Imposing the Penalty of PhP1 Million on PSE/PSE-NOMELEC for Its Violation of Section 40.2 of the SRC

May 26, 2011 SEC-MRD OPINION Philippine Stock Exchange, Inc. PSE Plaza Ayala Avenue Makati City Fax: 891-9004 Attention: PSE-NOMELEC Mr. Remy T. Tigulo, Chairman Atty. Daisy P. Arce Ms. Shirley Y. Bangayan Atty. Monico V. Jacob Mr. Jose Luis S. Javier Independent Director Member Atty. Cornelio T. Peralta Independent Director Member Atty. Aissa V. Encarnacion Non Voting Member cc: PSE Board of Directors Gentlemen : On 28 April 2011, the Commission directed PSE-NOMELEC, its members, collectively and individually, to show cause why they should not be sanctioned for not complying with Rule 1 and Rule 2 (1) of the 2011 NOMELEC Rules, pursuant to Section 40.2 of the Securities Regulation Code (SRC). The pertinent portion of Rule 1 of NOMELEC Rules provides that: "(a) Issuer companies are juridical entities offering securities for sale to investors, who are listed in the PSE, are not suspended from listing and remain in good standing. An issuer company may be considered in good standing, as certified by the concerned departments of the PSE and SEC, under the following circumstances, as of date of nomination: (1) It has been compliant with PSE and SEC Rules for the preceding calendar year; (2) It has no outstanding obligations to the PSE; and (3) It has paid its dues." On the other hand, Rule 2 (1) of the NOMELEC Rules reads: "1. He must be a senior officer or a director of a brokerage firm/trading participant that has a valid license issued by the SEC as a broker dealer in securities and has been compliant with the PSE and SEC Rules for the preceding calendar year and has no outstanding obligations with PSE." The show cause letter was issued in view of the findings by SEC-MRD as follows: DAHSaT "1. The PSE-NOMELEC concluded its evaluation of candidates last 1 April 2011 and has released the official candidates last 13 April 2011, without the certifications required under the NOMELEC Rules. PSE-NOMELEC's request to PSE-IRD to issue certification of good standing/compliance for San Miguel Corporation and Philippine Long Distance Telephone Company was only made on 12 April 2011 and received by PSE-IRD on 13 April 2011, or long after the PSE-NOMELEC concluded its evaluation of candidates. The PSE-IRD certifications for SMC and PLDT were issued on 14 April 2011 which is also after the PSE-NOMELEC concluded its evaluation of candidates. PSE-NOMELEC's request to PSE-MRD to issue certification of compliance for broker-dealers was only made on 12 April 2011 and received by PSE-MRD on 13 April 2011, or long after the PSE-NOMELEC concluded its evaluation of candidates. PSE-MRD certifications for broker-dealers were issued on 27 April 2011 which is also long after the PSE-NOMELEC concluded its evaluation of candidates. Similarly, PSE-NOMELEC's request to SEC-CRMD for certification/clearance for broker-dealers was made only on 12 April 2011, or long after the PSE-NOMELEC concluded its evaluation of candidates. However, SEC-CRMD certification as to the broker-dealers "registration" was issued only on 20 April 2011, which is also long after the PSE-NOMELEC concluded its evaluation of candidates. The SEC-CRMD certification advised PSE-NOMELEC to directly coordinate with SEC-MRD for the certification on broker-dealers "compliance" with SEC rules because the SEC-CRMD certification pertains only to registration. To date, the SEC-MRD certification as to broker-dealers "compliance" with SEC rules has not yet been issued. 2. The PSE-NOMELEC ignored the violations of firms committed in the preceding year as indicated in the certifications, contrary to the express provision of the NOMELEC Rules. The certifications indicate that San Miguel Corporation, Venture Securities, Inc., The First Resources Management & Securities Corp., Summit Securities, Inc., RTG & Company, Inc., Lucky Securities, Inc., IGC Securities, Inc., and Asia Pacific Capital Equities & Securities Corporation violated various provisions of the PSE Amended Market Regulation Rules as well as SRC rules. Yet, the PSE-NOMELEC declared the candidates qualified. Moreover, the PSE-NOMELEC has no basis to declare that the subject firms have been compliant with the SEC rules for the preceding year, as required by the rules, since the PSE-NOMELEC has yet to secure the certification from SEC-MRD." On 9 May 2011, the Commission received the response of PSE-NOMELEC which reads: "Contrary to the findings of the Honorable Commission, the Nomelec had all the required documents and certifications upon its evaluation of candidates for the 2011 annual stockholders' meeting of the PSE. Rule 9 of the 2011 Nomelec Rules provides for the documents to be submitted to the Nomelec. Specifically, Nomelec required the following with respect to certificates: aSEHDA e) For Brokers director Candidates, Certificate from the PSE-MRD that the brokerage firm represented by the candidates has a valid license and has been compliant with the PSE and SEC rules and has no outstanding obligations with PSE; f) For Non-Broker Director Candidates representing Issuers, Certificate of Good Standing issued by the PSE and the SEC pursuant to Rule 1 (a) hereof; All the candidates submitted all the required documents on 24 March 2011, the deadline set by Nomelec. Upon evaluation, the Nomelec evaluated the candidates based on these requirements, including said certifications. . . . For non-brokers candidates, Rule 1 (a) of the Nomelec Rules provides that an issuer company may be considered in good standing, as certified by the concerned departments of the PSE and SEC, under the following circumstances, as of date of nomination: (1) It has been compliant with the PSE and SEC rules for the preceding calendar year; (2) It has no outstanding obligations to the PSE; and, (3) It has paid its dues. Hence, the Nomelec considered the submitted certifications sufficient to comply with the requirements of Nomelec. Said provision clearly states that a certificate of good standing already signifies that the issuer has been compliant with the PSE and SEC rules for the preceding year, that it has no outstanding obligations to the PSE, and that it has paid its dues. Notwithstanding such, the Nomelec, pursuant to the letter dated 14 April 2011 of the Honorable Commission, wrote the Corporation Finance Department of the SEC to request for a certification as you have required. In its letter dated 19 April 2011, the Corporate Finance Department through its Acting Director, Justina Callangan, stated that the certification of good standing issued by the Corporation Registration and Monitoring Department of the SEC should already serve our purpose. This confirms the sufficiency of the Nomelec Rules and the implementation of its rules by the Nomelec. For broker candidates, the required certifications were all submitted to Nomelec and were considered during its evaluation of candidates. The Nomelec relied on the certificates issued and found them sufficient to have qualified the broker candidates. Nomelec, in its meeting last 10 March 2010, determined that a certification issued by the PSE MRD that a broker has a valid license and is currently in operation is sufficient proof that the broker has complied with the PSE and SEC rules for the preceding year and therefore qualifies as a candidate under the Nomelec rules. In its evaluation of candidates, the Nomelec relied on such fact cognizant that violations in the preceding year are all taken into consideration in the grant by the SEC of the license for the current year. This Nomelec decision was conveyed to the honorable Commission last year. STaCIA The Nomelec was not informed of any objection or a different interpretation from the Honorable Commission until last 26 April 2011, long after the 2011 Nomelec rules were submitted to the Honorable Commission for approval and long after NOMELEC's evaluation of candidates. In fact, when the Honorable Commission gave its comments on the 2011 Nomelec Rules, this was not one of those raised by the Commission, nor were there suggested amendments on the certifications required under Rule 9. Despite this, however, the Nomelec requested for certifications from the PSE Market Regulation Division as specified in your letter dated 14 April 2011. The Nomelec considered these certifications anew along with the certification issued by Atty. Benito Cataran, of the SEC CRMD. The Nomelec saw no reason to change its position and re-confirmed that the broker candidates are qualified under the Nomelec Rules." The issue is whether or not PSE-NOMELEC complied with its own rules as required by Section 40.2 of the SRC. Based on the review of the documents submitted and foregoing explanation, PSE-NOMELEC violated its own rules contrary to the mandate of the SRC. The Commission noted that Rule 1 and Rule 2 (1) of the 2011 NOMELEC Rules require that issuer companies and brokers must be compliant with PSE and SEC rules for the preceding calendar year (2010) as certified by the concerned departments of PSE and SEC. As regards brokers, the fact that a broker has a license and is operating is different from broker's record of compliance with the PSE and SEC rules for 2010. The reason is that violations of PSE and SEC rules may have been committed after the issuance of the license, and not all violations may result in the suspension or revocation of license. So, a broker may have violated some rules and sanctioned by PSE and/or SEC and yet it may remain a licensed broker. Having a license is one thing, not having complied with the rules is another. Records show that many brokerage companies violated or were not compliant with PSE and SEC rules in 2010, but they remain licensed brokers. The PSE-MRD certifications indicate that broker X "has been admitted and is currently authorized to operate as a PSE trading participant; has no outstanding liabilities as of December 31, 2010". The certifications further state that "broker X was found to be compliant with the provisions of SRC and IRR as a result of the 2010 annual audit," EXCEPT for the following VIOLATIONS (enumerated). It is incredulous for PSE-NOMELEC to accept only the first portion of the certifications that "broker X was found compliant", and ignore the latter part stating that "broker X has the following violations". Now, even assuming that PSE-NOMELEC is correct in declaring the brokers as compliant with PSE rules, PSE-NOMELEC has no basis to declare that the brokers were compliant with SEC rules in 2010. The certification of SEC Company Registration & Monitoring Department (CRMD) simply provides the PSE-NOMELEC "the list of licensed broker-dealers in securities for the year 2011". Significantly, in a letter dated 20 April 2011, the SEC-CRMD Director even advised PSE-NOMELEC "to directly coordinate with SEC Market Regulation Department (SEC-MRD) for the certification on the matter of compliance of broker-dealers". PSE-NOMELEC could have corrected itself. But PSE-NOMELEC did not ask SEC-MRD for certificate of compliance of brokers with SEC rules for 2010. IHaECA How could then PSE-NOMELEC justify its findings that brokers were compliant with SEC rules in 2010? The NOMELEC rules expressly state that the proof of compliance must be supported by "certification from the concerned department of SEC". As regards brokers, it is the SEC-MRD which is the proper office to issue such certification and this was made clear by SEC-CRMD to PSE-NOMELEC. But then again, PSE-NOMELEC never asked from SEC-MRD the requisite certification for brokers. It is precisely because of the misapplication of the express provision of the NOMELEC rules that SEC-MRD has called the attention of PSE-NOMELEC on the reading, understanding and application of the subject provision. After all, the PSE-NOMELEC has time to reconsider its action before the May 14 elections. Clearly, PSE-NOMELEC did not conduct diligent screening of the nominees for brokers, by declaring candidates qualified despite absence of SEC-MRD certificate of compliance for 2010. In so doing, the PSE-NOMELEC violated its own rules and SEC rules which constitutes violation of Section 40.2 of the SRC. It is worth stressing that on 30 April 2009, the Commission already warned PSE-NOMELEC and enjoined it to be more circumspect in the performance of its duties in future elections. This was after the Commission noted lapses on the part PSE-NOMELEC in the evaluation of PSE candidates during the 2009 election such as absence of clearances for SEC Corporation Finance Department and PSE Market Regulation Division at the time of evaluation. In view of the foregoing, the Commission in its meeting held on 19 May 2011 adopted the following resolution: "SEC RES. NO. 226, s. of 2011 RESOLVED, To IMPOSE on PSE/PSE-NOMELEC the penalty of PhP1 Million for its violation of Section 40.2 of the SRC in not complying with its own rules in the evaluation of candidates for the election of directors of the Exchange held on 14 May 2011." The PSE/PSE-NOMELEC is directed to pay the said penalty to the Commission within five (5) days from receipt of this order. Very truly yours, (SGD.) JOSE P. AQUINO Director