PSE mulls creation of integrity board

The Philippine Stock Exchange (PSE) could set up an integrity board that would ensure the objectivity of audits conducted by its trading watchdog, the Compliance and Surveillance Group (CSG).

According to Securities and Exchange Commission (SEC) chairman Lilia Bautista, they may no longer require the PSE to spin off the CSG into a separate corporation but instead, merely require the exchange to create an integrity board that that would ensure the CSG’s independence.

Bautista said the SEC and PSE are expected to sign an agreement with respect to the creation of an integrity board.

The SEC has earlier directed the PSE to submit interim measures to ensure that the CSG is not subordinated or otherwise controlled in its activities by the PSE board or management.

The directive came after the PSE board of directors decided to retain the CSG within the PSE organization despite calls for the creation of a separate company that will handle the examination and investigation of trading participants.

The establishment of a separate corporation, the PSE said, would entail additional costs.

But the SEC’s Markets and Exchanges Department head Jose P. Aquino pointed out that the interim measures would be discarded once the permanent measures are decided upon based on the PSE’s review of the current structure and operations of the CSG.

The SEC said there was a need to ensure the independence of the CSG in the performance of its functions due to criticisms that some PSE officials and directors have been wielding their authority over the CSG.

The CSG is tasked with monitoring market conditions and trading activity to detect violations of the securities law and exchange rules. It also monitors compliance by listed companies with continuing listing obligations.

The SEC said the CSG shall be responsible for carrying out the exchange’s disciplinary role.

Apart from the establishment of an integrity board, the PSE shall put in place a risk management framework and a system for compliance with risk-based capital adequacy requirements.

To further safeguard the interest of the investing public, the PSE is drafting new rules governing the suspension and take-over of erring broker firms.

The revised rules seek to update the old Compliance and Surveillance rules in light of past experiences and present requirements of the exchange and to make them conform to the provisions of the Securities Regulation Code.

The rules set out the procedures for the inspection, examination and investigation of trading participants and the disposition of cases by the CSG.

In order to arrest the further commission of violations of the securities law and prevent financial instability among brokers to avoid damage to the capital market, the CSG may summarily suspend or impose limitations upon the erring trading participants without need of approval from the PSE’s governance committee, provided, however, that the latter shall within five trading days from implementation of such order, convene to review, modify or reverse the CSG’s action.

Before summarily suspending, the CSG may grant a period within which the erring broker shall rectify or remedy the violations of the securities law or exchange rules.

Failure by the governance committee to resolve the summary order shall be deemed an automatic confirmation of the action taken by the CSG.