After taking a bad hit for failing to crackdown on the Legacy pre-need scam that victimized many small investors, the Securities and Exchange Commission (SEC) may find itself in hot water again if it does not act decisively on controversial appointments at the local bourse.
A news report came out Tuesday about a brewing boardroom war at the Philippine Stock Exchange (PSE) over the appointment of two of its officers beyond the limits of the Securities Regulation Code (SRC).
These officers are William Ang, president of brokerage firm Astra Securities, and Alejandro Yu, president of another brokerage firm, RS Lim and Co. Inc.
A former PSE board director and who failed to clinch enough votes in the bourse's May 9 stockholders meeting, Ang was later appointed by the new board as corporate secretary. On the other hand, Yu has been treasurer of the exchange for more than 2 years now.
Concerns about their appointments as officers of the PSE stemmed from violations of the SRC.
Under Chapter 9, Sec. 33.2 (h) of the SRC, the exchange is prohibited from appointing a broker not only as president or member of its management team, but also as an officer. The SRC provision specifically instructed that officers should not have been "a member or affiliated with any broker, dealer or member of the exchange for a period of at least 2 years."
To allow Ang and Yu to keep their current posts, the PSE board has formally asked the SEC to exempt them from this SRC provision. In legal parlance, this request is considered an application for an "exemptive relief."
In an interview with reporters on Monday, SEC commissioner Jenny Cueto said they are "inclined to grant" PSE's request when the commission en banc meets to deliberate on it Thursday.
To exempt or not
That the SEC has the power to grant exemptions is no debate.
But corporate law experts like Jose Bernas of the Makati-based Bernas Law Office said this only holds true for exemptions that are provided for and have basis in law.
Sec. 33.2 (c) of the SRC, for instance, provides that the SEC "may adopt rules, regulations or issue an order upon application, exempting" a person and an industry or business group from the prohibition against owning over 5 percent and 20 percent of voting rights of the exchange, respectively.
The SEC actually used this provision to allow the PSE to operate even if stockbrokers own some 45 percent of the bourse—more than double the limit stated under the SRC. The SEC just resolved to slap the PSE with a P500 daily fine until it fully complies with the code's ownership cap. (In a press briefing after PSE's May 9 stockholders meeting, president Francis Lim said they will ask soon ask legislators to relax this cap.)
Bernas noted a person or entity may also claim exemptive relief from rules covering transactions, such as disclosures on purchase of shares or registration of securities. The SRC allows the SEC this discretion as long as the transactions do not, in any way, affect public interest, Bernas said.
However, the issue that involves Ang and Yu is not about mere investment-related transactions.
Bernas said their appointment as officers is controversial because it boils down to their qualifications. He said the SRC gave no room for the SEC to adjust what makes one qualified or not.
"The rule on the qualifications and disqualifications of PSE officers is clear. Since the SRC did not provide an exemption for brokers to become officers, the commission is not empowered to waive such qualifications," he told abs-cbnNEWS.com in an email.
Ang's and Yu's appointments, therefore, were against the securities law and the exemptive relief the PSE was asking could not be applied.
But while the SRC may not allow brokers to sit as officers of the PSE, Ang argued that precedent does.
In a chance interview with reporters on Monday night, Ang admitted that this was not the first time that a broker like him was appointed as management member or officer of the PSE.
Ang cited that Yu has been given exemptive relief for the past few years. He said his predecessor, Francisco Villaroman—who served as corporate secretary of PSE while working for brokerage firm Securities Specialist Inc.—was granted the same.
Much worse, he added, was the case of former Supreme Court justice Jose Vitug who was previously chairman and independent director of PSE. Vitug acted as a legal consultant of a PSE-regulated listed firm Manila Electric Co. during the power distributor's contentious May 2008 stockholders meeting. (Vitug explained then that he was a mere consultant, not an officer of the listed power firm).
For hoping to be granted the same exemption given to those before him, "How can you say that my appointment was conflicted?" Ang remarked.
The case of former PSE president Cayetano Paderanga, however, is instructive.
In 2004, the former economic planning secretary was cited by a group of brokers in the PSE board for possible conflict of interest. The brokers group cited his continued employment as president and chief executive officer of PNOC-Management Development Corp. (PNOC-MDC) and president of CIBI Information Inc.
State-owned real estate firm PNOC-MDC is related to the listed firm Petron Corp. while CIBI is a credit information bureau that gathers business information for the private sector and publishes the top 5,000 companies with the SEC.
Paderanga, who was barely six months into his 2-year term, eventually resigned.
Conflict of interest
The dominance of brokers in terms of ownership of the PSE and the number of seats in the bourse's board and management, time and again, raises the issue of conflict of interest because it casts doubt about the credibility of the corporate watchdog to act in favor of small public investors rather than the brokers.
This was one of the core issues that the SRC was seeking to address when it was passed after the BW Resources scandal drove investors away from the stock market, triggering its massive collapse.
An exhaustive investigation by the PSE's Compliance and Surveillance Division back then concluded that owners of BW Resources and some brokers were manipulating the company's stock price, which skyrocketed to over P100 per share from just less than P1 in about one year. Investigation showed fraudulent matched orders and wash sales in which the seller and buyer were one and the same person.
To eliminate fraud and manipulation in the market and ensure greater protection of investors, the SRC was passed into law in July 2000.
It required that the PSE be made public and majority of its board of directors and management be non-brokers.
More importantly, the SRC granted the PSE the SRO (self-regulatory organization) status.
But what is puzzling, according to Bernas, is that PSE, as a self-regulating body, wants to violate the law by insisting the appointment of broker officials.
"They're strict in their own rules but then they want to violate the qualifications for officers imposed by the law," he said, citing how the exchange is quick to fine listed companies that fail to comply with disclosure rules. For example, PSE has rules that listed companies should disclose some required information to investors through the exchange within just 10 minutes.
The SEC, on the other hand, has been yielding to PSE’s requests for exemptive relief in relation to the appointment of brokers even if it has no rules in place for this yet, noted Bernas.
Due to the lack of rules, the SEC's decisions on the matter have been subjective.
Sadly, Bernas said this precedent would likely go on because "no one is complaining."
In more mature markets, the complaining is usually the role of shareholder activist groups whose main goal is to see to it that the rights and interest of minority shareholders are respected. These shareholder groups police decisions and actions taken by regulators mostly by filing class suits.
Here, however, class suits are almost non-existent since the legal pursuit is costly and could drag for many years.
In the absence of pressure from shareholders, the role of protecting the interest of investors, by default, rests with the SEC, which, in turn, has other concerns, including growing the capital markets.
Bernas said the SEC is caught in an inherent dilemma of balancing promoting investments and protecting the interest of investors.