SEC chairman Lilia R. Bautista said the Commission may, on its own initiative, conduct periodic or parallel examinations of PSE member-brokers to validate the exchange’s findings.
Bautista issued this statement in response to newly-elected PSE president Francis Lim’s proposal to limit SEC’s interference to cases where grave abuse of discretion have been committed. As an SRO, the PSE has the autonomy to investigate and discipline its member-brokers. The SEC serves as the oversight body over the PSE.
"If they have a good compliance department which could monitor all their broker-members then there will be no problem with us. We have been receiving complaints that some brokers have been wielding their authority over the Compliance Department. If they’re doing their job properly then there is no reason for us to review their findings," Bautista said.
This is primarily the reason why SEC wants the PSE to establish an independent audit, compliance and surveillance office within a registered exchange or as an entity separate and distinct from the PSE to ensure the objectivity of audits.
The Commission wants the CSG to be independent from the exchange to avoid possible conflict of interest between the investigating group and the exchange’s member brokers, who are part owners of the exchange
Nevertheless, Bautista said the Commission welcomes the appointment of Lim, saying he was highly qualified. "He has very good qualifications. He knows the securities law well and he is fair" she said.
The SEC and PSE recently signed a memorandum of understanding on the functions of the exchange as an SRO. The MOU would set forth the commitments of the SEC and PSE regarding the "arrangements and procedures for establishing a risk management framework, a system for compliance with risk-based capital adequacy requirements, and an independent audit, compliance and surveillance office regulating the relevant market participants."
Under the memorandum, the PSE will review the current structure and operation of the compliance and surveillance group (CSG) and the disclosure department to ensure their independence in carrying out the exchange’s responsibilities as an SRO. The deadline for the review is on July 15.
The PSE‘s review will include the proposed source of funding, personnel structure, surveillance systems and procedures, and other information that demonstrates the CSG’s and the disclosure department’s capacity to perform independent, sustainable and effective regulation of trading participants and issuers.
The PSE is also required to establish an interim system to monitor trading participants‚ compliance with existing minimum capital requirements, until the SEC implements a risk-based capital adequacy framework.
The SEC will evaluate the PSE review and inform it on or before August 30 whether the existing structure or the proposed CSG and the disclosure department restructuring complies with the src provision.
Should the SEC determine that the existing structure or proposed restructuring within the exchange "cannot feasibly comply with the independence requirement of the law, the parties shall expand their study with the view of identifying other structural options that would achieve the required independence for the audit, compliance and surveillance office sought by law.