SEC to review PSE decisions on 20 firms

The Securities and Exchange Commission (SEC) will review the decisions of the Philippine Stock Exchange (PSE) on 20 corporate cases investigated for possible insider trading to determine whether the local bourse is fulfilling its functions as a self-regulatory organization (SRO).

The SEC will ask the PSE to submit detailed individual reports on the results and findings of the latter’s investigations to determine possible institutional inadequacies and system flaws of the exchange as an SRO.

"This is part of the agency’s regular monitoring of the PSE’s compliance with SRO rules," a SEC official said, adding that there is nothing irregular in the termination of the investigations conducted by the exchange on insider trading.

"We will look into the reasons cited by the PSE for terminating the investigations. They may be right. Such reports will enable us to thoroughly determine if the PSE is able to enforce compliance with the Securities Regulation Code (SRC)," the SEC official said.

As SRO, the PSE is required to investigate suspected violations of the securities law based on complaints, examination/audit findings or unusual trading activities and take disciplinary action, where appropriate, pursuant to SRO rules. It must promptly notify the SEC of the findings of its investigations.

The SEC may, if in its opinion such action is necessary for the protection of investors, suspend or take over the operations of the PSE if it finds out that the exchange has willfully violated or is unable to comply with any provision of the securities law or SRO rules.

The SEC official said although the companies investigated may have been cleared by the PSE, the SEC will reopen the cases for possible criminal liabilities.

All results of probes conducted by the PSE are reviewed by the PSE’s Business Conduct and Ethics Committee (BCC), a five-member team that is tasked to hear and adjudicate complaints against member brokers. The BCC then recommends action on the case to the board, which has the final say on investigations.

Under the SRO system, the SEC does not get a first crack at investigating allegations of price manipulation and insider trading. The corporate watchdog merely exercises oversight functions over the PSE and as such, PSE findings are "automatically" subject to the Commission’s review.

Insider trading is the selling or buying of a security by corporate officers and other parties with knowledge of a fact of special significance which was not made available to the public. Material information include those related to a corporation’s financial condition, prospects, development projects, contracts entered into in the ordinary course of business or otherwise.

The SRC considers a fact of special significance if it can affect the market price of a stock to a significant extent or if a reasonable person would consider it especially important in determining the course of his action. Thus, material information may not be considered especially significant unless it is accompanied by a significant movement in the market price of the shares of the company involved.

The same official said insider trading will always be around because officers or directors of listed firms can easily go around the policy by using "dummies" or by simply trading through brokerage houses other than their own.

Temporary insiders include underwriters, lawyers, accountants and consultants who obtain confidential information about the firm due to a legal relationship of trust and confidence in the conduct of ordinary business. When an insider or temporary insider becomes a "tipper" by providing non-public information or "buy" or "sell" recommendations to someone – called a "tippee" – who then trades on the information or passes it on to others who do so, both tipper and tippee will be held liable.

All results of probes conducted by the PSE have to be reviewed by the Business Conduct Committee (BCC). The BCC, composed of five member brokers, is tasked to hear and adjudicate complaints against member brokers. The BCC then recommends action on the case to the board, which has the final say on investigations.

"Our concern is that having vested the PSE with SRO status, the management under this procedure or system is mandated to maintain a very high degree of independence, free from the interference of members and board of governors, when the board of governors can use their influence over the professional management of the exchange in redirecting the course of the investigations," the official said.

The PSE management during the time of former PSE president Eduardo de los Angeles opted to inform the public about penalized member brokers and listed companies, and the corresponding fines imposed so that the investing public "will know that the PSE is doing something" about violations taking place in the market.

The PSE board then was hesitant about publicizing the information as this may be unfair to the listed companies and member brokers whose mistakes were exposed to the public despite their compliance with PSE procedures on penalties.

An analyst at a local brokerage house, however, said that the SEC should make sure that the PSE dutifully performs its functions as a SRO and enforces sanctions on erring individuals and corporations. "Regulators must pursue insider trading cases with determination no matter who is involved. The problem of obtaining prima facie evidence of wrongdoing will be made easier by the ability to disregard the influence exercised by personalities involved," he said.