SEC issues rules on how to purge errant corporate execs

The Securities and Exchange Commission (SEC) has issued tighter guidelines on how to purge unworthy and errant people from corporate Philippines’ leadership pool.

Citing efforts to improve the quality of corporate governance in the country, the SEC has issued memorandum circular No. 4, series of 2022, providing for the disqualifications of corporate directors, trustees and officers as well as the guidelines for their removal.

The new rules operationalize sections 26 and 27 of the Revised Corporation Code of the Philippines (RCC).

Based on the circular, corporate directors, trustees or officers may be disqualified if, within five years prior to their election or appointment, or within their tenure, they were convicted by final judgment of an offense punishable by imprisonment for more than six years.

Another ground for disqualification is violation of the RCC, Securities Regulation Code (SRC), or any offense involving fraudulent acts punishable under the RCC, SRC, and other laws, rules, or regulations implemented by the SEC.

They may also be disqualified if, within five years prior to their election or appointment, or within their tenure, the director, trustee, or officer had been found administratively liable by a foreign court or equivalent foreign regulator authority for acts, violations, or misconduct similar to those stated under the RCC.

Corporate records

Within five years prior to their election or appointment, or within their tenure, they may likewise be disqualified if found administratively liable by final judgment for refusal to allow the inspection and/or reproduction of corporate records.

An independent administrative action for the removal of an official begins with the issuance of a formal charge by the SEC, or upon filing of a verified complaint with the operating department. A verified complaint may be filed by any real party in interest for the removal of the director, trustee, and/or officer.

But the complaint may be dismissed outright if it was found to be noncompliant with requirements, or if the SEC or the operating department held no jurisdiction over the subject matter. The complaint may also be dismissed if there was already a pending action or complaint involving the same subject matter or issues in any court, tribunal, or agency; or if there is insufficient evidence to support the allegations.

The SEC may remove a director, trustee, and/or officer of a corporation as a sanction in its proceedings if, during its administrative or adjudicative proceedings, the grounds for disqualification had been established.

Show cause order

A show cause order will be issued to give these people the chance to explain why they should not be disqualified from their position or be administratively penalized. They may file a verified response within 15 days from receipt of the order.

In addition to the removal of the director, trustee, and/or officer, the SEC may also issue a permanent cease and desist order, and/or impose a fine from P10,000 to P400,000 for each violation of the SEC’s orders, or any relevant laws and regulations.

For a one-person corporation whose sole director has been removed, the nominee will take the place of the single stockholder as director and manage the corporation’s affairs.

The SEC will keep a list of removed directors, trustees, and create an officers index for its own use.