A consultant of the Securities and Exchange Commission (SEC) said over the weekend that to ensure the protection of investors, outsiders or non-broker dealers should outnumber brokers/dealers in the composition of the 15-man board of directors of the Philippine Stock Exchange (PSE).
Specifically, there should be eight outsiders or non-broker dealers, just six broker/dealers and an exchange president, said the United States Agency for International Development-accredited Accelerating Growth Investment and Liberalization with Equity (AGILE).
AGILE, which has given inputs into the recently Congress-approved Revised Securities Act 2000 and came up with a number of recommendations for the governance of the PSE, added that of the six brokers who hold board positions, at least two must be brokers whose primary trading is for customer accounts or 70 percent of orders must be customer orders.
AGILE said that to become qualified board members, nominees should be persons of moral integrity and economic solvency, and have established a reputation in financial and commercial, matters, experience and professional knowledge in financial, commercial and stock transaction matters, and in case of brokers, must be part of a recognized firm in good standing not subject to sanctions for failure to abide by stock exchange rules.
The consultant said that the current makeup of the PSE board is overwhelmingly in favor of the brokers and its study indicates it is not even in favor of brokers in general, but "rather favors the smaller brokers."
"This uneven distribution of control prevents both listed companies and investors from having reasonable representation. Rules and decisions reached by the Board are not influenced by established world practices. This is evidenced by the Board's failure to fully activate its Securities and Clearing Corp. of the Philippines, (clearing house of all traded stocks), which would insure and secure the settlement of trades," AGILE noted.
AGILE said the present exchange structure does not protect the interests of listed firms or investors. It cited as examples transactions such as the allocation in the initial public offering (IPO) wherein brokers/dealers are allowed to buy 60 percent of an IPO.
"The rule calls for brokers to give customer orders priority but this only protects their immediate customers and does not protect other brokers' customers who may wish to subscribe to the new issue."
Also, the special block rule that allows sales to take place off the exchange, ignores existing bids or offers which should take precedence. It also allows prints above or below the existing offer or bid.
AGILE said the "off board trading" also ignores the first and best bid or offer at the exchange and allows traders to create their own market.
It noted that there is no "trade through" which if established, would prevent any trade from taking place without first satisfying the existing bid or offers.
AGILE recommended that the present rules of the exchange be assessed by a committee whose primary purpose is to organize the exchange rules to ensure all investors' trading rights are equally represented, with an insurance that customer orders always take precedence over those of brokers.
In the area of rules and enforcement, AGILE recommended the following: Stocks that no longer meet original listing requirements should be delisted; backdoor listings should be stopped, a proposed listing is qualified or it cannot be traded on the main board; new issues should be offered to non-broker/dealers first, only if they are not fully subscribed to should brokers be allowed to participate and the special block rule should be cancelled because it gives certain large customers advantages over smaller investors.-- Rocel Felix