BSP to sanction banks for unsafe, unsound practices

MANILA, Philippines -  The Bangko Sentral ng Pilipinas (BSP) yesterday said universal banks that fail to segregate their securities brokering dealership and underwriting activities would be sanctioned for unsafe and unsound banking practices.

BSP Deputy Governor Nestor Espenilla Jr. said that all universal banks that are non-compliant with the provisions of law and rules or regulations on the segregation of securities brokering dealership and underwriting activities should undertake steps for immediate compliance.

“Failure to comply may be considered unsafe and unsound banking practice, subject to imposition of penalties under the law and existing rules or regulations,” Espenilla warned.

He pointed out that a number of banks have been licensed to simultaneously engage in securities brokering, dealing and underwriting activities.

The Manual of Regulation for Banks allows a universal bank to perform the functions of an investment house either directly or indirectly through a subsidiary investment house.

He explained that the BSP is mandated to ensure that the performance by banks of such securities activities would not endanger the interests of the depositors and other creditors of the bank.

“Banks are therefore enjoined to observe proper segregation of these functions,” he said.

Espenilla stated that under Memorandum No. M. 2011 - 047, if the investment house functions are performed directly by the universal bank, such functions should be undertaken by a separate and distinct department or other similar unit in the bank.

Likewise, he added that securities brokering, dealing, and underwriting activities are also covered by the provisions of the Securities Regulation Code (SRC) being implemented by the Securities and Exchange Commission (SEC).

Rule 34.1 of the SRC provides the “Segregation of Broker and Dealer Function. Affiliations and Practices” wherein a member broker of an exchange should not effect any transaction on such Exchange for its own account, the account of an associated person, salesmen, or any otherperson associated with the Member Broker, including affiliated persons, or an account with respect to which an associated person exercises investment discretion, unless it complies with the ‘Customer First’ policy.

The provision also covers the “Segregation of Functions (Chinese Walls)” wherein any broker dealer who assumes more than one function whether as dealer, adviser, or underwriter, or which engages in market making transactions, should maintain proper segregation of those functions within the firm to prevent the flow of information between the different parts of its organization as well as any conflict of interest.