The Work Ahead and Challenges

Chairman Lilia R. Bautista outlines some work directions that lie ahead for SEC and the challenges it faces:

The SRC provides a number of changes for our implementation.  The more important ones are the following:

1.           The demutualization of the Philippine Stock Exchange (PSE) to allow non-brokers to be part of the Exchange and thus, remove the perception that it is an “old boys club” which must be done in one year, i.e., August 8, 2001.

2.           The effective removal of control by the brokers in the board of the Exchange with the election of the majority non-brokers in the Board.  Today, there are eight (8) non-brokers and seven (7) brokers in the Board of Directors of the PSE.

3.           The codification of the concept of self-regulation among the major market players such as the exchange, clearing agencies and association of brokers and dealers.  To date, only the PSE is a self-regulatory organization.  The SEC retains an oversight function over the Exchange.  It can suspend or appoint an administrator for the Exchange under certain conditions.

4.           Incorporation of new market developments and practices.  It allows flexibility to adopt modern practices and trading technologies such as electronic trading systems and uncertificated securities.

5.           It removed the exemption of shares of bank from SEC regulation.

6.           Mandatory tender is required for acquisition of at least 15% of any class of security or at least 30% of such security over a 12-month period.

7.           Segregation and limitation of the function of member  brokers and dealers.

8.           Prohibition for broker dealer to deal with securities listed on the Exchange if its stockholders, directors, associated persons, salespersons, and their relatives are at the same time directors and officers of the issuer.Prohibition for broker dealer to deal with securities listed on the Exchange if its stockholders, directors, associated persons, salespersons, and their relatives are at the same time directors and officers of the issuer.

9.           Publicly held corporation (200 stockholders or more each holding at least 100 shares with P50 million assets) and listed companies shall have at least 2 independent directors or 20% of the board, which ever is less.

10.          Settlement offers for violation of the Code may be favorably considered by the Commission if it is in the public interest.  Such decision may be made without a determination of guilt.

11.          Strengthened the full disclosure system as against the merit system.

12.          Increased penalties for violation of the Code.

What are the problems we foresee in the implementation.  Let me cite a few:

1.           Resistance of some of the brokers to lose control of the Exchange.  Under the SRC, no one group can own more than 20% of a demutualized Exchange and no person or company can own 5% of the Exchange.  Compliance with 20% will probably take time and the SEC is willing to look at a timetable to meet this requirement since there is flexibility granted to SEC under the law. 

2.           The segregation of the broker-dealer function of a member of the Exchange.  The provision in question has been copied from the U.S. law.  In a situation where brokering is slow due to a bearish Market, understandably the brokers do a lot of dealing for themselves.  Under the present law, this would not be allowed unless such broker is a Market maker.  The rules clarified that if the transaction is done thru another broker, a member broker can also be a dealer.  The possibility of front running is nil since the broker is just like any other customer of the transacting broker.  Of course, this means additional brokerage fees as well as the possibility to miss the opportunity to grab a good buy when such a situation arises.

3.           The prohibition of a broker to buy and sell securities of listed companies whose directors, officers and controlling shareholders are also stockholders, director, associated person or authorized clerk of the broker, including their relatives to first cousins by blood or by affinity.  The prohibition seems strict and we are now looking at possible exemptions under certain conditions utilizing our power under Sec. 72 to exempt certain individuals from a law or regulation.

4.           Preparing the Markets for the commodities future.  There has been a request to reopen the Market for commodities futures.  We are thinking of reopening the same only for financial futures, which seems to be the most urgent since in the absence of rules, some companies are operating here using the foreign exchanges on commodities future.

5.           Supervision of pre-need plans.  By next month, we expect to come up with the amended rules, which would allow us to tighten the trust fund for the protection of the plan holders but at the same time not dampening the growth of the industry.  We will now have automatic approvals after 45 days of complete applications for registration filed by a pre-need company.

6.           Prevent the use in the Philippines as a base to engage in the fraudulent sale of securities to foreigners residing abroad.  We have received complaints from Australia, New Zealand, Finland, South Africa, Singapore and some Arab countries against companies located in the Philippines selling, mostly foreign securities which are non-existent.  We have referred the matter to the PNP and NBI and has set-up an anti-fraud interagency committee with the Center of Transnational Crime as the secretariat.  We have started to crack down on some of them.

7.           Investments in pyramiding schemes.  Foreigners have tied with local entrepreneurs to set-up schemes, which in our opinion is a fraud in securities and at the same time a violation of the Consumers Code on pyramiding.

8.           Innovative and other Trading Markets.  The SRC mandates the SEC to come up with the rules to register and license innovative and other Trading Markets or Exchange, small and medium, growth and venture enterprises and technology-based ventures.  Discussion with interested parties have not borne fruit and to come up with rules on a non-existent market must give way to more pressing matters.

9.           Tender offer rule.  A number of trust funds and investment companies have criticized SEC for recognizing that under the old RSA, tender offer is not mandatory.  Due to the clamor of these companies and funds to share in buy-outs of shares, the new code now provides that any acquisition of 15% of the shares or 30% thereof over a 12 month period are mandatorily required to make tender offer. 

10.          Retraining the regulator and market participants.  A reorganized SEC necessarily requires a change in culture of our people.  The bureaucratic approach must give way to a more developmental approach.  A sense of urgency to act first and efficiently is necessary and a primary obligation of each government employee.  In view of our desire to develop our capital market, which in the past has not been the thrust, we are gearing our training and retraining program towards this goal. Retraining does not apply to our staff alone.  It must apply as well to the market participants.  The fact that we have filed cases against a number of brokers on stock manipulation would seem to indicate the veracity of the previous statement that there is need to retrain the market participants as well.

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