SEC may bar brokers from independent directorships

The Securities and Exchange Commission (SEC) is planning to disqualify a stockbroker from sitting as an independent director of a corporation affiliated with a company whose shares are being traded by the stockbroker.

The SEC’s Corporation Finance Department said a stockbroker who has been elected as an independent director of a listed corporation should not be allowed to trade shares of other companies that are owned or affiliated with the listed stock to avoid conflict of interest.

Under the Securities Regulation Code, an independent director should not be an officer or a substantial shareholder of a corporation or its related companies. He or she should also not be a relative of any director, officer or substantial shareholder of the corporation.

"The interference with the exercise of independent judgment sought to be prevented by the rule on independent director would be easily circumvented if a stockbroker is allowed to sit as an independent director of another corporation which belongs to the same group considering that both corporations are entities which are controlled by a parent corporation," the CFD said.

According to the CFD, the transfer of material information from one to another is inevitable because of the legal bond that links one subsidiary/affiliate to the other.

Being also privately interested in earning commissions from his activity as a broker, he might make use of his directorship to gain material information from other corporations, the CFD said.

"As an independent director of a subsidiary/affiliate, it is possible for him to obtain material information directly from other corporations owned/controlled by the parent company by reason of his position," the CFD said.

"There is also the possibility of indirectly gaining material information from the other corporations within the group. It is not difficult to imagine that a material information is shared within the group or that a material information on subsidiary/affiliate is passed on by the parent company to the other subsidiary/affiliate or vice-versa during a casual conversation between or while in a formal meeting of the directors and officers," the CFD added.

An outside director is expected to ensure that board members act on a fully informed basis, in good faith with due diligence and care, and in the best interest of the company, the CFD noted.

The proposal is in line with efforts to improve corporate governance by enhancing the independence and effectiveness of boards of directors of listed corporations.

Veteran stockbroker Vivian Yuchengco said she welcomes the SEC’s proposal, pointing out that brokers can’t be independent because they deal in listed shares and may even be the broker of owners of listed corporations.

In the wake of recent corporate scandals, the role of the independent director on a corporate board has received heightened scrutiny.

In an effort to ensure objectivity and independence of the board of directors, the SEC has required all independent directors to submit by Dec. 31, 2006 a certification under oath that they possess all the qualifications set forth in the SRC.

The certification shall also contain an enumeration of the independent director’s affiliations or positions in all organizations, corporate or otherwise, that may directly or indirectly give rise to a conflict of interest. Thereafter, the certification shall be submitted within 30 days from date of election or appointment to the said position or where applicable.