 29): - The Exchange must immediately arrange for another member to take over outstanding contracts relating to securities, notify the SEC in writing of such transfer and any affected customers, and provide customers the opportunity to re-transfer their account to another broker dealer of their choice. - If the suspended/revoked broker dealer is not a member of an Exchange, the SEC notifies affected customers and requires transfer of their accounts to another broker dealer. - Monitoring and intervention: - The Net Capital Rule provides opportunities for the SEC and the Exchange to monitor solvency of intermediaries and intervene before any intermediary becomes fully insolvent. - The SRC provides full autonomy for an Exchange to act on member’s insolvency under the supervision of the SEC. - SIPF funding and coverage: - SIPF is funded with monthly member contributions of P10,000 plus one 0.0002 percent of each member’s gross trading volume. - The SIPF is to cover up to P100,000 per customer. - The SIPF has so far not been mobilized to act on a broker dealer insolvency. *Source: _cr0462 - Section 30 of the SRC and SRC Rule 30.2-6 provide a requirement and basic rules for sound* ### Section 33 of the SRC, and the registration is a requirement for any market participants to use ### _cr0462 - Section 33 of the SRC, and the registration is a requirement for any market participants to use ### Registration requirements for an Exchange (Section 33, SRC Rule 33.1, Form 33) - Registration and filing requirement: applicant must file SEC Form 33. - Eligible applicant must be able to comply and enforce compliance by its members with the SRC, the IRR and the rules of the Exchange. - Required filings and documentation: - organizational charts; - rules of procedures and ethics; - list of officers and members. - Operational capacity requirement: must have capacity and procedures to deal with a failure of a member. - Corporate form and business purpose: - applicant must be a stock corporation; - must be engaged solely in the business of operating an Exchange (SRC Rule 33.2(b) permits a holding company for an Exchange). - Discipline and fairness: - Section 33.2(d) requires ability and willingness to discipline a member for violations of just and equitable principles of fair trade; - Section 33.2(e) requires that procedures for disciplining, denial of membership, and prohibition or limitation of access be fair and equitably applied. - Ownership and governance (Section 33.2(c), (f), (g), (h), SRC Rule 33.2(c)): - majority of board members must consist of independent directors and persons who represent the interest of issuers, investors and/or other market participants not associated with any broker dealer or member of the Exchange; - No person can own voting shares of an Exchange more than 5 percent; - No industry or interest group can own such shares more than 20 percent; - intended to protect interest of investors over that of member brokers and dealers. - Fees: 33.2(j) requires equitable allocation of reasonable fees for members, issuers and other users of the Exchange. - Transparency and market integrity: 33.2(i) and (k) require transparency of transactions and prevention of fraudulent and manipulative acts. - Clearance and settlement: 33.2(l) requires transparent, prompt and accurate clearance and settlement. ### Competency and market operator requirements (SRO criteria, SRC Rule 39.1-1) - Conventional competency requirements provided as part of SRO requirements include: - market structure; - standards applicable to direct users; - rules for listing and trading; - financial soundness. - Identified omission: a requirement of a backup system is included in neither the requirements for a registered Exchange nor those for an SRO. - No elaboration in the SRC or IRR on differentiated market access or specific permitted market types (examples listed in source): - organized membership exchange; - inter-dealer market; - telephone market; - electronic trade matching system; - electronic bulletin board; - proprietary trading system; - automated order routing system provided by an intermediary or other third party. ### SEC oversight, audit, and operational monitoring - SEC views trading and settlement procedures as responsibility of the PSE as an SRO rather than of the SEC. - The SEC does not have a specific oversight program for the PSE; should audit Exchange handling of: - errors; - cancellation of trades; - dispute resolution and appeal procedures; - unmatched trades; - modification of orders; - operational failures. - Audit trail and record-keeping: - an Exchange should provide the SEC with information on the above and avail audit trail for SEC review; - record keeping system and capability should be subject to SEC audit. - Meetings and communications: - SEC and the PSE hold monthly meetings where directors of the PSE and the chairman and commissioners/senior staff of the SEC meet and discuss various issues extensively; - official communications and orders from the SEC are documented in letters to the PSE which are disclosed; - detailed minutes of the meeting are not disclosed. - SEC monitoring access and authority gaps: - SEC currently does not have monitoring access to the PSE’s surveillance system; - SEC does not have clear authority to re-examine or withdraw registration of an exchange; - authority to modify rules or order a registered Exchange to take particular actions is not clear once registered. ### Market access, emerging exchanges, and demutualization issues - Current authorized exchanges and plans: - currently only the PSE is an authorized Exchange; - reopening of a Commodity Futures Exchange is under consideration; - a Fixed Income Exchange (FIE) is being planned by the Bankers’ Association. - Likely characteristics of the FIE: - may adopt more open but differentiated or discriminating access to the market and its information; - currently only factor of differentiation appears to be adequacy of Net Capital of the participants. - Cross-registration option: - an applicant for an Exchange license may apply for an SRO license by filing SEC Form 33-SRO under Section 40 of the SRC. - PSE demutualization and SRO responsibilities: - PSE has been corporatized and due to go public to complete demutualization in near future, with SRO responsibilities to remain; - introduction of non-broker directors was a key condition to restore its once suspended SRO status; - governance reform intended to enable better control of conflicts of interest. - Ownership/governance separation provision: SRC Rule 33.2(c) provides for a holding company structure and separation of ownership and participation in the Exchange. ### Trading halts, intervention, and market rules - Suspension or halt of trading is exercised by the PSE under the current framework; not by the SEC. - Recommendation: SEC should retain option to directly intervene in the market when necessary (e.g., leak of price sensitive information). - SEC should review that PSE’s position limits and margin rules are prudent and that rules encompass timing of disclosure (e.g., after the market is closed) of price sensitive information. ### Surveillance system, transparency, and disclosure - Existing surveillance limitations: - existing system is arbitrary and inadequate: only price band and only one arbitrary price band, i.e., 50 percent ceiling and 40 percent floor, for all securities to flag abnormal movements. - PSE upgrades and planned improvements: - PSE is working on establishing a unique price band for each issuer/class of securities; - new system expected to flag trade concentration among market participants, accumulation of positions, volume as well as price movements including combined movements, etc.; - PSE is upgrading the surveillance system subject to approval by the SEC. - Monitoring recommendation: - SEC should be provided with a terminal to monitor not only market activities but also the PSE’s surveillance activities. - Automated disclosure system: - PSE is developing an “automated disclosure” system to be accessed on-line by interested parties; - lack of funding has slowed its development; - the system is expected in 2002. - Transparency findings: - Section 33.2(i) requires transparency of transactions as part of registration; - SRC, IRR and most PSE rules promote public disclosure of information about trading on a real time basis; - information vendors have interlinked with the PSE trading system to provide “pre, post and real time” trading information; - PSE is developing automated disclosure. ### Market conduct, manipulation, and enforcement powers - Statutory prohibitions and rules: - Section 24 of the SRC prohibits manipulative practices (market cornering, misleading statements, etc.); - SRC Rule 24.1(b)-1 provides further details; - Section 26 of the SRC prohibits fraudulent transactions; - SRC 32.2(a)-2 provides broker’s duty of Best Execution; - SEC issued Customer First Rule to prevent front running; PSE reconfigured MakTrade to automatically ensure implementation. - Section 33.2(k) requires a registered Exchange to prevent fraudulent and manipulative acts and promote just and equitable principles of trade. - SEC administrative and civil enforcement powers: - Section 54 provides SEC powers to impose administrative sanctions (disqualification of officers, fine, etc.); - Sections 58 and 59 provide Civil Liability for Fraud in Securities Transactions and for Manipulation, respectively; - Section 61 provides Civil Liability on Insider Trading. ### Assessment excerpts and regulatory comments - Assessment status notes: - Assessment: Partially Implemented (appears in multiple assessment statements). - Assessment: Implemented (for transparency—Principle 27). - Key assessment comments: - SEC’s control over the PSE as a trading market is somewhat loose while control over it as an SRO is tight. - Registration requirements for an Exchange do not expressly include establishment of listing standards; SEC seems to see listing standards as a prerogative of an Exchange. - Conventional SRO requirements (market structure, type of market, standards applicable to direct users and product types) are covered as criteria for an SRO but may be more appropriate as requirements for a registered Exchange. - The cross requirement that a registered Exchange must be an SRO eliminates possibility of a registered Exchange escaping from those requirements, but appropriateness of this cross requirement may need review as demutualized PSE and other new exchanges start competing for profit. - A requirement of a sound backup arrangement should be expressly required. - The regulatory framework could elaborate more on access criteria and market structure to guide differentiated access (e.g., Market Makers, Dealers, Agents in primary market and GSEDs). - The SRC and IRR may need to provide general but sound rules to guide differentiation of access so as to ensure market efficiency without sacrificing fairness and transparency. - Regulation could define more clearly the concept of Exchange to differentiate an Exchange from other quasi organized markets; omission of listing standards may be advantageous or problematic as demutualization and competition intensify. - Where a market outsources core operational responsibilities or functions, the SEC should be informed of the arrangements. - With development of the debt market, interest rate derivatives are likely to be important instruments given likely adoption of a market making requirement by the Bureau of Treasury. ### Principles referenced and implementation notes - Principle 26 (ongoing regulatory supervision of exchanges and trading systems): - Description: SEC conducts continuous oversight over the PSE; registration criterion requires a registered Exchange to enforce rules onto members. - Noted accomplishment: PSE reconfigured MakTrade to ensure implementation of the Customer First Rule; SEC reviewed and approved the rules and system. - Monitoring gap: SEC currently does not have monitoring access to the PSE’s surveillance system. - Assessment: Partially Implemented. - Principle 27 (transparency of trading): - Description: Section 33.2(i) requires transaction transparency; SRC, IRR and PSE rules promote real time public disclosure. - Implementation: Implemented. - Comment: More specific rules of transparency are recommended for differently structured markets (e.g., equal access to pre-trade price information for direct participants; pre-trade anonymity of participant identities; market operator and SEC access to pre-trade identities for surveillance; wide public availability of post-trade price and volume information). - Principle 28 (detect and deter manipulation and unfair trading practices): - Description: SRC Sections 24, 26, 32.2(a)-2, 33.2(k) and related rules and SEC measures (Customer First Rule, MakTrade changes) address manipulation and unfair trading practices. - Enforcement powers: Section 54 (administrative sanctions), Sections 58 and 59 (civil liability for fraud and manipulation), Section 61 (civil liability on insider trading). *Source: _cr0462 - Section 33 of the SRC, and the registration is a requirement for any market participants to use* ### Section 64 of the SRC provides the SEC with a power to issue Cease and Desist orders to halt ### _cr0462 - Section 64 of the SRC provides the SEC with a power to issue Cease and Desist orders to halt ### Market surveillance, inspection and enforcement (Principle 28) - Section 64 of the SRC provides the SEC with a power to issue Cease and Desist orders to halt or suspend trading. - The surveillance function of the PSE can be outsourced (i.e., no legal restriction). The PSE directly surveys its market. - The SEC currently uses Technistock, a market-related database system operated by a private information vendor, to survey the market movements, activities and conducts. - The SEC has sufficient power to compel inspection of systems within the limit of Constitutional Rights. - The SEC and the PSE as the SRO have information sharing arrangements, arrangements to provide assistance in inspection, investigation and surveillance. - Assessment: Partially implemented - Comments: - The legal and regulatory prohibitions, administrative powers and civil liabilities are sound. - The new market surveillance system of the PSE which is being tested currently and soon to be introduced reflects significant improvements to the existing system. - However, the SEC needs to gain direct monitoring access to it. - Recommendation: The SEC should have a clearly defined power to require the PSE and any prospective trading market operators to provide it with monitoring access to the surveillance systems and use the power. ### Regulation to ensure proper management of exposures and default risk (Principle 29) - Description of safeguards and arrangements: - The PSE (its Compliance and Surveillance Group) as an SRO is required to maintain fair and orderly market (Section 40.3(c), 40.4(b)). - The SEC has power to require the PSE as an SRO to maintain order in the market. - Section 42.2(f) provides that a Clearing Agency must establish and oversee a fund to guarantee the prompt and accurate clearance and settlement of transactions executed on an Exchange with contributions from members, based on their trading volume and a relevant percentage of the daily exposure of the four largest trading brokers. - The Securities Clearing Corporation of the Philippines (SCCP), to which all broker dealers are members, has a “fails management system” wherein any undelivered shares will have to be bought by making use of the Trade Clearing and Guarantee Fund (TCGF). Any unpaid shares be sold in the market to close out the exposure; incidental cost incurred is charged to the defaulting broker. - There is a “credit ring agreement” between the SCCP and its participants wherein the latter agree that they will contribute should the TCFG be insufficient to cover the deficiency incurred. - SCCP risk management measures include: a) early settlement mechanism for volatile issues and/or brokers who are at risk, and b) brokers have the option to pay their obligations or deliver their shares ahead of settlement date to cover their negative market exposure. - SCCP is required to report any breach or potential breach of its rules and material financial difficulty of its member immediately to the SEC. All these rules and arrangements of the SCCP are public information. - Registered market participants and PSE members are required to comply with Margin Rule (SRC Rule 48.1-1) and Net Capital Rule (SRC Rule 49.1-1) set by the SEC on the basis of Sections 48 and 50 and 49 of the SRC, respectively. - Penalties for non-compliance with exposure reporting: limitations on future trading, required liquidation of the position, revocation of trading privilege, or suspension from trading. - Stock lending and borrowing is permitted based on the SB & L Rules of the PSE. - Assessment: Implemented - Comments: - The SEC intends to soon amend requirements to increase the size of broker contributions to the Trade Clearing and Guarantee Fund (TCGF) to adequately reflect risk exposure. - Improvements are needed also in short-selling, netting, securities borrowing, regulation and Securities Investor Protection Fund (SIPF). ### Clearing and settlement systems oversight (Principle 30) - Legal and regulatory framework: - Section 42 of the SRC and SRC Rule 42-1 require registration of Clearing Agencies (SEC Form 42-CA). - Rules and Operating Procedures of the SCCP are approved by the SEC under the SRC and the IRR and available to market participants. - SRC Rule 40.5.1 provides the SEC’s powers over Clearing Agencies, Exchanges and SROs. - Registered Clearing Agencies (including SCCP, PCD) are required to file audited balance sheet and income statement annually. - SRC Rule 42-2 requires a registered Clearing Agency to report to the SEC any breach or potential breach of the Agency’s rules by its members or operational/financial difficulties immediately. - The SEC is studying a need of inspecting the SCCP regularly. - Operational performance measures and timelines: - Trade matching and its time frame (daily). - Transmission of transactions data by the market to the SCCP and PCD. - PCD for the purpose of immobilizing or dematerializing (before trading). - Book-entry systems for the movement of securities and payments (PCD). - Trade settlement and the time frame for settlement (T+3). - Allocation of executed trades to clearing members is achieved in T+4. - Risk management measures employed by SCCP and PCD: - Safeguards to protect securities, funds and related records. - Safeguards to assure the integrity of electronic data. - DVP on a net-net basis. - Net Capital Rules. - Identification and monitoring of risks of individual failure and overall risk to the system on an on-going basis. - Symmetric settlement of derivative pays and collects. - Insurance coverage. - Permitted settlement funds. - SIPF measures: a guarantee fund, a backup system, access to margin and other collateral, and liquidity facilities. - Margin and settlement specifics: - Margin requirements are set by the SEC to cover the risk of default by a market participant as a result of market movements in individual instruments and changes in market volatility. - SCCP uses intra-day settlements to cover volatility of derivatives trading. - Both securities and cash are netted daily. - The BSP is currently working on developing a RTGS system. - Order and price limits: 50 percent up and 40 percent down are used to control participants’ exposure and market volatility. - Trading halt can be called to control the market but no automatic circuit breaker. - Margin rules provide that broker can extend up to 50 percent of the transaction value. - Brokers transactions are monitored by the CSG of the PSE and financial stability monitored by SCCP. - Rules on short selling have been approved but not yet operational while the Securities Borrowing and Lending Rules are being formalized by the PSE. - Assessment: Implemented - Comments: - The SEC recently amended requirements to increase the size of broker contributions to the Trade Clearing and Guarantee Fund (TCGF) to adequately reflect risk exposure. - Improvements are needed also in short-selling, netting, securities borrowing, regulation and the SIPF. - Impediments have been resistance of the brokers many of which are struggling to survive in the current depressed market. The SEC is working with the brokers to educate them on the need to incorporate international best practice standards and slowly convincing them to support the SEC’s efforts. - Historical operational steps: - Last 17 April 2000, SCCP started imposing sanctions and collecting fines and penalties for settlement violations. - On 01 May 2000, the SCCP commenced a Mark to Market Collateralization System. - The SEC hopes by the end of September, the SCCP shall have executed a “credit ring agreement” with all its participants. ### Compliance with IOSCO Principles — summary observations - The document lists each Principle (1–30) with gradings (I/PI/NI/NA) and comments. Selected observations: - Principle 1: The responsibilities of the regulator should be clear and objectively stated. Grading: Implemented. Comment: The MOA together with the SRC and the New Central Bank Act filled loopholes, rationalized the responsibility sharing arrangements and made those clearer to the regulated. - Principle 6: Use of SROs. Grading: Implemented. Comment: The framework created by the SRC is sound. Diversification of the ownership of the PSE is awaited as the final step to complete full implementation. - Principle 10: Effective use of inspection, investigation, surveillance and enforcement. Grading: Partially Implemented. Comment: The SEC is in the process to complete the staffing and MIS capacity building to fully implement the SRC which emphasizes enforcement. The assessment is near “Implemented.” - Principle 12: Information sharing mechanisms. Grading: Partially Implemented. Comment: Finalization of the MOU with BAPEPAM and working relationships with the PSE is awaited. The assessment is near “Implemented”. - Principle 28: Detection and deterrence of manipulation. Grading: Partially Implemented. Comment: SEC should gain direct monitoring access to the new market surveillance system developed by the PSE and those of prospective trading markets. - Principles 29 and 30 are assessed as Implemented. ### Supervisory response and recommended actions (selected) - Supervisory Response (high-level items): - Intensify in-house training of SEC staff to enhance skills on market surveillance, investigation and enforcement. - Continue full computerization of SEC data; review and revise Manual of Operations and Procedures. - Implement PSE demutualization second phase (listing) and diversify PSE ownership away from broker dealers; consider private placement to institutional investors and involvement of ADB and IFC. - Discuss independence of the Compliance and Surveillance Group of the PSE (CSG-PSE); PSE President requested delay of operationalization as independent SRO while studying independence within organizational structure. - On April 16, 2002, the SEC operationalized its on-line filing for the registration of companies; reportorial requirements shall be filed electronically. Net-capital requirements from broker dealers shall be electronically filed and analyzed by MRD. - Finalize MOU with Indonesia’s BAPEPAM; pursue similar agreements with other regulators. - Approved Code of Corporate Governance to be “mandatory” for listed and other specified corporations. - Continue pursuit of Revised Investment Company Act (RICA) passage. - Prepare electronic Net Capital monitoring system for broker dealers; testing system expected before the end of the second quarter. - Provide key benchmarks through Rules and/or Orders to define the SEC’s concept of Philippine capital markets in an environment where various exchanges compete as for-profit businesses; develop a specific supervision program for trading market operators and SROs. - Recommended Action (selected table entries): - Principles relating to the regulator (CPs 1–5): Strengthen in-house training; use revised Manual of Operations and Procedures; continue computerization of regulatory reporting and monitoring. - Principles of self-regulation (CPs 6–7): Diversify PSE ownership away from dominance by broker dealers; consider private placement to institutional investors and going public; complete study on CSG-PSE independence. - Principles for the enforcement of securities regulation (CPs 8–10): Complete computerization of data filing, management and analysis to free human resources for enforcement. - Principles for cooperation in regulation (CPs 11–13): Finalize MOU with Indonesia’s BAPEPAM; pursue similar agreements. - Principles for issuers (CPs 14–16): Adoption of IASs should be implemented by 2005 as planned. Continue investor education. - Principles for collective investment schemes (CPs 17–20): Passage of RICA is needed urgently; capture investment advisors; clarify requirements for segregation and valuation of assets and delegation of functions. - Principles for market intermediaries (CPs 21–24): Implement electronic Net Capital reporting and monitoring for brokers dealers to enable daily monitoring. - Principles for the secondary market (CPs 25–30): Strengthen regulation and supervision of trading market operators and SROs; consider a regulatory framework accommodating trading markets with or without SRO functions; rationalize requirements for an Exchange, trading system and SRO. *Source: _cr0462 - Section 64 of the SRC provides the SEC with a power to issue Cease and Desist orders to halt (IMF PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr0462.pdf_