Easton Credit Corp. v. Securities and Exchange Commission

ELEVENTH DIVISION [CA-G.R. SP No. 77974. October 27, 2005.] EASTON CREDIT CORPORATION , petitioner , vs .SECURITIES AND EXCHANGE COMMISSION , respondent . D E C I S I O N DIMAAMPAO , J p : It is a recognized fact that absent some type of governmental regulation in the area of transaction in securities, some opportunistic dealers will defraud the naive and unsophisticated public. For this reason, the Securities and Exchange Commission has been delegated the immense task of supervising all corporations, partnerships or associations, who are grantees of primary franchise, license, or permits issued by the government to operate in the Philippines. Just how far this regulatory authority extends, particularly with the organization and operation of lending investors, is the vortex of controversy in the case at bench . This is a Petition for Prohibition filed by petitioner Easton Credit Corporation seeking to enjoin respondent Securities and Exchange Commission ("SEC") from implementing SEC Memorandum Circular No. 13, Series of 2001 1 ,which provided guidelines for the organization and regulation of lending investors. According to petitioner, the issuance of said circular has no legal basis as there is still no law regulating lending investors. The antecedents that led to the issuance of the subject circular, and ultimately, to the filing of the instant petition follow. With the enactment of the New Central Bank Act 2 ,the regulatory powers of the Bangko Sentral ng Pilipinas (BSP) over the operations of finance corporations without quasi-banking functions have been phased out and transferred to the SEC. 3 This triggered off an inquiry from the SEC to the Department of Justice ("DOJ") centering on the question of jurisdiction over the regulation of lending investors, whose activities encompass "direct lending", a financial activity under the Financing Company Act, but considered by some to be akin to banking activity. On 17 September 2001, then Secretary of Justice Hernando B. Perez issued Opinion No. 46, Series of 2001 4 ,(DOJ Opinion) expressing the view that lending investors which perform the functions of financing companies but do not perform quasi-banking functions fall within the regulatory jurisdiction of the SEC, while lending investors engaged in quasi-banking fall under the regulation of the BSP. The DOJ Opinion sets out relevant legal backdrop which is hereunder reproduced in full: "This refers to your request for a 'definite ruling' on the issue of whether it should be the Bangko Sentral ng Pilipinas (BSP) or the Securities and Exchange Commission (SEC) which should assume jurisdiction to regulate the operation of 'lending investors' (direct lending). The request, it appears, is raised in connection with the interpretation of the provisions of Republic Act No. 5980, also known as the 'Financing Company Act', as further amended by R.A. No. 8556, or the 'Financing Company Act of 1998', specifically Section 3(a) thereof which reads, to wit: 'SEC. 3. Definition of Terms . As used in this Act, the term: (a) Financing Companies hereinafter called companies, are corporations ,except banks, investment houses, saving and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under special laws which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises, by direct lending, or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases ,chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property.' (emphasis supplied) You state that pursuant to Section 130 of R.A. No. 7653 (The New Central Bank Act), the regulatory powers of the BSP over 'non-bank financial intermediaries' without quasi-banking functions had been transferred to the SEC; that there is, however, a doubt on whether the SEC, by virtue of said provision, has been given jurisdiction over lending investors engaged in 'direct lending' and, consequently, authority to issue rules and regulations governing said business activity since there is no law expressly conferring upon the SEC such power; and that you feel that no BSP regulatory power over direct lending was transferred to the SEC because prior to R.A. No. 7653, the BSP exercised merely monitoring not regulatory power. TASCDI You also state that the earlier quoted provision of R.A. 5980, as further amended by R.A. No. 8556, is clear that direct lending is a financial activity 'subject to the provisions of the Financing Company Act and to be regulated by the SEC.' Considering, however, the belief of others that 'direct lending' activity is more of a 'banking' activity, which should be placed under the jurisdiction of the BSP rather than the SEC, and considering also that the General Banking Law of 2000 (R.A. No. 8791) is silent on the matter, you now refer the matter to us for a definite ruling. The New Central Bank Act (R.A. No. 7653), insofar as material reads: 'SEC. 3. Responsibility and Primary Objective . The Bangko Sentral shall provide policy directions in the areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions ,hereafter referred to as quasi-banks, and institutions performing similar functions .' xxx xxx xxx 'SEC. 130. Phase-Out of Regulatory Powers Over the Operations of Finance Corporations and Other Institutions Performing Similar Functions . The Bangko Sentral shall ... phase out its regulatory powers over finance companies without quasi-banking functions and other institutions performing similar functions as provided in existing laws ,the same to be assumed by the Securities and Exchange Commission.' (emphasis ours) Upon the other hand, Republic Act No. 8791 (the General Banking Act of 2000) pertinently provides: 'SEC. 4. Supervisory Powers . The operations and activities of banks shall be subject to supervision of the Bangko Sentral.' xxx xxx xxx ' The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks ,trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision.' 'For purposes of this Act, ' quasi-banks ' shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the 'New Central Bank Act') for purposes of relending or purchasing of receivables and other obligations.' 'SEC. 6. Authority to Engage in Banking and Quasi-Banking . No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral :...' (emphasis supplied) By clear and express provisions of both R.A. No. 7653 and R.A. No. 8791, the supervisory authority/regulatory power of the BSP has been restricted to banks and entities performing quasi-banking functions and institutions performing similar functions, while the supervision and regulatory powers over entities/institutions without quasi-banking functions have been given to the SEC (see Secs. 3 and 130, R.A. No. 7653; Secs. 4 and 6, R.A. No. 8791 [ supra ]). The specific question raised is whether 'lending investors' which are engaged in direct lending are subject to the regulatory jurisdiction of the BSP or the SEC. Our view is that if the lending investor is not engaged in quasi-banking, then it is to be regulated by the SEC, but if it is engaged in quasi-banking, then the BSP is the proper regulatory agency over such lending investor. Quasi-banking is an activity which involves ' the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of the Republic Act No. 7653 (. . . 'New Central Bank Act') for purposes of relending or purchasing of receivables and other obligations ' (Sec. 4, R.A. No. 8791, supra ). The regulatory jurisdiction of the BSP over the 'quasi-banks' or finance companies and non-bank financial institutions engaged in 'quasi-banking' is clearly defined and delineated in both R.A. No. 7653 (New Central Bank Act) and R.A. No. 8791 (General Banking Act of 2000). Section 3 of R.A. No. 7653 ( supra ) expressly provides that the BSP shall 'exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions engaged in quasi-banking functions', while Section 130 of the same Act (also, supra ) expressly provides for the transfer of BSP's regulatory powers over 'finance companies without quasi-banking functions and other institutions performing similar functions' to the SEC. The regulatory jurisdiction of the BSP over quasi-banks is reiterated in Section 4 of R.A. No. 8791 and which provision sub-silencio affirms the regulatory jurisdiction of the SEC over finance companies and other institutions 'without quasi-banking functions'. Thus, when Section 3(a) of R.A. No. 8556 (The Financing Company Act of 1998) defines 'Financing Companies' as 'corporations, except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other similar financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities . . . by direct lending . . . the definition is deemed to include 'finance companies without quasi-banking functions' and to exclude 'finance companies and non-bank financial institutions performing quasi-banking functions' (see also Secs. 3 and 130, R.A. No. 7653 and Sec. 4, R.A. No. 8791). Accordingly, insofar as lending investors perform the functions of a financing company as defined in Section 3(a) and do not perform quasi-banking functions, then such lending investors fall within the regulatory jurisdiction of the SEC. If the lending investor is engaged in quasi-banking, the BSP would have regulatory jurisdiction over its activities. In this connection, it is pertinent to note the provision of Section 4 of R.A. No. 8556 (which amends Section 4 of R.A. No. 5980) which defines the implementing authority of the SEC. It provides: 'SEC. 4. Grant of Authority to Securities and Exchange Commission . The Securities and Exchange Commission is hereby empowered to enforce the provisions of this Act and issue implementing regulations except insofar as the Bangko Sentral may have supervisory authority under the provisions of Republic Act No. 7653 with respect to financing companies licensed to perform quasi-banking functions ,and insofar as the Monetary Board has authority to prescribe financing company rates and charges under Section 5 hereof. (Emphasis supplied) CHcESa Please be guided accordingly." Pursuant to the afore-quoted DOJ Opinion, the SEC issued the herein assailed SEC Memorandum Circular No. 13 ,which, in main, required all registrant corporations which will engage in direct lending activities to comply with the requirements of the Financing Company Act 5 .It further required existing lending investors organized as partnership or single proprietorship to convert into corporations within one (1) year from the effectivity of the circular, and to secure a Certificate of Authority to Operate as Financing Company within the same period. More importantly, the subject circular obligated the converted entities to comply with the required paid-up capital requirement under the Financing Company Act in accordance with the following schedule: Location Minimum Period of Compliance Paid-Up Capital Metro Manila & P10 Million Within three (3) years other 1st class from effectivity of this cities Circular Other Classes/ P5 Million Within two (2) years of cities from effectivity of this Circular Municipalities P2.5 Million Within one (1) year from effectivity of this Circular Memorandum Circular No. 13 further subjected lending investors to reportorial and other requirements for financing companies and required that all securities issued by them to more than nineteen (19) persons to be registered with the SEC, except those which have a quasi-banking license issued by Bangko Sentral ng Pilipinas. On the other hand, if said securities shall be issued to not more than nineteen (19) persons, a disclosure statement will be required. As We stated at the outset, the issuance of Memorandum Circular No. 13 gave rise to the filing of the present petition. Petitioner, a corporation whose primary purpose is to " engage in business as lending investor without however engaging in pawnbroking under PD 114 and financing under RA 5980 ",and whose capital stock amounts only to THREE HUNDRED THOUSAND PESOS (P300,000.00) assails the authority of SEC to issue Memorandum Circular No. 13 ,regulating the business of lending investors. It argues that the SEC went beyond the scope of its authority when it imposed upon lending investors rules and regulations that should be applicable only to financing companies. The petition is impressed with merit . There is no dispute that the SEC has been granted general jurisdiction and right of supervision and control over all corporations under Sec. 3 of P.D. 902-A. 6 However, while We recognize the SEC's power to regulate corporations under its general jurisdiction, We cannot sustain Memorandum Circular No. 13 .We are convinced that the SEC has strayed from the well recognized limits of its power, because (1) there is still no law regulating lending investors; and (2) the Financing Company Act was never meant to apply to lending investors. I While, as above-stated, the SEC has general jurisdiction and power of supervision and control over all corporations, such jurisdiction is not unconfined. Memorandum Circular No. 13 was issued pursuant to its rule-making power. It is settled that for the validity of administrative rules and regulations, it is necessary: (1) That the rules and regulations must have been issued on the authority of law ; (2) That the rules and regulations must be within the scope and purview of the law; and (3) That said rules and regulations must be reasonable. 7 (Emphasis supplied) Thus, to be valid, it is essential that the authority to issue them must be based upon some legislative act, i.e. ,there must be a law authorizing it to issue rules and regulations. 8 Stated differently, the authority to issue it must be derived from an authorizing statute. The apparent defect in Memorandum Circular No. 13 is that its issuance was not derived from an existing law; there is still no law regulating the business of lending investors. This is bolstered by the fact that at present, there are pending bills in the Congress of the Philippines 9 intending to regulate the establishment and operation of lending companies in the Philippines. Manifestly, the provision of law from which SEC derived its authority is Sec. 130 of the New Central Bank Act phasing out all regulatory powers of the Bangko Sentral over finance companies without quasi-banking functions and transferring the same to the SEC. Even the DOJ capitalized on this transfer of regulatory power in its opinion. It cannot escape Our attention, however, that even the SEC expressed doubts as to how far it can exercise jurisdiction over lending companies because prior to the enactment of the New Central Bank Act ,the BSP exercised merely monitoring, not regulatory power. The portion of the DOJ opinion dwelling on this point is hereby reproduced for emphasis: . . . You state that pursuant to Section 130 of R.A. No. 7653 (The New Central Bank Act), the regulatory powers of the BSP over 'non-bank financial intermediaries' without quasi-banking functions had been transferred to the SEC; that there is, however, a doubt on whether the SEC, by virtue of said provision, has been given jurisdiction over lending investors engaged in 'direct lending' and, consequently, authority to issue rules and regulations governing said business activity since there is no law expressly conferring upon the SEC such power; and that you feel that no BSP regulatory power over direct lending was transferred to the SEC because prior to R.A. No. 7653, the BSP exercised merely monitoring not regulatory power ...(Emphasis Supplied) II The requirements of the Financing Company Act were never meant to apply to lending investors. The technical term "lending investor" does not come within the definition of "financing company". aCIHcD Section 3 of R.A. 8556 10 defined financing companies as " corporations, except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property ." Under Section 9 thereof, they have the following powers: Sec. 9. Rights and powers . Financing companies shall have the following powers, in addition to those granted by this Act and other laws: (a) Engage in quasi-banking and money market operations with the prior approval of the Bangko Sentral ng Pilipinas; (b) Engage in trust operations subject to the provisions of the General Banking Act upon prior approval by the Bangko Sentral ng Pilipinas; (c) Issue bonds and other capital instruments subject to pertinent rules and regulations of the Bangko Sentral ng Pilipinas; (d) Rediscount their paper with governmental financial institutions subject to relevant laws, rules and regulations; (e) Participate in special loan or credit programs sponsored by or made available through governmental financial institutions; and (f) Provide foreign currency loans and leases to enterprises who earn foreign currency by exports or other means, subject to existing laws and regulations promulgated by the Bangko Sentral ng Pilipinas. On the other hand, lending investors, prior to the issuance of Memorandum Circular No. 13 , had very limited powers. They cannot engage in financing activities under the Financing Company Act, and they are covered by the 19-lender limit. They grant direct loan from their own funds or from other persons, but not exceeding 19. Relative to this, We find the Explanatory Note in the proposed bill 11 by Senator Ramon Magsaysay (seeking to regulate the establishment and operation of lending companies) enlightening, and is hereunder quoted with favor: Lending investor (LI) or lending company, as others would call it, is a form of an institution which had its beginning in the country in the mid-70s. It emerged to address the needs of individuals left unserved by the more sophisticated form of credit institutions. Lending investors are no different from institutions engaged in micro-finance. Micro-finance, as recognized by the Bangko Sentral ng Pilipinas, is the provision of a broad range of financial services such as deposit, loans, payment (of) services, money transfers and insurance products to the poor and low income households, for their micro-enterprises and small businesses, to enable them to raise their income levels and improve their living standards. xxx xxx xxx Lending institutions, non-bank financial institutions without authority to engage in quasi-banking functions, are covered by BSP regulations in the 19-lender limit, i.e.,LIs cannot accept deposits or placements nor borrow from more than 19 lenders or from the public. .. Further, they are not allowed to undertake financing activities under Republic Act No. 5980 or the "Financing Company Act," pawn broking under Presidential Decree No. 114 and fund management/trust operations under Republic Act No. 337 or the General Banking Act, as amended . While the definition of financing companies includes those engaged in "direct lending",it does not, to Our mind, intend to include lending investors. Finance companies refer to the more sophisticated form of credit institutions. The literal or common meaning of "direct lending" cannot be applied to lending investors because the latter term has a peculiar meaning in our commercial system. In the absence of any qualification or intention to the contrary, the technical, not the general or ordinary meaning of a word used in a statute should be adopted in the construction of the statute. 12 To apply therefore the requirements for financing companies to lending investors is to strain the interpretation of the Financing Company Act , as amended, into its incredulous limits. If Congress had contemplated the inclusion of lending investors in the said Act, the law would have stated so. Under the maxim expression unius est exclusio alteruis ,the mention of one thing implies the exclusion of another. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect. 13 Moreover, lending investors are not institutions to be envisioned. They were already in existence in 1998 when the Financing Company Act was amended. As held in Delos Santos v. Mallare 14 ,the history of the times and state of things when the act was framed must be followed. Conditions of the things at the time of enactment of the law should be considered to determine the legislative intent. 15 It may not be amiss to point out that, as stated earlier, there is a pending bill in the Congress seeking to regulate lending investors. If lending investors were covered within the term financing company, there would have been no need to introduce a new law regulating them. All told, We find that the SEC exceeded its jurisdiction in issuing Memorandum Circular No. 13 because it has no authority to do so. It cannot derive its authority from Section 130 of The New Central Bank Act ,or from Section 4 of the Financing Company Act ,as amended. Legislation may not be enacted by an administrative agency under the guise of its exercise of the power to make rules and regulations by issuing a rule or regulation which is inconsistent or out of harmony with, or which alters, adds to, extends or enlarges, subverts, or impairs, limits, or restricts the act being administered. 16 One last word .Lest We be misunderstood, nothing here should be interpreted to mean that lending investors should go unregulated, or they should have unfair advantage compared to banks and other regulated institutions. Nothing herein should likewise be interpreted as to strip the SEC of its general power to prescribe regulations under its general jurisdiction and power of supervision. Our point here is that there must first be a law empowering it before it can exercise its regulatory supervision over those matters peculiar to lending investors. ICDSca WHEREFORE, the petition is GRANTED and a writ of PROHIBITION is hereby ISSUED directing the Securities and Exchange Commission to desist from implementing Memorandum Circular No. 13, Series of 2001. SO ORDERED. Villarama, Jr. and Sundiam, JJ., concur. Footnotes 1. Rollo ,pp. 31-32. 2. Republic Act 7653. 3. Section 130 of R.A. 7653, which reads: SECTION 130. Phase-out of Regulatory Powers Over the Operations of Finance Corporations and Other Institutions Performing Similar Functions. The Bangko Sentral shall, within a period of five (5) years from the effectivity of this Act, phase out its regulatory powers over finance companies without quasi-banking functions and other institutions performing similar functions as provided in existing laws, the same to be assumed by the Securities and Exchange Commission. 4. Rollo ,pp. 47-50. 5. Republic Act 8556. 6. " Reorganization of the Securities and Exchange Commission with Additional Powers and Placing the Said Agency under the Administrative Supervision of the Office of the President " Sec. 3 thereof reads: "SECTION 3. The Commission (SEC) shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines; ..." Also, the Sec. 3 of the Revised Securities Act (B.P. 178) provides : "SECTION 3. Administrative agency . This Act shall be administered by the Commission (SEC) which shall continue to have the organization, powers, and functions provided by Presidential Decrees Numbered 902-A, 1653, 1758 and 1799 and Executive Order No. 708. The Commission shall, except as otherwise expressly provided, have the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the provisions hereof." See also Section 5 (1) of the Securities Regulation Code (RA 8799) granting the SEC the power of supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government. .." 7. Gonzales, ADMINISTRATIVE LAW, LAW ON PUBLIC OFFICERS AND ELECTION LAW, 1972 ed.,p. 52. 8. Ibid . 9. Among them Senate Bill No. 1180, introduced by Sen. Ramon B. Magsaysay. 10. Amending the Financing Company Act. 11. Senate Bill No. 1180 (now substituted by Senate Bill No. 1949). 12. Agpalo, Statutory Construction 1986, p. 138. 13. Vera v. Fernandez ,89 SCRA 19, 203 (1979). 14. 87 PHIL. 289. 15. Gomez Garcia v. Hipolito, et al ., 2 Phil. 732; United States v. De Guzman ,30 Phil. 416. 16. 1 AM Jur 2d 132.