SEC to conduct more on-site audits

The Securities and Exchange Commission (SEC) will conduct more on-site audits and investigations on companies to verify suspected or alleged violations of its rules and regulations.

SEC Chairman Lilia R. Bautista said they will continue to implement joint audits with the Philippine Stock Exchange (PSE) and the Bangko Sentral ng Pilipinas (BSP)to ensure compliance of the securities law.

Bautista said among the SEC’s top priorities is to strengthen investor protection by continuing to aggressively investigate and prosecute capital market violations.

The SEC may, on its own initiative, conduct periodic or parallel examinations of PSE member-brokers to validate the exchange’s findings.

The SEC and the BSP, on the other hand, have agreed to conduct a joint on-site examination of entities they both regulate to ensure an effective and efficient supervision of the financial sector.

The Asian Development Bank earlier underscored the need for the SEC and BSP to conduct joint inspections of non-bank subsidiaries and affiliates licensed to engage in capital market activities to ensure that regulatory gaps do not occur.

The SEC and BSP have dual control over some areas and activities of investment houses. Investment houses which are subsidiaries or affiliates of banks are under the BSP because of their direct effect on their parent companies. The BSP has no responsibility over investment houses’ securities – regulated activities while commercial paper registration and underwriting is left with the SEC.

Under the current system, examination of a banking group is conducted separately without any coordination by the BSP’s Supervision and Examination Department and the SEC’s Markets Regulation Department.

The risks of a fragmented regulatory system, particularly the presence of regulatory gaps and absence of coordination between regulatory agencies, became evident with the failure of Urban Bank in 2000.

The failure of Urban Bank was attributed to problems in its investment house subsidiary, Urbancorp Investments Inc. Urban Bank was one of the country’s commercial banks before it was downgraded to a thrift bank last March 2000 as it was unable to meet the new capitalization requirement.

Urbancorp operated as an investment house without quasi-banking functions and engaged in trust operations. Owing to a significant real estate exposure, the company suffered liquidity problems, forcing its investors to preterminate their holdings.

Urban Bank, in turn, suffered heavy withdrawals due to the loss ofpublic confidence following its downgrade and the pretermination of Urbancorp.’s placements.

Failure to detect problems in Urbancorp has been attributed to some lapses in supervisory oversight, which in turn arose from confusion in the proper assignment of regulatory function over investment houses between the BSP and the SEC.

The Philippine Institute for Development Studies, the research arm of the National Economic Development Authority (NEDA), said changes should be made in the system of supervision and regulation of the financial sector to effectively monitor corporate frauds or failures.

Economist Melanie S. Milo said the insolvencies that resulted particularly in investment houses, finance companies and commercial banks had resulted in the loss of confidence of foreign investors in the Philippine financial market.

Milo said the consolidation of the financial sector supervision could be a solution to eliminate gaps in regulatory coverage.

She said should the country opt to move to integrated/functional regulation, the question is which entity should be appointed as the lead regulator.

Under the New Central Bank Act, the BSP has to some extent become the de facto "super-regulator" of the financial system, with its authority to supervise and examine banks‚ subsidiaries and affiliates engaged in allied activities.

As such, she said designating the BSP as the lead regulator would make sense because of the dominance of banks.

As an alternative solution, Milo said the Philippines can set up a council similar to the Federal Financial Institutions Examination Council of the US composed of the heads of the various regulatory agencies, which was created in 1978 to promote consistency in the examination and supervision of financial institutions.