Court stops SEC from implementing contested Securities Code rules

A local court has barred the Securities and Exchange Commission (SEC) from executing 42 provisions in the new implementing framework governing the Securities Regulation Code which were disputed by a group of stock brokers.

Acting on the petition of the Philippine Association of Brokers and Dealers Inc. (Pasbdi), the Regional Trial Court of Mandaluyong City issued a 20-day temporary restraining order (TRO) preventing the SEC from implementing the contentious provisions in the 280-page IRR.

Pasbdi said certain provisions of the new IRR were contrary to the Constitution, arguing that the new framework denied them due process and even impaired the obligation of contracts. The group also alleged that the contested provisions were contrary to law that they were supposed to implement and effectively “amended” the SRC itself. It argued that the SEC had neither explained the amendments nor showed that the existing rules were no longer workable.

In a six-page order dated Feb. 15, a copy of which was obtained by Inquirer, RTC Judge Rizalina Capco-Umali said: “At the outset, this court is mindful that it shall not, at this stage, rule on the issue of constitutionality and validity of the assailed 2015 SRC IRR to prevent a pre-judgement on the merits of the instant case which may only be tackled by this court after the parties have fully presented their arguments on all the issues raised in the amended position.”

Capco-Umali said the “court is quite convinced there is a prima facie showing of a right to be protected in favor of the petitioner against the apparent violations of such right by the respondents in the form of issuance and implementation of the assailed provisions of the 2015 SRC IRR.”

The RTC judge said it was “very clear” that the irreparable injury that the petitioner might suffer alongside the “threatened acts of the respondents” were “continuing in nature.”  As such, the judge said it was within its power to issue the TRO “if only to maintain the status quo of the parties prior to the controversy and preserve and protect the rights of petitioner during the pendency of the main case.”

Pasbdi had questioned a number of amendments, including the one that required the disclosure of beneficial owners of shares of stocks.  As contained in provision 18.1.2. of the IRR, “if the equity securities under the name of the legal owner are beneficially owned by another persons, the legal owner and beneficial owner shall individually or jointly, within five business days after such acquisition, submit to the issuer, the Exchange where the security is traded, and to the Commission a sworn statement containing the information required by SEC Form 18-A.”

The legal debate is reminiscent of the private sector’s battle with the Bureau of Internal Revenue’s bid to require submission of an alphabetical list or “alphalist” of recipients of income payments subject to creditable and final withholding taxes, from which the private sector obtained relief from the Supreme Court. The SEC, on the other hand, insisted that its disclosure requirement was necessary to intensify efforts against money laundering and to comply with a Supreme Court directive requiring the SEC to look into the beneficial ownership of corporations and ensure compliance with the limit on foreign ownership.

Under IRR provision 30.2.1.2.4.2., information obtained from clients shall be treated with utmost confidentiality and shall not be disclosed to unauthorized persons “provided that, such treatment of confidentiality shall not apply to the Commission, SROs (self-regulatory organizations), Exchanges, clearing agencies, depositories and their authorized representatives that exercise regulatory and supervisory responsibilities or to any order issued by the Commission.” This was interpreted to mean that the SEC can just summon confidential documents at any time.

The group of brokers also assailed, among others, the requirements set by the SEC on information technology plan, business continuity, disaster recovery plan, risk management manual and internal control procedures as a pre-requisite for registration. Several provisions governing any SRO – in this case applicable to the Philippine Stock Exchange – were likewise challenged.

Meanwhile, the SEC said that as of February 16, 88 of the 133 (or 66 percent) broker dealers/trading participants of the PSE had already submitted the new requirements under the 2015 SRC IRR which took effect on November 9, 2015. Two broker-dealers requested and were granted extension of time to comply with the new requirements.

The amendments to the IRR, SEC chief Teresita Herbosa had earlier said, were “intended to enhance investor protection, address regulatory gaps, strengthen the market and regulatory structures, and adopt global best practices.” She said that the final version faithfully implemented the statutory requirements as mandated by Securities Regulation Code.