SEC firms up new guidelines on broker outsourcing

MANILA, Philippines - The Securities and Exchange Commission (SEC) has firmed up a new set of guidelines governing the outsourcing of certain functions of broker-dealers in the local bourse.

In a public notice, the corporate regulator said the new rules highlight transparency and ensure the capacity of local and foreign service providers to help the operations of brokerage firms.

“The SEC recognizes that as the Philippine capital market develops and expands, the volume of activities undertaken by brokers and dealers increases, and it becomes more cost effective for brokers and dealers to outsource certain activities to third-party service providers,” the SEC said.

However, breaches by service providers might lead to disruptions in the Philippines’ securities market with dire consequence to the investing public, the corporate watchdog said.

Under the new rules, only back-office functions can be outsourced by brokerage firms as material tasks and activities that involve direct contact with clients should be handled by the broker-dealers themselves.

Back-office functions or activities that can be outsourced refer to non-material administrative or operational functions such as clearing and settlement, information technology, finance and accounting, and marketing and legal services.

In contrast, material activities require that require a license from the SEC involve the buying and selling of securities.

“Outsourced activities may further be sub-contracted by the service provider,” the SEC said.

The SEC said brokerage firms should conduct due diligence “to ensure that the appropriate service provider is selected.”

Specifically, brokerage companies should look into the service provider’s capacity to perform the outsourced activities, financial condition and risk management practices.

Foreign service providers, for their part, will be subjected to enhanced due diligence as brokerage firms look for the foreign firms’ “ability to effectively monitor the performance of the foreign service provider...ability to maintain the confidentiality of customer and other proprietary information, and ability to execute contingency plans and exit strategies,” the SEC said.

The SEC, broker-dealer and its auditors shall have the right to inspection, allowing them access to the books and records of service providers relating to outsourcing activities.

Brokerage firms are also given the leeway to pre-terminate or re-negotiate contracts that does not meet SEC requirements.

The SEC started revising the rules on brokerage firms’ outsourcing activities in October as it sought comments and suggestions from the public.

There are currently 135 active trading participants at the Philippine Stock Exchange.