DOJ Opinion No. 045, s. 2001

DOJ OPINION NO. 045 , s. 2001 September 12, 2001 Chairperson Lilia R. Bautista Securities and Exchange Commission SEC Building, EDSA, Greenhills Mandaluyong City M a d a m : This has reference to the request for opinion on the interpretation of the last sentence of the first paragraph of subsection 72.1, Section 72 of the Securities Regulation Code (RA No. 8799) regarding the power of the Securities and Exchange Commission (SEC) to classify persons, securities and other matters within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and exempt any person, security, transaction, or class or classes of persons, securities or transactions from any or all provisions of the Code. You state that Senator Raul Roco, the principal author of the Code, has opined that the subject provision of the Code would authorize the SEC to grant exemptions to particular persons or group of persons from the directory provisions thereof, as well as from the provisions that do not declare certain acts as unlawful; that in the discussions regarding the SEC's power to provide exemptions, Section 19 of the Code regarding tender offers was referred to; that because the tender offer provisions were intended to protect minority shareholders, the SEC was empowered to provide exemption to give way to public interests; and that it has been the opinion that Section 2 of the Code, providing the Declaration of Policy, is the standard or guide in the exercise of the power to provide exemptions from the provisions of the Code. In the light of the above premises, and in the absence of a specific statement of the legal question involved, we take it that opinion is requested on the extent of the power of the SEC to promulgate rules and regulations classifying persons, securities and other matters within its jurisdiction, prescribing different requirements for different classes of persons, securities, or matters, and exempting any person, security, transaction, or class or classes of persons, securities or transactions from any or all provisions of the Code, or specifically, on whether the last sentence of subsection 72.1, Section 72 limits the phrase "any or all provisions" to directory provisions of the Code such that by rule or order, a person, security, transaction or class or classes of persons, securities or transactions may be exempted by the SEC from the directory provisions of the Code only. Although the Secretary of Justice, as a matter of established policy, does not render opinion on any issue that has been passed upon by other government officials or officers, 1 this Department is inclined to render the requested opinion in view of the importance of the subject matter involved. Section 72 of the Code, insofar as pertinent, reads: SECTION 72. Rules and Regulations ; Effectivity . 72.1. This Code shall be self-executory. To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate, including rules and regulations defining accounting, technical and trade terms used in this Code, and prescribing the form and forms in which information required in registration statements, applications, and reports to the Commission shall be set forth. For purposes of its rules and regulations, the Commission may classify persons, securities and other matters within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, security, transaction or class or classes of persons, securities or transactions, from any or all provisions of this Code . xxx xxx xxx (emphasis supplied) The above-quoted subsection authorizes the SEC, through its power to promulgate rules and regulations, to classify persons, securities and other matters within its jurisdiction, prescribe different requirements for different classes of persons, securities or matters, and conditionally or unconditionally, exempt any person, security, transaction or class or classes of persons, securities or transactions, from "any or all provisions" of the Code. It does not limit the phrase "any or all provisions," to the directory provisions of the Code. Rather, it refers to "any or all provisions," without any distinction or qualification whatsoever, from which exemptions may be provided. Where the law is free from ambiguity, qualifications not contemplated may not be engrafted into it. 2 A meaning that does not appear nor is intended or reflected in the very language of the statute cannot be placed therein by construction. 3 Thus, such provision of the Code should not be interpreted to limit the exemption to the directory provisions of the Code only, but should be construed to include exemptions from its mandatory and prohibitory provisions. In granting to the SEC the foregoing powers, the legislature has apparently recognized that it is not in a position to provide all the detailed rules, regulations and exemption in regulating securities transactions, and that it is a practical necessity to delegate to the SEC, as the most suitable and qualified government agency, the power to make implementing regulations and to grant exemptions in order to carry the Code into effect in the face of ever-changing conditions and the highly complicated and technical field of securities regulation. Be that as it may, as an express delegation of legislative power by Congress, which is understood to mean the power to fill in the details in the implementation of the law, but not the power to make the law, 4 the rule-making power, including the power to grant exemptions, under Section 72.1 must be subject to standards set by law for the SEC's guidance. It has been ruled that to constitute a valid delegation of legislative power, the delegation has to pass the completeness and sufficiency of standard tests. The Supreme Court, in the case of Pelaez vs . Auditor General , held: DSAEIT Although Congress may delegate to another branch of the Government the power to fill in the details in the execution, enforcement or administration of a law, it is essential, to forestall a violation of the principle of separation of powers, that said law: (a) be complete in itself it must set forth therein the policy to be executed, carried out or implemented by the delegate and (b) fix a standard the limits of which are sufficiently determinate or determinable to which the delegate must conform in the performance of his functions. Indeed, without a statutory declaration of policy, the delegate would in effect, make or formulate such policy, which is the essence of every law; and without the aforementioned standard, there would be no means to determine, with reasonable certainty, whether the delegate has acted within or beyond the scope of his authority. Hence, he could thereby arrogate upon himself the power, not only to make the law, but, also and this is worse to unmake it, by adopting measures inconsistent with the end sought to be attained by the Act of Congress, thus nullifying the principle of separation of powers and the system of checks and balances, and, consequently, undermining the very foundation of our Republican system. 5 There are, therefore, two accepted tests to determine whether or not there is a valid delegation of legislative power, namely, the completeness test and the sufficient standard test. Under the completeness test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate the only thing he will have to do is to enforce it. Under the sufficient standard test, there must be adequate guidelines or limitations in the law to map out the boundaries of the delegate's authority and prevent the delegation from running riot. Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative. 6 Assuming that the Code satisfies the completeness and sufficient standard tests, the SEC, in the exercise of the authority to promulgate the above-mentioned rules, has to ensure that the rules conform to, and implement, the policy enunciated in Section 2 thereof which reads: SECTION 2. Declaration of State Policy . The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortion in the free market. To achieve these ends, the Securities Regulation Code is hereby enacted. There are other provisions that expressly provide for the SEC's powers to exempt or issue special rules, e . g .,. a) Sec. 9.2 which states that the SEC may add to the list of exempt securities "if it finds that the enforcement of [the SRC] with respect to such securities is not necessary in the public interest and for the protection of investors"; b) Sec. 10.2 which provides that the SEC may exempt other transactions from registration "if it finds that the requirements of registration under [the SRC] is not necessary in the public interest or for the protection of investors such as by reason of the small amount involved or the limited character of the public offering"; c) Sec. 33.2 (b) which provides that the Commission may adopt rules, regulations or issue an order, upon application, exempting an Exchange organized as a stock corporation and owned and controlled by another juridical person from the requirement that the applicant should be engaged solely in the business of operating an exchange; d) Sec. 33.2 (c) which provides that the Commission may adopt rules, regulations or issue an order, upon application, exempting an applicant Exchange that is organized as a stock corporation from the prohibition that no person may beneficially own or control, directly or indirectly, more than five percent (5%) of the voting rights of the Exchange and no industry or business group may beneficially own or control, directly or indirectly, more than twenty percent (20%) of the voting rights of the Exchange, where it finds that such ownership or control will not negatively impact on the exchange's ability to effectively operate in the public interest; e) Sec. 28.3 which provides that the SEC may exempt any broker, dealer, salesman or associated person from registration with the SEC "as it deems consistent with the public interest and the protection of investors"; and f) Sec. 34.1 which provides that it shall be unlawful for a broker to effect a transaction for its own account, except for certain enumerated transactions and "any other transaction of a similar nature as may be defined by the Commission". Rules and regulations are products of subordinate legislation. If valid, they have the force and effect of a law. To be valid, they must be germane to the objects and purposes of the law, conform to the standards that the law prescribes, must be reasonable, and must be related solely to carrying into effect the general provisions of the law. Implementing rules and regulations issued by an administrative agency cannot add nor detract from the provisions of law, which it is charged to implement. The administrative agency's rule-making power cannot be extended to amending or expanding the statutory requirements or to embrace matters not covered by the statute. 7 Administrative regulations adopted under legislative authority by a particular department must be in harmony with the provisions of the law they are intended to carry into effect. They cannot widen its scope. An administrative agency cannot amend an act of Congress. 8 These cardinal principles should serve as guide in the promulgation by the SEC of the rules and regulations contemplated under Section 72.1 of the Code and other relevant provisions. Insofar as the rules envisioned may provide for classification of matters within the SEC's jurisdiction, prescription of different requirements for different classes of persons, securities, or matters, and exemption of any person, security, transaction, or class or classes of persons, securities or transactions from any or all provisions of the Code, the power to promulgate such rules must be exercised with extreme caution and with due regard to the equal protection clause 9 so as to keep them away from challenge of unconstitutionality or invalidity for being violative of the equal protection guaranty. A classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) it is germane to the purpose of the law; (3) it applies not only to present conditions but also to future conditions which are substantially identical to those of the present; and (4) it applies only to those who belong to the same class. 10 Unless these requirements are satisfied, the rules are liable to be struck down on the ground that they violate the equal protection clause of the Constitution. All told, the exemptive powers given to the SEC under Sec. 72.1 is the legislature's recognition of the complexity and ever-changing nature of the capital markets and the impossibility of foreseeing all possible situations and contingencies that can be addressed in advance, necessitating delegation of this function to the SEC as the most suitable and qualified government agency to exercise them. To carry out this intent of the legislature, the SEC, subject to the standards mentioned above, should have sufficient flexibility in exercising such powers to issue rules and regulations providing for exemptions, classifications, definitions, as well as to rescind or amend said rules and regulations as may be required from time to time. Please be guided accordingly. SAHIDc Very truly yours, (SGD.) HERNANDO B. PEREZ Secretary Footnotes 1. See Secretary of Justice Opinion No. 9, current series, citing Opinion No. 40, series of 1994, and No. 12, series of 1996. 2. Ramos vs . Court of Appeals , 108 SCRA 728 (1981). 3. Manikan vs . Tanodbayan , 127 SCRA 724 (1984). 4. Pelaez vs . Auditor General [ infra ]. 5. 15 SCRA 569, 576-577 (1965). 6. Tatad vs . Secretary of the Department of Energy , 281 SCRA 330, 351 (1997), citing case. 7. Shell Philippines, Inc . vs . Central Bank of the Philippines , 162 SCRA 628, 633-634 (1988); Cebu Oxygen & Acetylene Co ., Inc . vs . Drilon , 176 SCRA 24, 29 (1989). 8. Boie-Takeda Chemicals, Inc . vs . De la Serna , 228 SCRA 329, 340 (1993). 9. Section 1, Article III, 1987 Philippine Constitution. 10. Chua vs . Civil Service Commission , 206 SCRA 65, 76 (1992), citing case; Philippine Association of Service Exporters, Inc . vs . Drilon , 163 SCRA 386, 392 (1988), citing case.