SEC Quasi-Legislative Power: When Courts Can Review Agency Regulations

The Securities and Exchange Commission (SEC) holds broad authority to regulate the securities market, but that power is not absolute. When the agency issues a directive that affects shareholder rights, can affected parties challenge it in court? The Supreme Court addressed this question in a recent decision involving the SEC and the Philippine Stock Exchange (PSE) — a case that clarifies the boundary between the SEC's regulatory authority and the courts' power of review.

The SEC's Powers and Their Limits

Administrative agencies like the SEC exercise two kinds of powers. Quasi-legislative power allows them to issue rules and regulations that carry the force of law. Quasi-judicial power enables them to adjudicate disputes and enforce those regulations. Neither power is unlimited.

The Securities Regulation Code (Republic Act No. 8799) grants the SEC authority over the securities market while building in safeguards against abuse. Section 33.2(c) of the Code restricts ownership and control of voting rights in stock exchanges: no person may beneficially own or control more than five percent of an exchange's voting rights, and no industry or business group may own or control more than twenty percent. The SEC may grant exemptions upon application where such ownership would not harm the exchange's ability to operate in the public interest.

Courts Can Review Agency Regulations

The Supreme Court has consistently held that regular courts have jurisdiction to review the validity or constitutionality of rules issued by administrative agencies in the exercise of their quasi-legislative functions. This principle prevents agencies from exceeding their delegated authority and ensures their regulations comply with the Constitution and existing laws.

In this case, the Philippine Association of Securities Brokers and Dealers, Inc. (PASBDI), representing brokers who were also shareholders of the PSE, challenged the SEC's directive limiting brokers' voting rights as an industry group to twenty percent of the PSE's outstanding capital stock. PASBDI argued the limitation infringed on their property rights as shareholders.

The Case Before the Courts

The factual background is straightforward:

• The SEC, citing Section 33.2(c) of the Securities Regulation Code, directed the PSE to limit brokers' voting rights to twenty percent.
• PASBDI filed a petition for injunction with the Regional Trial Court (RTC) to restrain the SEC and the PSE from implementing the directive.
• The RTC issued a writ of preliminary injunction allowing brokers to vote their entire shareholdings.
• The SEC appealed, arguing the RTC lacked jurisdiction.
• The Court of Appeals upheld the RTC's decision.
• The Supreme Court consolidated the cases to examine the scope of the RTC's jurisdiction and the propriety of the injunction.

The Supreme Court's Ruling

The Court held that the RTC had jurisdiction because PASBDI's petition challenged the validity of the SEC's directive — an exercise of quasi-legislative power. It cited Section 23 of the Revised Corporation Code, which guarantees that stockholders eligible to vote may vote the number of shares standing in their names in the corporation's stock books.

However, the Court found that the RTC erred in granting the injunction against the SEC itself. Since the SEC was implementing a valid provision of the law, there was no basis to restrain its actions. As the agency entrusted to administer Republic Act No. 8799, the SEC committed no error in issuing its resolutions to limit brokers' voting rights in the 2010 and 2011 stockholders' meetings.

The Court further emphasized that because the SEC's directive was based on the statute, it could not be collaterally attacked. Questions regarding the restriction on PASBDI's voting rights should have been raised as a direct attack on the validity of Section 33.2(c) itself.

Practical Takeaways

• Courts may review regulations issued by administrative agencies in their quasi-legislative capacity, ensuring agencies do not exceed their authority.
• Shareholders have remedies when regulations infringe on property rights, but must pursue them through proper legal channels.
• Direct versus collateral attack matters. A regulation based on a statute must be challenged directly against the statute's validity, not indirectly through an injunction proceeding.
• Injunctions against agencies are disfavored unless there is a clear showing of a violation of rights or grave abuse of discretion.
• The twenty percent limit stands as a statutory restriction on industry groups' voting rights in stock exchanges, subject only to SEC-granted exemptions.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.