DOJ affirms jurisdiction of SEC over lending investors

The Department of Justice (DOJ) has affirmed the regulatory jurisdiction of the Securities and Exchange Commission (SEC) over lending investors (LIs), in turn putting in jeopardy the registration of new LIs at the Department of Trade and Industry (DTI).

In a four-page opinion, the DOH said LIs fall under the purview of the SEC if they are not engaged in quasi-banking, an activity which involves the borrowing of funds for relending or purchasing of receivables and other obligations from not less than 19 entities.

It added that LIs that also act as financing companies and do not perform quasi-banking functions would also be under the supervision of the SEC instead of the Bangko Sentral ng Pilipinas.

Financing companies are those primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises by direct lending; discounting or factoring commercial papers or accounts receivables; buying and selling contracts, leases, chattel mortgages; or by financial leasing.

With the DOJ concurrence, the SEC will have to issue another circular that puts more teeth on the crackdown against LIs, particularly the small, fly-by night operators that prey on the unsuspecting public.

Last July 12, the SEC ordered a one-year moratorium on the registration of new LIs and has instead encouraged them to convert into financing companies, whose activities are more tightly regulated by the SEC.

In contrast, the SEC’s control over LIs extend only to the monitoring and listing of reportorial requirements such as information sheet and financial statements. On top of that, there is no minimum capitalization required to register, leaving the business a widely unregulated activity, hence posing greater risk to the investing public.

Aside from their exemption from the minimum capital rule, the SEC said LIs tend to borrow from more entities than they are allowed to (at a maximum of 19), which the SEC said leads to an overexposure that oftentimes result in the companies’ collapse at the expense of its clients.

The SEC cited as an example the case of Pacific Lenders Inc., a Cebu-based lending investor now facing criminal suit for its failure to pay back some 300 investors around P83.9 million in investments.

At present, there are 5,061 lending corporations and partnerships registered with the SEC. However, a significant number equal or even higher than that from the SEC are registered as single proprietorship with the DTI which has not imposed a similar moratorium on new registrations.

But since the DOJ opinion did not explicitly state the jurisdiction of the SEC over LIs registered as single proprietorships under the DTI, SEC Chairman Lilia Bautista said they would also have to seek the DTI’s concurrence in imposing a similar halt for new LIs to avoid the possible circumvention in their registration from the SEC to the DTI.