SEC En Banc Case No. 05-22-495Investigation and Review Committee vs. Venture Securities, Inc., Wilfred Racadio (President), Adora Aguilar (Associated Person), Teresita Mosenabre (Settlement Head), and Loreto Balabis (Salesman)
Securities and Exchange Commission COMMISSION EN BANC Republic of the Philippines Department of Finance
IN THEMATTEROF R&L INVESTMENTS, INC.
INVESTIGATION I AND REVIEW COMMITTEE, Appellant,
- versus - Promulgation: _2 6 NOV 2024 SEC En Banc Case No. 05-22-495
Head), B. MOSENABRE VENTURE BALABIS (Salesman), TERESITA WILFREDO (President),ADORA M.AGUILAR (Associated Person), LORETO B. SECURITIES, S (Settlement RACADIO Appellees. INC.
DECISION
Securities, Inc. (VSI), the dispositive portion of which, in part, reads: VOID, and for the reinstatement of the Decision dated 11 June 2021 issued by the latter in SEC MSRD Case No. MSRD-MID-2020-2 (the "Assailed Decision"), specifically on the penalty imposed upon Venture 2022 (the Appeal) filed by the Investigation and Review Committee (the Committee") praying that the Resolution dated 29 March 2022 (the "Assailed Resolution") of the Special Hearing Panel (SHP) be declared Before this Commission is the Appeal Memorandum dated May 2,
Respondents violated the above-mentioned pertinent provisions of the SRC and the SRC IRR and hereby imposed the following administrative sanctions: "WHEREFORE,premises considered,the panel finds that the
A. Venture Securities, Inc.
2.A fine of One Million Pesos (P1,000,000.00) for violation 1.A fine of One Million Pesos (P1,000,000.00) for violation of Rule 30.2.1. (Ethical Standards Rules) of Rule 30.2.1.1.2.3 (Capabilities)
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3. 4 A fine of One Million Pesos (P1,000,000.00) for violation A fine of One Million Pesos (P1,000,000.00) for violation of Rule 30.2.1.2.4 (Information About Clients)
5. A fine of One Million Pesos (P1,000,000.00) for violation of Section 48.2 and SRC Rule 48.2 (Prohibition on Extension of Credit)
6. A fine of One Million Pesos (P1,000,000.00) for violation of Section 50 of the SRC and SRC Rule 50 (Purchases and Sales in Cash Account)
7 A fine of One Million Pesos (P1,000,000.00) for violation of Rule 52.1.1 (Books and Records Rule)
8. 9 A fine of One Million Pesos (P1,000,000.00) for violation Revocation of its license/registration as broker/dealer of Rule 52.1.6 (Customer Account Information Rule) of Rule 30.2.6. (Supervision)
of the above-mentioned provisions of the SRC and the SRC IRR. pursuant to Section 29 of the SRC for willfully violating all
XXXXXXXXX"
parties, the Commission, applying suppletorily Sec. 2, Rule 31 of the Rules the Individual Respondents' Appeal.2 The instant Decision will therefore interest of convenience, and to accord due and proper appreciation and consideration to the defenses proffered by the Individual Respondents in the Individual Respondents' Appeal, and to avoid prejudice to any of the of Court,1 will consider and dispose of the instant Appeal separately of 28 April 2022, docketed as SEC En Banc Case No. 05-22-496 (the Racadio,Adora M.Aguilar,Teresita B.Mosenabre and Loreto Balabis (the "Individual Respondents"), which contains an exhaustive presentation of their respective defenses, and the evidence in support thereof. In the "Individual Respondents' Appeal"), separately filed by Wilfredo s. The Commission is cognizant of the Memorandum of Appeal dated
economy while providing justice to the parties." Though there is no hard and fast rule requiring the consolidation of cases involving a common question of law or fact that are pending before it in order 1 Pursuant to Sec. 1-6, Part I, Rule I of the 2016 Rules of Procedure of the Securities and Exchange 2 "Consolidation is "a procedural device granted to the court as an aid in deciding how cases in its docket are to be tried so that the business of the court may be dispatched expeditiously and with consolidation of related cases, Section 1, Rule 31 of the Rules of Court allows the courts to order the to avoid unnecessary costs or delay. Commission.
XXX XXX XXX To be clear, the failure to consolidate a case with a related case does not necessarily result in the dismissal of the former, unless there is litis pendentia or res judicata. Thus, it is incumbent upon the parties to be on the lookout and to immediately inform the courts of cases pending with other courts,
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focus and pass-upon only on the allegations, arguments, and the evidence presented by VSI.
THE RELEVANT FACTS
client security holders, and the payment of their share proceeds. in En Banc Case No.MP-2019-001, directing the Capital Markets Integrity deteriorated, which rendered it incapable of meeting the demands of its Corporation (CMIC) to take over the operations of R&L Investments, Inc. (R&L), on the basis of a finding that the latter's financial condition has On 14 November 2019,the Commission issued a Take Over Order
and conducted its investigation from 9 to 12 December 2019. Regulation Department (MSRD) to conduct an independent investigation on the fraudulent transactions that resulted in the loss of the shares owned by the clients of R&L,to determine the violations committed by all who were involved therein, including VSI, and the Individual (the "Committee") was created, which issued subpoenas to the parties, Respondents. For this purpose, the Investigation and Review Committee The Commission also directed its Markets and Securities
administrative cases against (a) R&L, its management and officers, (b) VSI, its management and officers, (c) Mr. Marlo Moron (Mr. Moron), and on 5 February 2020. The SHP was tasked to determine and pass upon the (d) Mr. Julieto Sulapas (Mr. Sulapas).3 A Special Hearing Panel (SHP) was likewise created by the MSRD
answer to the findings of the Committee for violation of the following Implementing Rules and Regulations (SRC-IRR): directing VSI, among others, to submit and file with the SHP a verified provisions of the Securities Regulation Code (SRC) and/or its On September 2020, the Committee issued a Formal Charge,
b g ( ( (e Rule 48.1. - Margin; Rule 50. -- Purchases and Sales in Cash Account; Rule 52.1.1 -- Books and Records Rule; and Rule 30.2.1. - Ethical Standards Rule; Rule 30.2.1.2.3. - Capabilities; Rule 30.2.1.2.4. -- Information about Clients: Rule 48.2. -- Prohibitions on Extension of Credit;
and if needed, to move for the consolidation of related cases in order to avoid the dismissal of a case 3 MSRD Memorandum dated 5 February 2020, signed by Dir. Vicente Graciano P. Felizmenio, Jr. on the grounds of litis pendentia and/or res judicata,or the issuance of conflicting decisions. Goodland Company, Inc.vs Banco de Oro-Unibank, Inc.,G.R.No.208543.February 11,2019)
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(h)Rule 52.1.6. Customer Account Information Rule
became the basis for the issuance of the Formal Charge, to wit: reached during the investigation conducted by the Committee, which The following factual antecedents and findings were obtained and
for the loss of R&L.5 the shares of the clients of R&L to the account of Mr. Sulapas in R&L. Mr. Sulapas opened an account in R&L sometime in 2007 (the clients of R&L which were fraudulently transferred to Mr. Sulapas R&L reached PhP700 Million,more or less,which also accounted Mr. Moron, an employee of R&L, orchestrated and carried out a fraudulent scheme which facilitated the unauthorized transfer of "Sulapas R&L Account").4 The total amount of the shares of the
they were actively traded, resulting in the regular issuance of were eventually transferred to the Sulapas VSI Accounts, where checks payable to Mr. Sulapas. In 2012,Mr. Sulapas opened two (2) account with VSI i.e.Customer Account SU026 and SU027 (the "Sulapas VSI Accounts") where he personally appeared in its office, and declared in his CAIF that his PhP1 Million income is derived from JS Lumber. During the Covered Period, as defined below,the shares of the clients of R&L which were fraudulently transferred to the Sulapas R&L Account,
of calling the settlement officer. The personal check settlement was in the name of Mr. Sulapas who claimed the cash immediately at T+3.7 with a volume of about PhP2 Billion. VSI assumed that there was check and balance in R&L, which led it to apply the usual practice The Sulapas VSI Accounts were used in effecting huge transactions
In 2015,VSI granted Mr. Sulapas a credit line with a PhP 40 Million stock position.8
The report submitted by the Capital Markets Integrity Corporation (CMIC) on VSI showed that for the period covering 2012 to 2019 (the "Covered Period"), the transaction volume of all of VSI's clients
7 Ibid. pars. 6, 18 and 19 (pages 5 and 6) 4 Investigation Report on R&L Investment, Inc., Venture Securities, Inc. and other individual persons, dated 17 August 2020. Par. 21 (page 4), see also par. 27 (page 8) Investigation Report on R&L Investment, Inc., Venture Securities, Inc. and other individual persons, dated 17 August 2020. Pars. 3, 7 (page 5); see also par. 3 (page 9) Ibid.par.18(page 10) 5 Formal Charge (SEC MSRD Case No.MSRD-MID-2020-2) dated September 2020.par.2 of page 15
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amounted to roughly 14% (buying) and 20% (selling); where in transactions worth PhP5,302,514,824.70 i.e. 13%).9 terms of value, the transactions involving Mr. Sulapas' accounts in VSI reached PhP9,905,454,333.20 (which can be broken down as buy transactions worth PhP4,602,939,508.50 i.e. 15%, and sell
payments in the same period.1o The account ledger of Mr. Sulapas showed that while he had approximately two thousand eight hundred (2,800 transactions during the Covered Period,he only made five (5) cash buy
render VSI liable under Sec.26 of the SRC and the SRC-IRR.12 less than PhP1,000,000.00.11 This, according to the Committee, and/or together with its officers and employees, failed to perform the duties entrusted to them by law; and for which reason, might The documents submitted by VSI showed that no inquiry or during the Covered Period which reached almost PhP10 Billion, despite the fact that the liquid net worth and annual income which he declared in his Customer Account Information Form (CAIF) was constitutes gross inexcusable negligence of VSI who, through verification was made in relation to the transactions of Mr. Sulapas
without written requests and/or with unsigned requests, and certain "transfer in" and "transfer out" requests were unsigned; and (c) Mr.Sulapas was not required to update his CAIF.14 CAIF was shown to have been irregularly accomplished; (b) some of the EQ trades involving the Sulapas VSI Accounts were effected The investigation also showed that VSI was placed on notice of Mr. Sulapas' disclosure that he does not have accounts in other companies, one that is contained in his 2017 CAIF which was accomplished in relation to his second VSI account.13 Moreover,the following established circumstances showed that VSI fell short in complying with its obligations as broker-dealer: (a) Mr. Sulapas'
the SRC/SRC-IRR specified in the Formal Charge, and prayed for the Respondents maintained that they are not liable under the provisions of In their Answer dated 21 September 2020,VSI and the Individual
10ibid.par.5 page 15 13 Investigation Report on R&L Investment, Inc., Venture Securities, Inc. and other individual persons dated 17 August 2020. Par. 4 (page 9) 9 Formal Charge (SEC MSRD Case No. MSRD-MID-2020-2) dated September 2020. pars. 3 and 4 (page 11 (bid.par.8(page 16 12 Ibid. par.18page 16 14 Ibid. pars a,(b) and (c of page 27 15
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matters relating to the Sulapas VSI Accounts, to wit: complied with all applicable provisions of the SRC and the SRC-IRR in all dismissal of the same for alleged lack of merit.VSI claimed that it
a The creation of the Sulapas VSI Accounts complied with all
situation, investment experience and objectives provided by the requirements of KYC,where VSI identified the true owner of the account, and found the information on the financial Mr. Sulapas to be adequate for the purpose of opening such account:15 b Mr. Sulapas is a day trader who executed numerous buy and sell transactions in a trading day during the Covered Period, and who, because of his trading pattern, showed that he is a Covered Period, one that was allegedly affirmed by the knowledgeable and responsible trader who did not have any irregular in any of the transactions of Mr. Sulapas during the issues in settling his account.VSI found nothing suspicious or CMIC;16
f (e (C VSI has systems in place for purposes of Anti-Money VSI also implemented proper internal control measures as settlement, accounting and back office functions; the VSI conducted the proper KYC procedures, and continued for his transactions almost entirely from his trading activities, which explained why he only made a few deposits into the Sulapas VSI Accounts during the Covered Period;18 shown by the implementation of the procedures required in opening an account; the segregation of its trading, maintenance of its books and records;19 and certain features that VSI extended in recognition of the good standing and credit profile of Mr. Sulapas. Considering that the Sulapas VSI Accounts complied with the requirements in a credit line which allowed him to borrow up to 40% of the monitoring the buy and sell transactions of Mr. Sulapas after the Sulapas VSI Accounts were created. Based on the trading pattern of Mr. Sulapas, VSI found that he can sustain funding The Sulapas VSI Accounts were cash accounts which had Rules 48.1 and 48.2 of the SRC-IRR, VSI granted Mr. Sulapas current market value of his present stockholdings;17
Laundering, where it reports all covered transactions. In this
15 Answer dated 21 September 2020. pars. 4.3 and 4.6 16 [bid. pars. 4.9, 4.10, 4.11, 4.13, 4.15 and 4.21 17 Ibid. pars. 4.23, 4.24, and 4,26 18 (bid. pars. 4.29, 4.30, 4.32 and 4.33 19 Ibid. pars. 4.34, 4.35, and 4.37
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regard, the transactions involving the Sulapas VSI Accounts
with his trading profile and established trading pattern.20 were not reported as suspicious as they were in accordance
against them.21 Formal Charge which embodied a recital of the violations of VSI, among others, failed to allege the ultimate facts that constitute a cause of action conference held on 24 February 2021, VSI and the Individual Respondents filed their Position Paper on 8 March 2021 where they thereof,VSI and the Individual Respondents essentially reiterated their previous allegations and arguments. In addition, they argued that the prayed for the dismissal of the Formal Charge for lack of merit. In support In compliance with the directive issued by the SHP during the
Paper where it prayed for the issuance of an order sustaining the finding of liability of VSI for violation of the relevant provisions of the SRC and the SRC-IRR. The Committee maintained that: On the same date, 8 March 2021, the Committee filed its Position
(a VSI did not follow the requirements relative to the creation
b increased;24 (iii) Mr. Sulapas denied having transacted the screening;22 The admissions of, and the documents submitted by VSI, the Sulapas do not support the conclusion that there was nothing the contrary, they showed that (i) Mr. Sulapas is not an active day trader as he holds his securities for one to three days, on the average;23 (ii Mr. Sulapas'daily trading amounts during the Covered Period did not start low and gradually of the Sulapas VSI Accounts,as it failed to conduct the initial Sinumpaang Salaysay and the Supplemental Affidavit of Mr. suspicious or irregular in the transactions of Mr. Sulapas. On
settlement issues as the proceeds from the selling sustain the buying transactions i.e. the Sulapas VSI Accounts incurred a net loss of PhP431 Million;26 (v) the Sulapas VSI Sulapas VSI Accounts;25 (iv) the Sulapas VSI Accounts had transactions originally purchased was not sufficient to Accounts were not cash accounts since the same were backed
22 Position Paper dated 8 March 2021 filed by the Committee. Pars. 6.3, 6.4, 6.5 and 6.6 23 (bid. pars. 6.15, 6.15, and 6.18 24 Ibid. par. 6.21 26 Ibid. pars. 6.23, 6.24 and 6.25 21 Position Paper dated 8 March 2021. See. Pars. 2.5 and 2.8 25 Ibid. par. 6.22 20 Ibid. par. 4.40
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c VSI is liable for fraud under Sec. 26 of the SRC. control procedures, record keeping and anti-money by a Credit Line Agreement;27 and (vi VSI did not maintain laundering procedures on the Sulapas VSI Accounts;28 and proper customer acceptance and KYC procedures, internal
merit. Specifically in relation to VSI, the Reply restated that: (a) it followed the relevant laws and rules by complying with the KYC and Accounts;29 (b) VSI found nothing suspicious or irregular in any of the transactions of Mr. Sulapas during the Covered Period;3o c) the Sulapas Reply (to Complainant's Position Paper dated 8 March 2021) where they essentially reiterated their previous allegations and arguments in support of their position that the Formal Charge is dismissible for lack of other applicable requirements in the opening of the Sulapas VSI VSI Accounts were cash accounts that substantially complied with the On 15 March 2021, VSI and Individual Respondents filed their
with false and misleading allegations34, and cannot be used pursuant to of the SRC-IRR.33 Finally, the Reply faults the Committee for giving Sulapas which, according to VSI and Individual Respondents,were filled the doctrine of res inter alios acta alteru nocere non debet.35 requirements for a margin account;31 (d) VSI maintained proper customer acceptance and KYC procedures,internal control procedures record-keeping and Anti-Money Laundering Procedures which the Committee failed to refute;32 and (e the Committee failed to show how VSI and Individual Respondents violated Sec. 26 of the SRC and Rule 26.1 credence to the Sinumpaang Salaysay and Supplemental Affidavit of Mr.
of the following findings of violation of the relevant provisions of the SRC No. MSRD-MID-2020-2. The monetary penalties as well as the revocation and the SRC-IRR: of VSI's license/registration as a broker/dealer was imposed on the basis The SHP forthwith issued the Assailed Decision in SEC MSRD Case
(a VSI failed to implement the proper KYC procedures on the Sulapas VSI Accounts; to take all reasonable steps to establish the true and full identity of Mr. Sulapas,his financial
28 Ibid. pars. 6.40 to 6.59 29 Reply dated 15 March 2021. pars. 2.18, 2.20, 2.34 30 Ibid. par. 2.30 to 2.37 31 Ibid. par. 2.52 and 2.56 32 Ibid. par. 2.57 to 2.59; 2.68 to 2.69; 2.71 33 Ibid. 2.85 34 Ibid. par. 2.24 35 Ibid. par2.28 27 Ibid. par. 6.36
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(e (d ( h g c b VSI violated the Ethical Standards Rules, and did not activities committed by its officers and employees VSI failed to maintain satisfactory internal control VSI failed to comply with the Books and Records Rule which is shown by the discrepancies in the Stock (In) CM and EQ establish an effective and appropriate compliance function, which was shown by its failure to properly address and rectify the violations, irregularities, infractions or unusual procedures, and financial and operational capabilities, when it facilitated "transfer in" and "transfer out" transactions which did not have written authorizations from Mr. Sulapas; existing account with another broker, R&L, contrary to what VSI failed to implement systems relating to compliance with VSI unlawfully extended credit to Mr. Sulapas who had no VSI violated Rule 50.2 when it failed to liquidate numerous transactions made through the Sulapas VSI Accounts which did not pay in full the amount due within T+3; trade forms of Mr. Sulapas; and situation, investment experience and objectives; the value of his stock position,when as early as 2012,it was already clear that Mr. Sulapas' financial capacity cannot sustain funding for his buy and sell transactions if not for the execution of the EQ trade transactions; VSI did not take steps to ensure that Mr. Sulapas updates his CAIF, even after becoming aware that the latter had an was declared; Anti-Money Laundering; margin account with it; VSI intentionally and repeatedly allowed or facilitated the buy transactions of Mr. Sulapas which exceeded his declared financial capacity,and extended a credit line of up to 40% of
therefore be the proximate cause of the loss of the shares of the clients of the concomitant dismissal of the Formal Charge. VSI maintained that it the transactions covering the Sulapas VSI Accounts which were fully in its handling thereof,especially that the CMIC never found any adverse findings on the same.36 The Sulapas VSI Account was not, and cannot Motion for Reconsideration (the "Motion") where they sought the complied with all the relevant laws,rules and regulations in relation to disclosed to the CMIC,and it is not guilty of bad faith,amounting to fraud reconsideration, reversal and setting aside of the Assailed Decision, and On 28 June 2021, VSI and the Individual Respondents filed their
36 Motion for Reconsideration dated 28 June 2021. Pars. 3.2 to 3.7; 3.10
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follows: R&L.37 In particular, VSI refuted the following findings of the SHP for allegedly being baseless, inaccurate,misleading and/or incomplete,as
c b (a In relation to the financial capacity, and the capability of Mr. The grant to a credit line to the Sulapas VSA Accounts,with the execution of a Credit Line Agreement, is allowed and sanctioned under Rule 48.2 of the SRC-IRR, especially that The Sinumpaang Salaysay and Supplemental Affidavit of Mr. Sulapas failed to provide a clear, consistent and coherent uncredible witness;39 the same complied with the requirements prescribed transactions of the Sulapas VSI Accounts,and omitted the sell transactions;38 narration of the events, which made Mr. Sulapas an therein;40 Sulapas to trade, the Committee only presented the buy
a written transfer request for his "transfer out" transactions, and secured a verbal or written confirmation from the There is nothing in the SRC-IRR which requires both the written request from a client, contrary to the position of the SHP;at any rateVSI allegedly required Mr. Sulapas to submit "transferring" and "receiving" broker/dealers to obtain a
(e transactions;41 Mr. Sulapas was able to settle his obligations within T+3 days transferring broker/dealer Mr. Sulapas' in compliance with Rule 50.1 of the SRC-IRR, or within a reasonable amount of time;42 "transferin"
N.A. et. al. vs Tanco-Gabaldon, et. al. was misplaced.43 Finally, the Motion the same is inconsistent with that prescribed under Memorandum Circular No. 6, series of 2005 (MC No. 6-2005)44; as well as the penalty of Code of the Philippines, arguing that its reliance on the case of Citibank assailed the correctness of the monetary penalties imposed, arguing that prescriptive periods provided in the Code of Commerce and the Civil The Motion also questioned the failure of the SHP to apply the
37 Ibid. pars. 1.4, 3.11, 3.12 to 3.15 39 Id. pars. 3.40, 3.41 41 Id. pars. 3.75 to 3.77; 3.80; 3.123.5 43 Id. pars. 3.125 to 3.133 44 Id. pars. 3.151 to 3.154 38 Ibid.3.22 42 Id.par.3.113 40 Id. pars.3.60 to 3.62; 3.68
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revocation of the license and registration of VSI, arguing that bad faith was not proven by the evidence on record.45
broker/dealer on the basis of a finding that it did not act in bad faith; and aside the order revoking the license/registration of VSI as a by modifying the monetary penalties imposed upon VSI, as follows: The Assailed Resolution partially granted the Motion by setting
4. 6. 7 8. 2 3. 5 1. A fine of Two Hundred Thousand Pesos (PhP200,000.00) for violation of Rule 30.2.6 (Supervision). A fine of Two Hundred Thousand Pesos (PhP200,000.00) for violation of Rule 52.1.1 (Books and Records Rule); violation of Rule 52.1.6 (Customer Account Information Rule); and A fine of Two Hundred Thousand Pesos (PhP200,000.00) for A fine of Two Hundred Thousand Pesos (PhP200,000.00) for violation of Rule 30.2.1.2.3 (Capabilities); violation of Rule 30.2.1.2.4 (Information About Clients); A fine of Two Hundred Thousand Pesos (PhP200,000.00) for violation of Sections 48.2 and SRC Rule 48.2 (Prohibitions on A fine of Two Hundred Thousand Pesos (PhP200,000.00) for violation of Section 50 of the SRC and SRC Rule 50 (Purchases and Sales in Cash Account); A fine of Two Hundred Thousand Pesos (PhP200,000.00) for A fine of Two Hundred Thousand Pesos (PhP200,000.00)for Extension of Credits); violation of Rule 30.2.1(Ethical Standards Rule);
and the SRC-IRR, the penalty of revocation of its license as a broker/dealer is thus proper as it showed that VSI failed to supervise SRC and the SRC-IRR indispensably contributed, if it had not been the proximate cause, to the losses incurred by the clients of R&L. It argued that the SHP committed reversible error since under Section 29(a) of the SRC, the revocation of a license of a broker/dealer can be sustained by a Thus, considering that there was a clear showing that the Individual Respondents have willfully violated the relevant provisions of the SRC the reversal by the SHP of the revocation of VSI's license as a broker dealer, and in reducing the monetary penalties imposed upon it. The Committee emphasized that the acts and omissions which violated the showing that there was a failure to supervise,which need not be willful.46 On 2 May 2022,the Committee filed the Appeal where it assailed
45 Id. pars. 3.161 46 Appeal dated 2 May 2022. Par. 50
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which was likewise allegedly established by evidence.47 them, in addition to the bad faith on the part of its Board of Directors
which ultimately resulted in the loss of around P700 Million, more or less, worth of R&L shares owned by the clients of R&L, was completely carried Sulapas,and not VSI,as the real thieves of the R&L shares. VSI equally pointed out that the alleged abject neglect/gross incompetence of the 02 May 2022] which prayed for the outright dismissal and/or denial of the Appeal for lack of merit. In reiterating its position that it complied with the relevant laws and regulations, and should therefore not be penalized, VSI emphasized that the fraudulent scheme and/or theft out and consummated in R&L,48 making the Lees, Mr. Moron, and Mr. CMIC made possible the perpetration of the fraudulent scheme for seven (7) long years.49 Comment/Opposition [To: Appeal Memorandum (Partial Appeal) dated On 8 June 2022, VSI and the Individual Respondents filed their
matters/issues which allegedly justify the outright dismissal of the Appeal: In addition, the Comment/Opposition raised the following
( b (C The excessive, arbitrary, gravely abusive and confiscatory the revocation of the secondary license of VSI, considering that the administrative penalties imposed are already barred penalties imposed upon VSI in the Assailed Resolution totally disregarded the provisions of MC No. 6-2005. The Appeal was improperly verified and does not contain the required Certification Against Forum Shopping; The appeal violated the right of VSI to due process when it raised certain issues for the first time, and showed a clear The Committee is barred from seeking the reinstatement of by laches;and predisposition to find fault in VSI
ISSUES
(A) B Whether the matters subject of the instant case have already prescribed, or are barred by laches. Whether VSI was denied of its right to due process.
48 VSI in fact took pains in elaborating the process and fraudulent scheme that was employed by the Lees, Mr. Moron and Mr. Sulapas,if only to show that it had no participation in the same. (Comment/Opposition. See Discussions on page 2 to 9; see also pars. 3.2 to 3.6) 49 1bid. 47 Ibid. pars. 51 and 52
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( (H (D G (C (E (F to Rule 48.2 of the SRC-IRR (Prohibitions on Extension of Whether VSI violated Section 50 of the SRC,in relation to Rule 50 of the SRC-IRR (Purchases and Sales in Cash Whether VSI violated Rule 52.1.1 of the SRC-IRR (Books and Records Rule). Whether VSI violated Rule 52.1.6 of the SRC-IRR Whether VSI violated Rule 30.2.6 of the SRC-IRR Whether VSI violated Rule 30.2.1 of the SRC-IRR (Ethical Standards Rule). Whether VSI violated Rule 30.2.1.2.3 of the SRC-IRR Whether VSI violated Rule 30.2.1.2.4 of the SRC-IRR Whether VSI violated Section 48.2 of the SRC, in relation Account). (Customer Account Information Rule); and (Information About Clients). Credits). (Capabilities).
(K L Whether the SHP was correct in modifying the monetary penalties imposed in the Assailed Decision. Whether the SHP committed reversible reconsidering and setting aside the penalty of revocation of the registration of VSI. (Supervision). errorin
RULING
laws, and the role of the Commission as the country's securities regulator are, to Our mind, imperative as these will provide the proper context and understanding of the Decision. presented in the instant case, a preliminary discussion on the nature and functions of broker/dealers, the mandate and objectives of the securities Before this Commission delves into and passes upon the issues
Broker/Dealers in the capital and/or securities market. The functions andduties of
laws, is a registered broker/dealer. It was established for the primary purpose of buying, selling of, or dealing in stocks, bonds, debentures, and VSI, a corporation duly organized and existing under Philippine
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for the account of others as a stockbroker.50 other securities and commercial papers for its own account as a dealer or
assistance of a broker. Broker/dealers therefore operate in two (2) a dealer, on the other hand, is a registered firm who is in the business of capacities i.e. as agent (broker) or as principal (dealer). account of others"52; and a "dealer" as "any person who buys and sells securities for his/her own account in the ordinary course of business"53. securities for the account of others, acting as an intermediary between a buying and selling securities for its own account, with or without the person engaged in the business of buying and selling securities for the Simply stated, a broker is a registered firm who executes trades in buyer and seller,and charging a commission for services rendered;while The Securities Regulation Code51 (SRC) defines a "broker" as "a
intermediaries connecting a borrower with investment opportunities to a lender with excess funds but not enough productive investment.54 This, world, the securities markets perform the significant and critical economic function of raising capital, channeling funds from and across which may be in the form of shares of stock, bonds, or debentures, among borrower's future income or assets". Financial markets act as among others, enables the financial markets to promote and facilitate economic efficiency and production. We find the Supreme Court individuals, firms, and even the government. In securities trading, funds may be borrowed from lenders by selling them securities. Securities, other financial instruments, are characterized as "claims on the In the Philippines,very much like in most jurisdictions around the
Republic,55 to wit: elaborating this matter/process in the case of Banco de Oro et. al. vs
"Whether referring to money market securities or capital market or in the secondary market."Primary markets facilitate the issuance of new securities. Secondary markets facilitate the trading of existing securities, which allows for a in primary markets exist between issuers and investors, while secondary market transactions exist among investors. market securities, transactions occur either in the primary change in the ownership of the securities." The transactions
55 G.R. No. 198756. January 13, 2015 so Comment/Opposition [To: Appeal Memorandum (Partial Appeal) dated 02 May 2022]. Par. 1.1 51 Republic Act.No.8799 53 Section 3.4 52 Section 3.3 54 See Villafuerte vs SEC et. al. (G.R. No. 208379. March 29, 2022)
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In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information costs. A Broker is "an individual or financial institution who providesinformation
must be a fundamental coincidence of wants and needs between [lenders and borrowers] for semidirect financial transactions to take place." Either a buyer or a seller of securities may contact a broker buyers and sellers, but the dealer actually acquires the seller's securities in the hope of selling them at a later time at a more favorable price." Frequently, "a dealer will split up a large issue of primary securities into expand the flow of savings into investment. In semi characteristics of the borrower's [debt security].There still concerning possible purchases and sales of securities. whose job is simply to bring buyers and sellers together."A dealer"also serves as a middleman between smaller units affordable by... buyers...and thereby direct financing,"[t]he ultimate lender still winds up holding the borrower's securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity
Stock Exchange vs Secretary of Finance56, to wit: public interest which necessitates the regulation thereof by the State. This was emphasized and explained by the Supreme Court in Philippine The securities market and the transactions therein are imbued with
therein to the country's economy and commercial development cannot simply be brushed aside. The Court in Abacus Securities Corp. vs Ampil stated: "The importance of the stock market and the transactions
business conditions. Consequently, securities and are thus subject to public regulation. Stock market transactions affect the general fall of stock market indices reflect to a Trends in stock prices tend to herald changes in public and the national economy. The rise and considerable degree the state of the economy. transactions are impressed with public interest,
56 G.R. No. 213860. July 05, 2022
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empowered to regulate stock market transactions. As Given this consequential importance, the State is
market, the Court should not simply brush aside the issue; imposed by the State in the commercial aspect of the stock rather, such issue must be meticulously examined to determine whether it is in line with the Constitutional perpetrated; on the other hand, too much regulation may market due to high costs and burdens of doing business. The Chief Justice noted that "whenever there is a regulation mentioned by Chief Justice Alexander G. Gesmundo (Chief be potentially harmful as fraudulent transactions may be discourage investors, including foreign investors, to enter the Justice Gesmundo),an absolutely unrestricted market could
sector,encourage private enterprise,and provide incentives to needed investments. principle to recognize the indispensable role of the private
allowed under Section 43.1 of Republic Act No.8799,or the undisclosed, brokers are generally personally liable for contracts thus entered into." (Emphasis supplied) Trading through a broker or a securities intermediary is Securities Regulation Code (SRC).Brokers are essentially the counterparties to the stock transactions at the stock exchange.They buy and sell stocks on behalf of the principal. As the principals of these brokers are generally
in securities transactions, especially in the secondary markets (as its (implied) recognition of the important role played by broker/dealers Discernible from the afore-quoted ruling of the Supreme Court is
play an indispensable role in the secondary markets, to wit: benefit from are made possible, to a large extent by broker/dealers who opposed to primary markets where new securities are issued by a corporation or the government) where the buyers and sellers of securities that have been previously issued are matched,which facilitate and ensure the continuous trading and flow of investments. A productive and robust securities market where both issuers and investors thrive and
"Issuers of securities do not acquire new funds when their securities are sold from the secondary market. However, the secondary market makes the securities more liquid or easier to exchange. As investors can easily buy and sell to investors which, in turn, makes it easier for issuers to their securities, this makes the securities more attractive
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sell more securities in the primary market."57 (Emphasis supplied)
business is not only an ordinary business; it is a highly regulated industry imbued with public interest having a direct impact on the economy, as well as in the investing public's trust and confidence in the capital Hence, similar to an exchange, the stock brokerage/dealership
markets.
and the purposes for which they were enacted, are met and achieved. buying or selling securities in the Philippines as a broker or dealer can only be carried out by a person who is registered as such with the stock brokerage or dealership business carries with it defined and exacting duties, responsibilities, and obligations which include, among others, the submission of the necessary documents/information to keep the application for registration current and accurate,59 as well as compliance with the relevant and applicable provisions of the SRC and the SRC-IRR.60 The stringent and exacting regulatory requirements which the SRC, the SRC-IRR, and other securities laws mandate to be fully and consistently complied with are in place to ensure that their objectives, Commission. In this regard, We need not overemphasize the fact that the Section 2858 of the SRC is categorical in saying that the business of
applicable laws, rules and regulations. Verily, the failure of a imposition of the appropriate sanctions, including the suspension or revocation of its license.61 The doctrine in SEC vs Universal Rightfield the license granted by the State partakes of the nature of a permit, and not a contract from which a right can be demanded from the State. The business is therefore conditioned on its continued compliance with broker/dealer to comply with the provisions of the SRC may result in the Property Holdings, Inc.62 where the Supreme Court sustained the all applicable laws, rules and regulations, including any amendments thereto, is inherent in the grant of the license or registration to carry out a brokerage/dealership business. It is established in jurisprudence that continued enjoyment by a broker/dealer of the privilege to carry out its In the same vein, the duty of broker/dealers to fully comply with
dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as 57 See Concurring opinion of J. Leonen in Villafuerte vs SEC (G.R. No. 208397. March 29, 2022 such with the Commission. Xxx." (Emphasis supplied) 60 See Section 30 of the SRC 61 See Section 29 of the SRC 62 G.R.No.181381.July 20,2015 58 "Section 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. -- 28.1. No person shall engage in the business of buying or selling securities in the Philippines as a broker or 59 See Section 28.10 of the SRC
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revocation of the issuer's registration of securities, and its license to sell
be withdrawn by the state for failure on the part of the licensee to comply with the applicable laws,rules and regulations, to wit: the same,reiterated the nature of a license as a mere privilege which can
so in the course of the performance of its regulatory and law "Rather, when the SEC exercises its incidental power to conduct administrative hearings and make decisions, it does
enforcement function.
Significantly, unlike in Globe Telecom, Inc. where the Court
hearing, was null and void due to the denial of petitioner's right to due process, the revocation of URPHI's of a privilege, which regulatory power the SEC validly exercised after giving it due notice and opportunity to be heard."(Emphasis supplied) ruled that the fine imposed by the NTC without notice and registration of securities and permit to sell them to the public cannot be considered a penalty but a withdrawal
The mandate and the regulatory the SRC. powers of the Commission under
expressly granted to the Commission which include, among others,the Section 5 of the SRC, provides for the powers and authority
the appropriate penalties on the basis of a finding of violation of its power to regulate and investigate to ensure compliance, and to impose
provisions:
functions: shall have, among others, the following powers and Presidential Decree No. 902-A, the Corporation Code, the have the powers and functions provided by this Code, Investments Houses Law,the Financing Company Act and other existing laws. Pursuant thereto the Commission 5.1. The commission shall act with transparency and shall "Section 5. Powers and Functions of the Commission.
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(c Approve, reject, suspend, revoke or require amendments toregistration statements,and
registration and licensing applications;
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(d) Regulate,investigate or supervise the activities of persons to ensure compliance;
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Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto;
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(n) Exercise such other powers as may be provided by purposes of these laws." (Emphasis supplied) law as well as those which may be implied from, or which are necessary or incidental to the carrying Commission to achieve the objectives and out of, the express powers granted the
license/registration, explained the basis for the exercise of the said appropriate penalties which include the revocation of the corporate Supreme Court, in sustaining the power of the Commission to impose the In the case of Provident International Resources Corp.v.Venus3,the
powers, thus:
may suspend or revoke (after due notice and hearing). certificates of registration of corporations, partnerships and associations (excluding cooperatives, homeowners' association, and labor unions); compellegal and regulatory other penalties for violations of the Revised Securities touching nearly all of a corporation's concerns. This authority more vividly springs from the fact that a corporate franchise from the state. Under its regulatory responsibilities, the SEC may pass upon applications for, or compliances; conduct inspections; and impose fines or Act, as well as implementing rules and directives of the SEC "It can be said that the SEC's regulatory authority over corporation owes its existence to the concession of its private corporations encompasses a wide margin of areas,
such as may be warranted." (Emphasis supplied)
rule-making and quasi-judicial powers and authority have for their main The grant of, and the exercise by the Commission of its regulatory
63 G.R. No. 167041, June 17, 2008.
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objective and purpose, the implementation of the State policies provided in Sec.2 of the SRC,which are also the mandates given to the Commission to wit:
distortions in the free market." (Emphasis supplied) ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally "SECTION 2.Declaration of State Policy.- The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of eliminate insider trading and other fraudulent or manipulative devices and practices which create
and the SRC-IRR with a view of pursuing and achieving the State policies consistently interpretated and implemented the provisions of the SRC principles of the securities laws,should be considered in interpreting its various provisions to ensure that these principles are effectively carried out, thus: and the SRC-IRR, from which the intent and purpose for which the law was enacted by the Congress can be deduced. Thus, the Commission has and principles. In this regard, the case of Palanca IV v. RCBC Securities Inc.,64 emphasized that Section 2 of the SRC, which embodies the core The afore-quoted provision embodies the raison d'etre of the SRC
minimization, if not total elimination, of insider trading and other fraudulent or manipulative devices and "It has been observed that the afore-quoted provision lays down seven core principles of our securities regulation laws: self-regulation, encouragement of the widest participation of ownership in enterprises, enhancement of the democratization of wealth,promotion ensuring full and fair disclosure about securities, and practices that create distortions in the free market,with of capital market development, protection of investors
the unifying principle being the protection of investors. These core principles animate the whole of the SRC; and
in mind, giving particular attention to the principles of full manner that will carry out the foregoing principles. We therefore resolve the issues before Us with these principles as such, any doubt or conflict in the interpretation of the SRC and its implementing rules must be resolved in a
64 G.R. No. 241905, [March 11, 2020].
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disclosure, investor protection, fraudulent or. manipulative devicesand and the elimination of practices. (Emphasis supplied)
patterned, as well as the securities laws of other major jurisdictions, The securities laws of the US from which our securities laws were
came about in response to,and to address serious abuses that pervade in unregulated capital markets. These problems in the capital markets
fraud and abuses that continue to be perpetrated in this era of which are as timeless as the avarice of sellers and the gullibility of buyers65 have not disappeared, and this Commission is witness to the
of investors, the elimination of manipulative and deceptive practices, standards, and the provision of effective sanctions for violation.66 technological advancement. Thus, the securities laws of today continue to promote and implement socially-directed objectives as the protection the promotion of full disclosure, the encouragement of high ethical
disclosure provisions in the SRC ensure the protection of investors, and The prohibition of fraudulent activities/transactions, and the
prohibited in connection with the purchase or sale of securities. are categorical statements that certain behaviors, including omissions, will not be tolerated in transactions carried out in the stock market. information, and any act or practice that constitutes fraud or deceit are The anti-waver provisions of the SRC and the mandatory nature thereof Moreover, untrue statements or omissions of material facts or promote honesty, trust and ethical behavior in commercial transactions.
The noble objectives of the SRC justify and render imperative the strict and assiduous implementation and enforcement of its provisions, as they essentially relate to the very performance by the Commission of
duty-bound, to impose the appropriate penalties, including the its mandate of ensuring full and fair disclosure of securities to promote the development of the capital market,protect investors and eliminate fraudulent or manipulative devices and practices. In this regard, the Supreme Court has emphasized in SEC vs Subic Bay Golf and Country Club, Inc.67, that the Commission is clothed with ample authority, and is
suspension or revocation of a registration or license, for the protection of the investing public, among others, to wit:
67 G.R. No.179047.March 11,2015 65 Elaine A.Welle, Freedom of Contract and the Securities Laws:Opting Out of Securities Regulation by Private Agreement,56Wash.&Lee L.Rev.519(1999) 66 Ibid.
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jurisdiction, supervision and control over all corporations, partnerships' or associations. "Pursuant to these policies, the Securities and Exchange Commission is given regulatory powers and "absolute
Xxx xXX xXX
Securities and Exchange Commission is also given the implemented by the Securities and Exchange Commission. investigate motu proprio whether corporations comply with To ensure compliance with the law and the rules, the power to impose fines and penalties. It may also the Corporation Code, Securities Regulation Code, and rules
injures the public. The Securities and Exchange the erring corporation. It creates risks to corporations that issue securities and adds cost to errors, misrepresentations, and to impose fines and other penalties provides the contain representations thatare true, and that misrepresentations if later found, would be detrimental to and violations related to the issuance of those securities. This Any fraud or misrepresentation in the issuance of securities Commission's power to suspend or revoke registrations public with a certain level of assurance that the securities
protects the public who will rely on representations of corporations and partnershipsregarding financial
Commission's regulatory power over securities-related activities is tied to the government's duty to protect the instruments that they issue. The Securities and Exchange
investing publicfromillegal and fraudulent instruments." (Emphasis supplied)
participants, including and especially broker/dealers, are, by themselves, duty-bound to fully comply with all the applicable and relevant provisions of the SRC and the SRC-IRR. This duty,being a condition to the grant of the license,and the continued use/enjoyment thereof, is not, and should not be made dependent on the performance by the Commission or the registered SROs ie. PSE or CMIC of their duties to implement and/or enforce the SRC and the SRC-IRR. In other words, the failure of Be that as it may, emphasis should be made of the fact that market
from liability resulting from the latter's violation of the SRC and/or the the Commission and/or the registered SROs to perform their respective duties is not, and will not be a ground to exculpate a market participant
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SRC-IRR. If at all, such failure will expose the SRO and/or its responsible officers to the risk of being imposed the proper penalties provided by law.
The instant case determination of whether calls for VSI a
complied with its duties and responsibilities under the SRC and
Sulapas VSI Account. the SRC-IRR, in relation to the
Period using the Sulapas R&L Account that resulted in the loss of a huge have actively traded and profited from the same. amount of shares owned by the clients of R&L. In like manner, the same documents show that the shares that were stolen from the clients of R&L which were transferred from the Sulapas R&L Account, were further transferred to the Sulapas VSI Accounts, where Mr. Sulapas appeared to fraudulent transactions were carried out in R&L during the Covered The voluminous documents of the instant case will bear that the
actions/transactions that resulted in the loss of the shares owned by the VSI had ' consistently denied any participation in the
clients of R&L during the Covered Period was carried out and clients of R&L.VSI maintained that the theft of the shares owned by the
the SHP committed reversible error in penalizing it when "it could not consummated wholly within R&L, making it practically impossible for VSI (and other brokers) to know,or discover the same.68 VSI argued that
incompetence of the CMIC.7o SRC and the SRC-IRR. VSI thus posited that the objective of the instant same have been EQ traded to Venture Securities, the theft of shares of case was to make it a scapegoat for the abject neglect and gross have contributed to the loss of these securities because by the time that the clients of R&L Investments has already been completed or consummated within R&L Investments through the transfer to the account of Sulapas in R&L Investments"69, and it complied with the relevant provisions of the
penalties against VSI was warranted since the acts and omissions of the For its part, the SHP maintained that the imposition of the
latter indispensably contributed and completed the chain which caused the losses of R&L's clients. The said acts and omissions of VSI are integral parts of the cause.71
68 Comment/Opposition dated 8 June 2022. Pars. 3.20, 3.31, 3.34, 3.35, 3.43 69 Ibid. see second paragraph of page 247 7o Ibid. see second paragraph of Item D (page 147) 71 Resolution. see second paragraph of the Fourth Issue (page 23)
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bound to fully comply with the applicable provisions of the SRC and the SRC-IRR in acting on all the matters involving the Sulapas VSI Accounts, be determined solely on the basis of the manner by which it handled broker/dealers which are within the domain and control of the latter. their failure to consider that as a registered broker/dealer, VSI was duty which were completely within its exclusive domain. As explained earlier, the duty and obligation of every broker/dealer to fully comply with the laws, rules and regulations are conditions for their continued enjoyment Account,without regard to the other accounts of Mr. Sulapas with other of the privilege to carry out such business granted in its license. Thus, VSI's compliance or non-compliance with the SRC and the SRC-IRR will dealt with, and acted upon the transactions involving the Sulapas VSI The obvious flaw in the arguments of both VSI and the SHP rest in
full responsibility, and be accountable for its actions on the Sulapas VSI Accounts if they are shown to be violative of the SRC/SRC-IRR, even if R&L. The opposite is true. VSI cannot be held liable if it is able to show SRC/SRC-IRR, even if the same, on its own, might have contributed and completed the chain which caused the losses of R&L's clients. because the fraudulent transactions and/or theft of the shares of the clients of R&L were completed and consummated wholly within R&L, it is already impossible for VSI to violate the SRC/SRC-IRR. While VSI cannot be held liable, directly or indirectly, for transactions covering they are not the proximate cause of the losses that befell on the clients of that in acting on the Sulapas VSI Accounts, it fully complied with the and/or involving the Sulapas account(s) with R&L,VSI will have to take Prescinding from the foregoing, We do not agree with VSI that just
establishing the violation of VSI, and which the latter, in turn, used to The principle of proximate causality which the SHP used in
in relation to Sulapas account(s) in R&L, the CMIC's (and even the MSRD's) alleged gross negligence and incompetence, are matters that were are not the subject of the instant Appeal. consummated within R&L, does not and will not be applied. For purposes of the instant Appeal, this Commission will only look into and consider the actions of VSI on the Sulapas VSI Accounts, and determine based thereon, if VSI has fully complied with the SRC/SRC-IRR, or has failed to do the same. The matter relating to R&L's violation of the SRC/SRC-IRR support its position that it cannot be held liable since the violation was
presented in the Appeal, this Commission will be guided by, and will implement the rules obtaining in administrative proceedings that In making such determination and in passing upon the issues
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mind might accept as adequate to support a conclusion. technical rules of procedure and evidence are not strictly applied72, and substantial evidence73,or that amount of relevant evidence a reasonable that the quantum of proof necessary to sustain a finding is merely
I The relaxation of the
and evidence justifies giving due course to the Appeal. technical rules of procedure
the 2019 Amended Rules of Civil Procedure (the Rules of Court"). In Forum Shopping was attached to the Appeal which is required under Part V, Rule III, Section 3-4 of the 2026 Rules;75 and (c) the Appeal failed to allegations in the appeal "nothing but mere allegations".76 with the relevant provisions of the 2016 Rules of Procedure of the requirements under Section 4, Rule 7 of the Rules of Court, thus rendering the appeal improperly verified;74 (b) no Certification of Non attach material portions of the record which allegedly rendered the Securities and Exchange Commission (the "2016 Rules), in relation to particular,VSI claimed that (a) the Verification did not comply with the VSI maintains that the Appeal is dismissible for its failure to comply
The Commission does not agree with VSI.
for the standard to be used in interpreting its provisions, thus: Section 1-4(a) Rule I Part I of the 2016 Rules categorically provides
and administrative due process cannot be fully equated with due process in its strict judicial sense." Samalio vs Court of Appeals. G.R.No.140079.March 31,2005 substantial evidence is such relevant evidence as a reasonable mind may accept as adequate to support 74 Comment/Opposition dated 8 June 2022. See pages 110 to 112 75 Ibid. See page. 112 76 Ibid. See page 113 72 "Further, administrative bodies are not bound by the technical niceties of law and procedure fundamental and essential requirements of due process in justiciable cases presented before them. In 73 "Administrative proceedings are governed by the "substantial evidence rule." A finding of guilt in an that the respondent has committed the acts stated in the complaint or formal charge. As defined, a conclusion. This is different from the quantum of proof required in criminal proceedings which necessitates a finding of guilt of the accused beyond reasonable doubt. The Ombudsman, in ordering the withdrawal of the criminal complaints against respondent was simply saying that there is no evidence sufficient to establish her guilt beyond reasonable doubt which is a condition sine qua non for conviction. Ergo, the dismissal of the criminal case will not foreclose administrative action against and the rules obtaining in courts of law. Administrative tribunals exercising quasi-judicial powers are unfettered by the rigidity of certain procedural requirements, subject to the observance of administrative proceedings, technical rules of procedure and evidence are not strictly applied administrative case would have to be sustained for as long as it is supported by substantial evidence respondent."(Velasquez vs Hernandez.G.R.No.150732.August 31,2004
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"These rules shall be liberally construed and administered to promote public interest, to secure a just prompt, expeditious,and inexpensive determination of every action and proceeding before the Commission and to carry out the objectives of the laws it is mandated to implement." (Emphasis supplied)
established jurisprudential rule that administrative agencies exercising rules of procedure and evidence, to wit: quasi-judicial functions are not bound by the strict application of the The afore-quote provision of the 2016 Rules implements the well-
in the present case is administrative in nature. Although trial courts are enjoined to observe strict enforcement of the rules on evidence, the same does not hold true for administrative rules applicable to judicial proceedings are not exact "At the outset, it bears stressing that the proceeding involved bodies. The Court has consistently held that technical replicas of those in administrative
tenacious insistence for the OGCLS-BSP to strictly adhere to the Rules of Court so as not to purportedly defeat her rights. investigations.Recourse todiscovery proceduresas sanctioned by the Rules of Court is then not mandatory for the OGCLSBSP. Hence, We cannot subscribe to Norlina's
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to technical rules.As such,inproceedings before administrative or quasi-judicial bodies,like the OGCLS-BSP administrative proceedings is to achieve an expeditious and inexpensive determination of cases without regard The rationale and purpose of the summary nature of
proceedings which could defeat its very purpose."7 by technical rules of procedure and evidence. To require otherwise would negate the summary nature of the (Emphasis supplied) decisions may be reached on the basis of position papers or other documentary evidence only. They are not bound
the technical rules of procedure, Sec. 5-1 Rule I Part I of the 2016 Rules specifically grants the Commission the power and authority to suspend Moreover, to ensure that the Commission remains unfettered by
77 Sibayan vs Alda.G.R.No. 233395. January 17, 2018
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the application of the Rules to ensure the effective implementation of the laws that it is tasked to implement,thus:
and apply such suitable, fair and reasonable procedure to improve the delivery of public service and to assist the cases."(Emphasis supplied) public interest, the Commission may, in any particular manner, exempt it from these Rules in exceptional cases parties in obtaining a speedy and judicious disposition of "In the broader interest of justice and in order to best serve
jurisprudence is very clear: The implementation and enforcement of the laws administered by the Commission which are carried out in the The policy of the 2016 Rules which finds affirmation in
the principle established in jurisprudence that a litigation is not a game should be considered and used as an effective and efficient and can exercise its power to suspend its application. This is justified by of technicalities.78 proceedings before it are paramount and essential, and the 2016 Rules tool/mechanism to further the same. Hence, if, at any time and in any proceeding,the provisions of the 2016 Rules will (or mightprevent the Commission from performing its mandate, the Commission is authorized,
verification is to ensure that the allegations in the pleading are not merely products of the verifier's imagination, to wit: consistently applied Rule 7 Section 4 of the Rules of Court which allows circumstances can be affirmed by the affiant who attests that the same proceeds from his/her personal knowledge.81 After all, the purpose of a the veracity of an allegation therein to be affirmed either on the basis of personal knowledge, or on authentic records, or both.79 An allegation which relies heavily on documentary evidence can best be verified based on authentic records, and not by personal knowledge;8o in like manner the truth/correctness of an allegation which is anchored on factual In relation to the manner of verifying a pleading, jurisprudence has
79 See Victoriano vs Dominguez. (G.R. No. 214794, July 23, 2018) s1 Ibid. "Resultantly, Victoriano's failure to indicate that the allegations are true and correct based on 78 "The Rules of Court were conceived and promulgated to set forth guidelines in the dispensation of to [the] instant case, in the language of Justice Makalintal, technicalities "should give way to the to or robots of technical rules, shorn of judicial discretion. That is precisely why courts, in rendering justice have always been, as they in fact ought to be, conscientiously guided by the norm that on the balance, technicalities take a backseat to substantive rights, and not the other way around. As applied 80 Ibid. authentic records,may be excused,inasmuch as he already attested to the truth and correctness of the allegations based on his personal knowledge. justice but not to bind and chain the hand that dispenses it, for otherwise, courts will be mere slaves realities of the situation.(Pimentel vs Adiao,G.R.No.222678,October17,2018)
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"Verification is merely intended to secure an assurance that
that the pleading is filed in good faith."82 the allegations in the pleading are true and correct, and not the product of the imagination or a matter of speculation,and
represented the members of the Committee, is established in the records of the case. The said verification states, in part, that "have caused the above Appeal Memorandum to be prepared and has read and knows the contents thereof. that the allegations therein are true of his own The fact that the Appeal was verified by Atty.Varelie C.Vargas who
thereof were not merely products of their imagination. knowledge. It is readily evident that when the Committee, through Atty Vargas,verified the Appeal, they essentially declared that the contents
verification of the Appeal does not justify the dismissal thereof, the same Singson vs Inaki Larazzabal Enterprises83, thus: not being jurisdictional and fatal. This established rule was reiterated in Be that as it may, this Commission holds that the defect in the
read it and that to his or her knowledge and belief, its "An affiant verifies a pleading to indicate that he or she has
the ends of justice." (Emphasis supplied) in good faith and not out of mere speculation. Jurisprudence has considered the lack of verification as a mere formal, the dispensing of the procedural requirement to serve allegations are true and correct and that it has been prepared rather than a jurisdictional, defect that is not fatal. Thus, courts may order the correction of a pleading or act on an unverified pleading, if the circumstances would warrant
shopping to the Appeal, the doctrinal pronouncements of the Supreme penalize is the vexation brought upon the courts and the litigants by a Court uniformly emphasize that the evil that it seeks to curtail and/or party who asks different courts to rule on the same or related causes,and Anent the requirement to include a certification against forum
creates the possibility of conflicting decisions being rendered by the different fora upon the same issues.84 grant the same or substantially the same reliefs and, in the process,
83 G.R. No. 199107, August 30, 2017 4 See Heirs of Mapo vs Morada G.R. No.214526.November 3,2020) 82 Joven vs Spouses Tulio. (G.R. No. 204567, August 04, 2021)
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Relative to its implementation, it is equally settled in jurisprudence
objective of dispensing justice, to wit: administration of justice, and should not be used to stifle the ultimate that the rule on forum shopping is a tool to facilitate the orderly
"The Court has often stressed that rules of procedure are merely tools designed to facilitate the attainment of justice. They were conceived and promulgated to effectively aid the court in the dispensation of justice. Courts are not slaves to or robots of technical rules, shorn of judicial discretion.In rendering justice,courts have always been,as they ought
from its operation."85 (Emphasis supplied) substantive rights, and not the other way around. Thus, if the application of the Rules would tend to frustrate rather than promote justice, it is always within our to be, conscientiously guided by the norm that on the balance,technicalitiestakeabackseatagainst power to suspend the rules or except a particular case
Supreme Court sustained the act of the Commission in taking cognizance jurisdictional, thus: of, and resolving the complaint despite the lack of certificate of non- forum shopping, stating that the requirement, though mandatory, is not Hence,in Azucena Locsin-Garcia vs. AZ 17/31 Realty, Inc.86, the
forumshoppingis notjurisdictional. Unquestionably procedural rules are not to be simply disregarded as they "Though mandatory, the requirement of certification against
all rules of procedure -- which is to achieve substantial justice as expeditiously as possible.A liberal application of insure an orderly and speedy administration of justice. But the rule on non-forum shopping should not be interpreted with such absolute literalness as to subvert its own ultimate and legitimate objective or the goal of the rule may be justified where special circumstances or compelling reasons are present."(Emphasis Supplied)
issues presented therein, which, in effect, relate to the determination on whether VSI fully complied with the relevant provisions of the SRC/SRC- warrant the dismissal thereof. In the interest of fully disposing of the defects in the Appeal which were pointed out by VSI are not fatal that will On account thereof, this Commission finds and so holds that the
85 Torres vs Republic of the Philippines (G.R. No. 247490. March 2, 2022) 86 G.R. No. 240888, July 6, 2022
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IRR, this Commission hereby sustains giving due course to the Appeal.
process. VSI was not denied of its constitutional right to due
by the Committee of new matters in the Appeal for the first time;87 (b) the is being violated. In this regard,VSI bewails (a) the alleged introduction denial to it of access to exculpatory facts which allegedly confirmed that the crime was committed and consummated wholly within R&L, where it VSI claims that its constitutional right to due process has been,and
had no participation in the same;88 and (c) the Committee's reliance on the statements of Mr. Sulapas which are allegedly unreliable, perjurious and hearsay statements,all of which constituted a violation of its right to due process.
of its constitutional right to due process. The documents on record negate the claim of VSI that it was denied
be heard, either through oral arguments or pleadings, are complied process is satisfied where the notice requirement and the opportunity to with,89 and the respondent is given an opportunity to explain his/her side,or the opportunity to seek reconsideration of the action/ruling that is being assailed, thus: The rule established in jurisprudence is that administrative due
and in all situations require a trial-type proceeding. Due defend himself. In administrative proceedings, the filing of process is satisfied when a person is notified of the charge against him and given an opportunity to explain or charges and giving reasonable opportunity for the person so charged to answer the accusations against him constitute the minimum requirements of due process.The essence of due "Due process, as a constitutional precept, does not always
the action or ruling complained of."90 administrative proceedings, an opportunity to explain one's side,or an opportunity to seek a reconsideration of process is simply to be heard, or as applied to
In the instant case, VSI was fully informed of the charges against it
87 Comment /Opposition dated 8 June 2022. See page 118 90 Ledesma v. Court of Appeals. G.R. No.166780, December 27,2007,541 SCRA 444. 88 Ibid.pages 129 and 134 89 Vivo vs Philippine Amusement and Gaming Corporation (G.R.No.187854,November 12,2013
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and was provided the amplest opportunity to address the same,and to present evidence in support of its defenses. In fact, the records will show that VSI's Motion for Reconsideration dated 28 June 2021 consisting of fifty-five(55pages, excluding attachments, and its
three (253) pages, both of which were prepared by reputable law firms Comment/0pposition dated 8 June 2022 consisting of two hundred fifty- of the country,embodies a comprehensive and exhaustive presentation invoked in support of its claim that it did not violate the SRC/SRC-IRR. and discussion of the allegations, defenses and legal bases which it
its theory in the Appeal "from alleged willful violations of the SRC to a now modification in the Assailed Resolution of the original penalties imposed various provisions of the -SRC/SRC-IRR, including Rule 30.2.6 alleged failure to supervise. We note how the Committee assailed the upon VSI in the Decision. In this regard, the Commission is cognizant of the fact that the Committee maintained its position that VSI violated the Moreover,We do not agree with VSI that the Committee changed
among others, the suspension or revocation of the broker-dealer's license, to wit (Supervision),where the penalties provided in Sec.29 of the SRC include,
"As extensively discussed in the 11 June 2021 Decision of the
Opposition of the Appellants to the Appellee's Motion for Special Hearing Panel, and reiterated in the Comments and
indispensably contributed, if not have been the of the SRC and SRC IRR in such a level that they Reconsideration, the acts and omissions committed by the Appellee constituted violations of the various provisions
R&L Investments, Inc. Xxx"91 proximate cause to the losses incurred by the clients of
XxXXXXXXX
"Section 29(a) of the SRC provides that the penalty of revocation of registration may be granted if the Commission determines that the registrant has willfully violated the provisions of this Code,any rule, regulation or order made hereunder,or any other law administered by the Commission, or in the case of a registered broker,dealer or
preventing such violation, another person who commits such associated persons has failed to supervise, with a view to
91 Appeal Memorandum (Partial Appeal). Par. 27
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violation."92
Relative thereto, it must be pointed out that Section 29 of the SRC provides for the grounds that will justify the suspension or revocation Section 29 of the SRC,per se,cannot be a source of violation as it does not among others, of the registration/license granted to broker/dealers. prescribe an act to be done, or lays down those that are prohibited.
omissions constituting a violation of the SRC which are specifically Section 29 of the SRC merely provides for the consequences of the acts or
contained in the various provisions thereof. This explains why the Formal Charge only provided for the specific provisions of the SRC/SRC-IRR which VSI was found to have violated, which included Rule 30.2.6 only invoked to justify the penalty imposed on the basis of a finding that (Supervision). It would have been absurd to find in the Formal Charge a charge for violation of Sec. 29 of the SRC which, for obvious reasons, is the ground(s) enumerated therein are present.
Commission that in its Motion for Reconsideration, VSI extensively Be that as it may, it does not escape the attention of this
presented and discussed how the SHP erred in finding that it failed properly supervise, alleging, among others, that:
Sulapas was conducted by Ms. Grace Machacon, the officer- in-charge and head of Venture Securities at that time. Xxx. "3.119.1.The KYC procedures for the account opening of Mr.
3.119.4. Ms. Aguilar required Mr. Sulapas to correct and update his information in the CAIF. Xxx.
3.119.5.Venture Securities required Mr. Sulapas to submit a
As for the "transfer in" transactions, Venture Securities verified through verbal or written confirmation from the transferring broker/dealer. Xxx. written transfer request for his "transfer out" transactions.
with the requirements of margin accounts under the SRC- 3.119.6.The credit line agreement of Mr. Sulapas complies
IRR, and there was no intention to evade the requirements thereof.Xxx.
3.119.8. Venture Securities submittedallreportable transactions of Mr. Sulapas in accordance with its Anti-
92 Ibid. par. 49
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Money Laundering Policies as provided in its Anti-Money Laundering Manual.Xxx."93
Also, We equally note how VSI used the finding of the SHP in the Assailed Resolution to support its position that it implemented adequate supervisory procedures, to wit:
"In the Questioned SHP Resolution, the Special Hearing Panel correctly rejected the theory of petitioner Investigation Securities, there is no bad faith and the revocation of its Committee and held that with respect to appellee Venture
license to operate as a broker dealer is not warranted. Among others, it was held that:
1 Appellee Venture Securities has put in place adequate supervisory control procedures to enforce SEC Rules
and securities laws and regulations; Xxx.
The afore-quoted statements which are extant in the pleadings submitted by VSI negate its claim of having been denied of the right to due process. On the contrary, they clearly show that VSI (@) was well informed of the charges against it for violation of Rule 30.2.6 of the SRC-
comprehensively and exhaustively. Thus, granting ex gratia that the IRR, for which reason, (b it was able to present its defense Committee changed its theory in the Appeal "from alleged willful violations of the SRC to a now alleged failure to supervise", VSI cannot claim that it was denied of the right to due process because it was given the opportunity to refute the same, and present contrary evidence.
Anent the allegation of VSI that it was denied access to exculpatory facts which allegedly confirmed that the crime was committed and consummated wholly within R&L, the Commission finds the same to be irrelevant in the instant proceeding where the matters/issues which We will pass upon are limited to the transactions involving the Sulapas VSI Account in VSI. In other words,VSI cannot claim that it was, or will be denied due process because the matter on whether its actions on the transactions involving the Sulapas VSI Account violated the SRC/SRC-IRR but solely on the basis of its compliance with the SRC/SRC-IRR. The will be resolved not on the basis of the principle of proximate causality
Commission will not consider the violations or even the crime that was committed in R&L, as they are a subject of another case.
93 Motion for Reconsideration. See pages 39 to 40
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Appeal are not barred by The matters subject of the
Iaches.
In the Appeal, the Committee assailed the modification by the SHP of the penalties which it imposed upon VSI in the Assailed Decision, specifically the setting aside of the revocation of the latter's license/registration, and the reduction of the monetary penalties. The Committee argued that since the failure of VSI to supervise has been proven, this justifies the revocation of the license of VSI since under Section 29 of the SRC, such failure need not be willfully carried out.
VSI disagrees with the Committee, and maintains that the latter is already barred from praying for the reinstatement of the revocation of its license/registration, and the monetary penalties that were originally imposed upon it, on the ground that laches has set it. In support thereof, VSI argued that the anomalous transactions that have occurred in R&L which are being imputed against it have been occurring since 2012,94 and yet, it was only in 2019 that these transactions were discovered by the
which resulted in the filing of the Formal Charge by the Committee.95 CMIC after the "principal conspirators Lees provided the information,
According, to VSI, had the CMIC performed its job, it would have discovered from the documents that were submitted that the fraudulent transactions in R&L had been going on since 2012. This makes the CMIC, not VSI, the proximate cause of the losses suffered by the clients of R&L.
of the relevant provisions of the SRC/SRC-IRR can no longer be imposed belated discovery of the fraudulent transactions in R&L in 2019. upon it because the CMIC is now barred by laches consequent to its VSI is in effect saying that the applicable penalties for its violation
Again, this Commission does not agree with VSI.
The Supreme Court discussed the concept of laches in Republic vs Sundiam96,as follows:
"Laches is the failure or neglect, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence,could or should have been done earlier. Stated differently, it is negligence or omission to assert a right within a reasonable time,warranting a presumption that
96 G.R. No. 236381. August 27, 2020 94 Comment /Opposition dated 8 June 2022. See par 1 of Item III (page 166) 95 Ibid. see page 168-169
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the party entitled to assert it either has abandoned it or
demands" is based upon grounds of public policy which declined to assert it. The doctrine of laches or of "stale
requires, for the peace of society,the discouragement of
principally a question of the inequity or unfairness of stale claims, and is not a mere question of time but is
permitting a right or claim to be enforced or asserted. (Emphasis supplied)
of the fact that the same is a recourse given in equity,and does not In applying the principle of laches, due consideration must be made
automatically apply in any and all circumstances where there is delay.97
invoking the same must be able to show that its application will not In addition to the requisites of laches which must be shown to be present the Supreme Court has, in Agra vs PNB98, emphasized that the person
contravene a statutory provision, thus:
"Assailing the CA ruling that laches was inapplicable because
from and is applied independently of prescription. In the claim was brought within the ten-year prescriptive period, petitioners stress that the defense of laches differs
support, they cite, among others, Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., in which the Supreme Court ruled:
[T]he defense of laches applies independently of prescription. Laches is different from the statute of
of delay, whereas laches is concerned with the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of limitations. Prescription is concerned with the fact
permitting a claim to be enforced, this inequity being founded on some change in the condition of
applies in equity; whereas prescription applies at law. Prescription is based on fixed time, laches is the property or the relation of the parties. Prescription is statutory; laches is not. Laches
ot.
True,prescription is different from laches, but petitioners reliance on Nielson is misplaced. As held in the afore-cited case, laches is principally a question of equity. Necessarily
97 In any event, "the fact of delay, standing alone, is insufficient to constitute laches." (see Chavez vs Bonto-Perez (242 SCRA 73. March 1, 1995) 98 G.R. No. 133317. June 29, 1999
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"there is no absolute rule as to what constitutes laches or
according to its particular circumstances. The question staleness of demand; each case is to be determined oflaches is addressed to the sound discretion of the court
is controlled by equitable considerations."Petitioners and since laches is an equitable doctrine, its application
sureties was inequitable. Remedies in equity address only situations tainted with inequity, not those expressly governed by statutes." (Emphasis supplied) however,failed to show that the collection suit against herein
investigate the activities of persons to ensure compliance, to impose corporations, for violation of the SRC/SRC-IRR.99 Relative thereto, the sanctions, including the revocation of the license/registration issued to The SRC expressly authorizes the Commission to regulate and
administrative proceeding(s) for violation of the SRC/SRC-IRR to invoke the equitable principle of laches by proving that that Commission has failed or neglected, for an unreasonable and unexplained length of time, doctrine in Citibank N.A. and the Citigroup Private Bank v. Tanco- Gabaldon, et al.,100 recognizes and allows a person subject of an
to institute and/prosecute an appropriate case, which engenders a presumption on the part of the person/corporation concerned that the Commission has abandoned the performance of its functions.
Did the Committee fail/neglect, for an unreasonable and unexplained length of time, to issue the Formal Charge which started the administrative investigation on VSI's alleged violations of the SRC/SRC- IRR in relation to the Sulapas VSI Accounts?
present. We rule in the negative as the four (4) requisites of laches101 are not
99 Sec. 5 (d), (f), and (m) of the SRC 100 "Section 54 of the SRC provides for the administrative sanctions to be imposed against prescriptive period for the filing of criminal actions, it likewise omitted to provide for the having been afforded an opportunity to institute a suit; (c) lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and (d) injury or persons or entities violating the Code, its rules or SEC orders. Just as the SRC did not provide a this score, it is a well-settled principle of law that laches is a recourse in equity, which is, applied only in the absence of statutory law.And though laches applies even to imprescriptible actions,its elements must be proved positively. Ultimately, the question of laches is addressed to the sound considerations.(Emphasis and underscoring supplied) [G.R.No.198444,4 September 2013.] which complaint is made and for which the complaint seeks a remedy; (b) delay in asserting the complainant's rights, the complainant having had knowledge or notice, of the defendant's conduct and period until when complaints for administrative liability under the law should be initiated. On discretion of the court and, being an equitable doctrine, its application is controlled by equitable 101 "As in the Gamponia case conduct on the part of the defendant, or of one under whom he claims,giving rise to the situation of e, the four elements of lache esent in the case at bar, namely: (a)
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First, the transactions involving the Sulapas VSI Accounts were all processed and even granted incentives by VSI, who is now claiming that the same did not violate the SRC/SRC-IRR;
Second, the Formal Charge was issued in 2019, the same year when the Commission, through the Committee,discovered the fraudulent transactions using the accounts of Mr. Sulapas in R&L, which triggered a separate inquiry leading to the instant Appeal) on VSI's alleged violation of the SRC/SRC-IRR in relation to its actions/treatment of the Sulapas VSI Accounts. Similar to the claim of VSI, the Committee could not have known the fraudulent transactions or the theft of the shares in R&L on its own; and it was only after the same was discovered in 2019 when a separate investigation on VSI's compliance with the SRC/SRC-IRR in relation to the Sulapas VSI Accounts was triggered. In fact, the Formal Charge was immediately issued soon after it became clear to the Committee that Mr. Sulapas, who was actively trading/transacting using the Sulapas VSI Accounts, might have resulted in a similar violation by VSI of the SRC/SRC-IRR;
Third, it is unreasonable on the part of VSI to expect that the Committee will not pursue an appropriate action upon finding that it has probably violated the SRC/SRC-IRR; and
FourthVSI cannot validly and legally claim that it will be prejudiced or damaged if the appropriate penalties will be imposed on the basis of a finding of violation of the SRC/SRC-IRR. It bears emphasis that its continued use of the license granted by the State is merely a privilegeand by accepting such concession,VSI has effectively agreed that it will take responsibility, and be accountable for any violation that the Commission will find.
Moreover, it bears to reiterate that what is being evaluated,and will be passed upon in the instant case, are the actions, systems or processes that VSI made and/or failed to make in dealing with the Sulapas VSI Accounts. They will determine if VSI has complied with the mandatory requirements of the SRC/SRC-IRR, and if it is still deserving of such license. Thus, granting ex gratia that there was a delay in the issuance of the Formal Charge, the same is irrelevant since the fraudulent
prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held to be barred.Miguel vs Catalino.G.R.No.L-23072.November 29,1968
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transactions in R&L will not be considered, nor the same will be used as basis in determining if VSI complied with the SRC/SRC-IRR.
Be that as it may, even if we assume that laches has already set in. the same will not bar the State, through this Commission, from imposing the appropriate sanction upon VSI for its violation of the SRC/SRC-IRR This doctrine was emphasized by the Supreme Court in the case of New Coast Hotel, Inc. vs Securities and Exchange Commission,102 to wit:
were present in the instant case, the State is not barred "Third, even assuming arguendo that the elements of laches
from penalizing New Coast for its violation of the FIA Generally, the State cannot be put in estoppel by omissions, mistakes, or errors of its officials or agents. In Republic vs Court of Appeals, this Court discussed the exception of the foregoing rule:
The general rule is that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. However, like all general rules, this is also subject to exception, viz:
They should not be invoked except in a rare and unusual circumstances, and may not be invoked Estoppels against the public are little favored.
where they would operate to defeat the effective operation of a policy adopted to protect the public. They must be applied with circumspection and should be applied only in those special cases where the interests of justice clearly require it. Nevertheless, the
must not play an ignoble part do a shabby thing; dishonorably or capriciously with its citizens and and subject to limitations...,the doctrine of government must not be allowed to deal
equitable estoppel may be invoked against public authorities as well as against public individuals [.]
Here, it is cannot be gainsaid that the interest of justice will not in any way be served by absolving New Coast from its administrative offense. Thus, there is no basis
102 G.R. No. 264667. November 28, 2023
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for this Court to waive the State's immunity from estoppel." (Emphasis supplied)
IN. VSI violated Rule 30.2.1.of the SRC-IRR (EthicalStandards
Account Information Rule). 30.2.1.2.3. (Capabilities), and About Clients) in relation to Rule Rules), 30.2.1.2.4. 52.1.6 including (Information (Customer Rule
integrity of the capital market.104 same.103 This,according to the SHP, constitutes a failure on the part of VSI to observe high standards of commercial honor; the just and equitable principles of trade; and to act honestly and fairly for the Standards Rule, and the related provisions therein on Capabilities and Information about Clients, in relation to the Customer Account Information Rule. The SHP found that while VSI was able to show that it has Supervisory Procedures and Compliance Manual, as well as Risk Management Manual, it willfully failed to maintain and implement the In the Assailed Decision,the SHP found that VSI violated the Ethical
reduced the monetary penaltyto P200,000.00 for each provision that was violated from the original P1,000,000.00. violation by VSI of the Ethical Standards Rule,and the related provisions therein on Capabilities (Rule 30.2.1.2.3.), Information About Clients (Rule 30.2.1.2.4.) and Customer Account Information Rule (Rule 52.1.6), the SHP found that same was not attended by bad faith for which reason, it This Commission notes that while the SHP sustained its finding of
supervisory control procedures, as well as the SRC/SRC-IRR.105 VSI of Mr. Sulapas,106 and adopted a KYC procedure that is more than sufficiently compliant with the VSI Internal Rules on Opening of the Ethical Standards Rule, and the related provisions therein on Account Information Rule.VSI enumerated the incidents which allegedly showed a clear intent on its part to ensure compliance with its claimed that it took reasonable steps to establish the true and full identity Capabilities, and Information About Clients in relation to the Customer VSI disagrees with the SHP and maintained that it has not violated
103 Decision. See pages 189 and 205 1os Comment/Opposition. see pages 177 to 180 106 Ibid. pages 192 to 200 104 Ibid. page 209
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Customer Accounts and Documentary Requirements.107 Finally, VSI also enumerated the circumstances which showed that it fully complied with, or adhered to the Ethical Standards Rule108, and the Rules on Capabilities.109
of Broker Dealers, which includes and lays down the Ethical Standards Rule 30.2 of the SRC-IRR covers Transactions and Responsibilities
Rule (Rule 30.2.1.), a portion of which reads, thus:
"30.2.1.Ethical Standards Rule
salesman of a Broker Dealer (hereinafter referred to as a 30.2.1.1. Every Broker Dealer, Associated Person and "registered person"), in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.
standards: conducting his business in an ethical and fair manner under other SRC rules, will be guided by the following International Organization of Securities Commission (IOSCO) 30.2.1.2. In considering whether a registered person is the Commission, in addition to the requirements imposed principlesand requirements whichincorporate
Xxx.
30.2.1.2.3. Capabilities
A registered person shall have and employ effectively the
performance of his business activities. resources and procedures which are needed for the proper
any person he employs or appoints to conduct business for including having relevant training or experience to act in the 30.2.1.2.3.1.A registered person shall ensure at all times that or with clients or other registered persons is qualified,
Rules 28.1 and 28.2. capacity so employed or appointed in compliance with SRC
108 Ibid. pages 231 to 234 109 Ibid. pages 235 to 238 107 Ibid. pages 200 to 201
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30.2.1.2.3.2. A registered person shall ensure that at all times, pursuant to SRC Rule 30.2.6, he has:
and does diligently supervise his employees and all 30.2.1.2.3.2.1. Adequate resources to diligently supervise
persons appointed by him to conduct business for or with clients or any other registered persons; and
30.2.1.2.3.2.2. Satisfactory internal control procedures and financial and operational capabilities which can be
and authorized representatives. and other registered persons from financial loss arising from theft, fraud, and other dishonest acts, or professional misconduct or omissions of all company officers, employees reasonably expected to protect his operations, his clients
30.2.1.2.4.Information About Clients
30.2.1.2.4.1.A registered person should seek from his clients information about their financial situation, investment experience and investment objectives regarding the services to be provided pursuant to Rule 52.1.6 and other applicable laws. If the client refuses to disclose reasonable information about his financial situation, the registered person shall make the necessary estimate based on his initial evaluation of the information given by client.
30.2.1.2.4.2. Information obtained from clients shall be treated with utmost confidentiality and shall not be disclosed to unauthorized persons; Provided that, such treatment of confidentiality shall not apply to the Commission. SROs, Exchanges, clearing agencies, depositories and other authorized representatives that exercise regulatory and supervisory responsibilities, or to any order issued by the Commission pursuant to SRC Rule 30.2.9.This confidentiality treatment and all the exceptions shall be stated in the Client Agreement.
activities shall be complied with strictly by the registered All requests for information by the Commission about trading
persons in a form and style prescribed by the Commission, notwithstanding any confidentiality agreement between and among the registered persons and their clients.
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The submission of the registered persons referred to above
to expeditiously conduct surveillance, examination or or any other means that may hinder the Commission's ability shall not be made in codes, cyphers or internal descriptions,
investigation pursuant to this Rule.
30.2.1.2.4.3. A registered person shall take all reasonable steps to establish the true and full identity of each of his and investment objectives. clients, their financial situation, investment experience,
30.2.1.2.4.4. Having regard to information disclosed by a through the exercise of due diligence, the registered person client which the registered person is or should be aware of shall ensure that such recommendation or solicitation for
pursuant to Suitability Rule under SRC Rule 30.2..4. that client is reasonable and suitable in all circumstances
client, in relation to derivatives, including options and 30.2.1.2.4.5. A registered person providing services to any
warrants,structured products, or any leveraged transaction shall assure himself that the client understands the nature and risks of these instruments and has sufficient net worth and financial sophistication to be able to assume the risks and bear the potential losses of trading in such investments.
of the person ultimately responsible for originating the 30.2.1.2.4.6. A registered person shall be reasonably satisfied about the identity, address and contact details
Provided however that in relation to an investment company, instruction in relation to a transaction, the person who transaction and/or bears the commercial economic risk; or discretionary account,the person referred to above is the stands to gain the commercial or economic benefit of the
investment company or the account,not those who hold a beneficial interest therein.
a record of the details referred to above and provide the 30.2.1.2.4.7.A registered person shall keep in the Philippines
Commission with access to those records upon request pursuant to Section 52 of the Code and SRC Rule 52.1.1.
30.2.1.2.4.8. A registered person shall not do anything to effect a transaction unless he has first complied with the
In the Matter ofR&LInves mentsJn Investigation and Review Committee vs Venture Securities,Inc., et. al SEC En Banc Case No.05-22-495 Page 43 of 69 DECISION
requirements of this rule, as required by the Suitability Rule under SRC Rule 30.2.4." (Emphasis supplied)
The relevant provisions of the Customer Account Information Rule on the other hand, provides:
"52.1.6. Customer Account Information Rule
account, the following information and requirements: 52.1.6.1. Every Broker Dealer shall maintain for each
52.1.6.1.1. Customer's name, residence address, office address,principal business address and their corresponding phone numbers and email addresses, mobile phone number;
52.1.6.1.2. Trading Account Code;
52.1.6.1.3.Occupation of customer,and the name, address and phone number of employer, if employed;
identification card number; Passport Number, Driver's License Number, Senior Citizen's 52.1.6.1.4. At least one (1) of the following: Social Security Number, Government Service and Insurance System Number ID Number,Voter's ID Number or any government issued
52.1.6.1.5. Sources of funds;
52.1.6.1.7. Signature of the salesman introducing the account 52.1.6.1.6.Nationality
and signature of the partner,officer or manager who accepts the account:"
practice in securities regulation that was adopted from the securities laws of the United States,specifically the Securities Exchange Act of 1934 The Ethical Standards Rule embodied in the SRC/SRC-IRR is a best
investing public, and to elevate business practices within the securities which was specifically designed to extend greater protection to the
honor" and "just and equitable principles of trade" relates to the brokerage industry. The Ethical Standards Rule which makes it mandatory for broker/dealers to observe "high standards of commercial
transcendental goal of protecting investors and promoting public
Investigation and Review Committee vs Venture Securities, Inc. et. al. n the Matter of:R&LInvestments,In SEC En Banc Case No. 05-22-495 Page 44 of 69 DECISION
interest, resulting in the restoration of investor confidence in the capital markets.110
se, make broker/dealers ethical in the conduct of their business. They broker/dealers to observe"high standards of commercial honor"and"just and equitable principles of trade.These general principles does not,per Notably,the Ethical Standards Rule in Rule 30.2.1.of SRC mandates
only serve as guide to specific actions,systems and processes prescribed under the SRC/IRR which,if carried out,may result in the broker/dealer being considered as observing"high standards of commercial honorand "just and equitable principles of trade", and thus compliant with the Ethical Standards Rule.
Relative thereto, the measures used under the SRC-IRR in
standards on capabilities and information about clients, in determining as to what the instant case requires, if VSI was conducting its business in an ethical and fair manner viz the Sulapas VSI Accounts determining compliance with the Ethical Standards Rule are: (a) honesty and fairness;111 (b) diligence;112 (c) capabilities; (d) information about clients;113 (e) information for clients;114 (f) conflicts of interest;115 and (g) compliance.116 In this regard, Rule 30.2.1.2. expressly directs the Commission to be guided by the said provisions, specifically the
broker/dealers to employ adequate resources for the purpose of actually diligently supervising117 its employees, and in implementing internal control procedures and financial and operational capabilities that are As regards the standards on "capabilities", the SRC-IRR requires
registered persons from financial loss. The use in Rule 30.2.1.2.3.2.2 of the word "satisfactory" means that the intent of the Rule is to ensure that the internal control procedures and financial and operational capabilities reasonably expected to protect his operations, his clients and other
brokerage/dealership business is imbued with public interest, the mere are actually implemented; as it is in the implementation thereof that its effectiveness isdetermined. Consideringthatthe securities
116 Rule 30.2.1.2.7.SRC IRR 113 Rule 30.2.1.2.4 SRC IRR 117 Rule 30.2.1.2.3.2.1 states: "Adequate resources to diligently supervise and does diligently 11 Ramirez, Steven, The Professional Obligations of Securities Brokers Under Federal Law: An https://lawecommons.luc.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1276&context=f acpubs 111 Rule 30.2.1.2.1.SRC-IRR 112 Rule 30.2.1.2.2. SRC IRR supervise his employees...(Emphasis supplied) 114 Rule 30.2.1.2.5 SRC IRR Antidote for Bubbles?70 U.Cin.L.Rev.527(2002).Accessed at 115 Rule 30.2.1.2.6.SRC IRR
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of:R&LInvestmentsIn SEC En Banc Case No. 05-22-495 Page 45 of 9 DECISIO
capital market, which are the main objectives of the SRC/SRC-IRR. Thus. the maintenance of a perfectly crafted operations or compliance manual that is not actually or properly implemented, or which provisions do not themselves, result in the protection of investors and the integrity of the submission of manuals and procedures will not suffice as they will not, by
induce compliance with the SRC/SRC-IRR, will not render a broker/dealer compliant with the Ethical Standards Rule.
Clients which is essentially related to the Customer Account Information Rule,the SRC-IRR requires broker/dealers to take all reasonable steps to Anent the Ethical Standards Rule covering Information About
broker/dealers are able to provide appropriate recommendations to its intended to enable broker/dealers to decide whether to allow a and investment objectives of their clients. Aside from ensuring that investor-clients pursuant to the Suitability Rule, these Rules are also establish,among others, the financial situation of, investment experience,
prospective client to trade using its facilities/services, or to continue trading using their platform, in case of an existing client. This protects investors, especially those who are not sophisticated, or who does not have enough resources, from the risk of financial loss by gambling, among others, through the stock market. The Suitability Rule (Rule 30.2.4. supplements and provides added protection to investors by ensuring that they are properly/adequately advised on the transactions that they are carrying out.
demand from the State; and considering that such an activity is imbued brokerage business, trading in securities is not a right that a person can At this juncture, it is worth emphasizing that like the securities
with public interest, broker/dealers are duty-bound to ensure that only persons/investors who have fully complied with the requirements of the SRC/SRC-IRR are able to avail of their services.
The requirement to conduct a KYC is not merely a mechanical act
accomplished the CAIF,as what VSI is suggesting. From the perspective of the SRC/SRC-IRR, what is important/critical is how a broker/dealer that one can claim to have complied with after the prospective client has
appreciates and uses the information/data provided by the prospective client, as they determine compliance with the relevant provisions of the SRC/SRC-IRR.The Suitability Rule,for instance, is only relevant and will
to curtail money laundering will only be effective if broker/dealers are able to obtain information (and are satisfied) on the true identity and make sense if broker/dealers have complete and accurate information on the financial situation of a client. In the same manner, the Rules intended
personal circumstances of clients.
Investigation and Review Committee vs Venture Securities, Inc.,et. al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No.05-22-495 Page 46 of 69 DECISION
complied with the requirements of the SRC/SRC-IRR, it is not sufficient Thus, in assessing/determining if broker/dealers have fully
agreements or CAIF.Broker/dealers will have to prove, to the satisfaction that they have the manuals, procedures, the applications documents,
of the Commission,that in the performance of their responsibilities under theSRC/SRC-IRR,they haveactually implemented such manuals/procedures by properly considering and acting on the information/data obtained from clients. This is how the SRC/SRC-IRR
integrity of the capital market are accomplished. A contrary position will makes sure that the objectives of protecting investors and promoting the promote the principle of caveat emptor which our securities laws have long abandoned.
In the instant case,while VSI was able to show that it has a Risk
admitted facts and circumstances show that VSI fell short of actually Management Manual and Internal Control Policy, a Supervisory Procedures and Compliance Manual,and has followed its KYC procedures resulting in the accomplishment by Mr.Sulapas of his CAIF,the following
experience, and investment objectives of Mr. Sulapas: diligently supervising, and in implementing internal control procedures and financial and operational capabilities that are reasonably expected tg protect his operations, his clients and other registered persons from financial loss, and in establishing the financial situation, investment
Sulapas in acting and/or processing all the transactions of the Sulapas VSI Accounts. Nothing in the records will show that VSI First, VSI fully relied on the CAIFs purportedly accomplished by Mr.
made any further verification on the financial status or capability of Mr. Sulapas despite being aware of the sheer number of transactions, and huge amount involved therein. VSI justified the foregoing by invoking and capitalizing on Rule 30.2.1.2.4.1. of the
however, clearly ignored the directive in Rule 30.2.1.2.4.8. i.e. based on initial evaluation of the information given.118 VSI SRC-IRR which allegedly allowed it to make the necessary estimate prohibiting any transaction that does not comply with the provisions of the rules, which underpins the entire Ethical Standards Rule as it is intended to protect investors and promote the integrity of the capital market;
VSI Account from day one in 2012, in utter disregard of the financial Second, VSI processed and effected all transactions of the Sulapas
118 Comment/0pposition. See pages 194 and 203
Investigation and Review Committee vs Venture Securities, Inc.,et. al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No. 05-22-495 Page 47 of 69 DECISION
capacity of Mr. Sulapas who declared in his CAIF that he only had a liquid net worthand annual income of less than
transactions for CAL shares of Mr. Sulapas on 30 May 2012 (the very same month when the Sulapas VSI Accounts were opened) whichVSI PhP1,000,000.00.119 The records show that the first two (2) buy acteduponand effected, amounted to PhP2,210,759.23.12o Moreover,despite having barely opened his
VSI effected a buy transaction of 1Million MEG shares in the amount account in May 2012,and with the same declared annual income
of PhP2,252,800.00 on 2 July 2012. These two 2) transactions of
transactions, this Commission can only think of the other possible Accounts; consistent with his financial capability. If VSI was not interested in the commissions that it will get from such sheer volume of reason why VSI executed all the transactions of the Sulapas VSI Mr. Sulapas should have already raised doubts on his capacity to sustain the same,and yet VSI effected and even defended the same (as well as the subsequent numerous transactions) as regular and
Third, on the basis of the CAIFs purportedly accomplished by Mr
coming up with its own conclusion on Mr. Sulapas as a day trader, and in adamantly defending his trading pattern/activities as consistent with his financial capacity i.e. VSI claimed that the capacity of Mr. Sulapas is faulty and premised on a myopic focus on Sulapas,VSI facilitated and effected all transactions of the Sulapas VSI Accounts during the Covered Period, and used the same in Committee's conclusion on the trading activities vis the financial
the "buy" transactions only;
Fourth, VSI clearly disregarded the entry in Mr. Sulapas' CAIF
Accounts, VSI even went to the extent of justifying that it was normal to have accounts with other B/D121, instead of broker(s). Being fully aware that the considerable amount of shares which declared that he did not have other account with other from the Sulapas R&L were being transferred to the Sulapas VSI
asking/confronting Mr. Sulapas that the same was contrary to the declaration in his CAIF.Thisundoubtedly exposed VSI,its clients
mention the fact that a falsity, misrepresentation or fraud is and other registered persons to the risk of financial loss, not to
despised,abhorred,and punished under the SRC/SRC-IRR
119 (bid. par. 8 (page 16) 121 Answer par. 4.16 120 See Decision.Page 40
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No.05-22-495 Page 48 of 69 DECISION
Fifth, VSI clearly failed to establish the true and full identity, financial situation, investment experience and investment
opened an account with VSI on 29 May 2012;123 (b) it had profile as a day trader, there was nothing unusual in the transactions of Mr. Sulapas during the Covered Period;125 (d) it was Mr. Sulapas who primarily transacted in his account with VSI. However,VSI appears to have been blinded by the number,and the objectives of Mr. Sulapas.122 VSI admitted that:a Mr. Sulapas monitored the EQ trades, and the gradual increase of trades and balances of Mr. Sulapas over the years;124 (c) consistent with his
aggregate amount involved in the transactions that it effected for the Sulapas VSI Accounts,as shown by how it staunchly defended
confidently claimed that "[t]he buying and/or selling of the shares were not executed through a one-time transaction but a result of a conclusion. In 2017(or five [5]years after the Sulapas VSI Accounts were opened, and continuously traded actively), Mr. Sulapas and justified them as reasonable and regular. In this regard,VSI very long series of transactions over the years".VSI obviously failed to consider that Mr. Sulapas himself negated its position and
remained at less than PhP1,000,000.00.The updated CAIF showed accomplished and submitted an updated CAIF where he expressly that Mr. Sulapas was an inexperience or a newbie investor who is declared therein that his liquid net worth and annual income
not knowledgeable of his financial position,or VSI risked taking the Ethical Standards, Rule; cudgels by offering a justification for its failure to comply with the
Sixth,VSI processed and effected all transactions of the Sulapas VSI Account from day one in 2012,in utter disregard of the financial situation and investment experience of Mr. Sulapas. The record
124 Ibid. pars. 3.9.2., 3.14 122 "KYC is the bedrock of financial advice. It is a form of due diligence to ascertain relevant client for the ride; taking time to challenge appropriately is a must if the customer is to get value for money "There are many reasons why financial institutions do customer due diligence and commit time and needs/financial-crime-cyber-security/know-your-customer-kyc/customer-due-diligence-cdd) 123 Answer dated 21 September 2020. Par. 3.8.1 125 (bid. pars. 3.11, 3.13 information before doing business with them. Advisers must be careful that they are not taken along and your firm is to build a successful relationship with that customer. For too long there have been Itis. (https://www.huntswood.com/insights/reducing-investments-mis-selling-at-home-2); effort to 'know their customers': So that the financial institution can assist law enforcement"(https://www.swift.com/your- large blank spaces in fact finds or simple notes that state"does not wish to discloseor"not applicable". an To help make sure the customer is really who they say they are To guard against fraudulent activity such as identity fraud or impersonation To ensure the organization remains compliant with the regulations and laws of the regions or markets they are operating in adviser's duty to get to know the customer in front of them.
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No.05-22-495 Page 49 of 69 DECISION
shows that from day one, Mr. Sulapas, an investor with less than
name a few. It is a recognized industry practice, which this EW,VMC,LCB,RFM,OV,NI,MEG,MER,CHIB,ABS,EAGLE,SECB PhP1 Million liquid net worth and annual income,was trading CAL, DIZ,GERI,ABA,ELI,CPG,TDY,CMT,BHI,MAB,SFI,PX and,EG,to Commission takes administrative notice of, that trading in
inquiry on how Mr. Sulapas, with his lowly financial status, knew of are bereft of anything that showed VSI even making a further securities requires and demands a certain degree of knowhow and of issuers whom one intends to invest his money on. The records experience in analyzing the performance,financial and projections
Accounts without question; these issuers and decided to invest practically his entire net worth with them.VSI plainly executed all the trades of the Sulapas VSI
Seventh, VSI failed to carry out its duty of recommending to Mr. Sulapas the purchase of securities that are commensurate to his PhP1,000,000.00.The records are bereft of any showing that VSI declared liquid net worth and annual income of less than
cautioned, tempered and/or provided the appropriate advice to
policy certainly exposes VSI, its clients, and other registered persons to the risk of financial loss; Mr. Sulapas.What is extant in the evidence are documents showing Mr. Sulapas'unabated transactions during the Covered Period.This
Eighth, VSI executed all the transactions of the Sulapas VSI Accounts during the Covered Period despite full knowledge that the requirements prescribed under the relevant provisions of the Ethical Standards Rules,in relation to the Suitability Rule, have not been complied with;and
Ninth, VSI extended credit to the Sulapas VSI Accounts notwithstanding full awareness that by their classification as a cash accounts, they were not entitled to the same. Again,this policy and practice exposed VSI,its clients,and other registered persons to the risk of financial loss.
Sulapas VSI Accounts,clearly fell short in complying with the provisions Information Rule. While this Commission cannot speculate that the same procedures and practices which VSI implemented in dealing with the of the Ethical Standards Rule, which included the Rules on Capabilities and Information About Clients, in relation to the Customer Account The foregoing factual circumstances disclose that the policies,
policies and practices are also currently being implemented by VSI in the
Investigation and Review Committee vs Venture Securities,Inc., et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 50 of 69 DECISION
existing accounts of its other clients, one thing is certain: the Board of Directors and management of VSI allowed the full/continued
is nothing in the records of the case which show that the Board and/or imposition of the appropriate penalties on VSI as separate juridical entity implementation of these policies,procedures and practices during the entire period that the Sulapas VSI Accounts were actively trading. There practices for purposes, among others, of improving and/or correcting the that have been granted the privilege to operate a securities brokerage/dealership business. management of VSI evaluated its existing policies, procedures and same to ensure full compliance with the SRC/SRC-IRR.This justifies the
V. VSI violated Rules 48.1.
(Margin) and 48.2
Credit) of the SRC-IRR, in relation (Prohibitions on Extension of to Rule. 50.1
Account) of the SRC-IRR. (Purchases and Sales in Cash
of the SRC-IRR after finding that five hundred fifty-nine (559) In the Assailed Decision, the SHP ruled that VSI violated Rule 50.1
transactions of the Sulapas VSI Accounts,which are classified as a cash accounts,were not paid in cash within T+3,and were not liquidated.The SHP further ruled that VSI violated Rule 48.1 of the SRC-IRR after finding that it resorted to the credit line granted to Mr. Sulapas under the Credit Line Agreement (the"Agreement),and applied the same in paying the Sulapas VSI Accounts' buy transactions, instead of liquidating the same. The SHP also ruled that the act of VSI in extending credit to Mr.Sulapas also violated Rule 48.2 of the SRC-IRR.
was not attended by bad faith for which reason, it reduced the monetary original P1,000,000.00. violation by VSI of the Rules on Margin, Prohibition on Extension of Credit,and Purchases and Sales in Cash Account,the SHP found that same penalty to P200,000.00 for each provision that was violated from the We note however that while the SHP sustained its finding of
credit to Mr.Sulapas fully complied with the requirements prescribed VSI disagrees with the SHP and maintained that the extension of
transactions. VSI also claimed that for all his transactions where he did under Rule 48.1 of the SRC-IRR i.e. it did not exceed fifty percent (50%) of the current market value of his securities at the time of the
not avail of the Credit Line Agreement,Mr. Sulapas was allegedly able to
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of:R&L Investments.In SEC En Banc Case No. 05-22-495 Page 51 of 69 DECISION
settle his purchases within T+3 days. Thus, according to VSI, the SHP erred in finding that it violated the Rules on Margin, Prohibition on Extension of Credit, and Purchases and Sales in Cash Account.
Prohibition on Extension of Credit, and Purchases and Sales in Cash The relevant provisions in the SRC-IRR on the Rules on Margin
Account states:
"Rule 48.1 - Margin
in an amount that exceeds fifty percent (50%) of the current market value of the security at the time of the transaction. In 48.1.1.A broker Dealer shall not extend credit to a customer
no event shall new or additional credit be extended to an account in which the equity is less than fifty thousand pesos (Php50,000.00).
"Rule 48.2 -Prohibition on Extension of Credit
No member of an Exchange or broker or dealer shall
customer on the following: for the extension or maintenance of credit to or for any directly or indirectly extend or maintain credit or arrange
48.2.1. On any security unless such credit is extended and
which the Commission shall prescribe under this Section including rules setting credit in relation to net capital of such maintained in accordance with the rules and regulations
member, broker or dealer;
48.2.2. Without collateral or on any collateral other than
maintenance of credit is not for the purpose of purchasing or provisions of SRC Rule 48.2.1." securities,except (i) to maintain a credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or carrying securities or evading or circumventing the
"Rule 50 - Purchases and Sales in Cash Account
50.1. Purchases by a customer in a cash account shall be paid in full within three (3) business days after the trade date.
Investiga ion and Review Committee vs Venture SecuritiesInc.et.al In the Matter of: R&L Investments, Inc. SEC En Banc Case No. 05-22-495 Page 52 of 69 DECISION
50.2 If full pavment is not received within the required
such sale cannot be effected within said period for justifiable reasons in which case, notification in writing shall be made the transaction, or the unsettled portion thereof, starting with the Exchange and the Commission." (Emphasis supplied) time period, the Broker Dealer shall cancel or liquidate on the next business day but not beyond ten (10) business days following the last day for the customer to pay, unless
It is recognized in practically all jurisdictions around the world including the US where our securities laws were patterned, that a brokerage account, through which investors can buy and sell various
account. In other words, an investor who wishes to open a brokerage account has to choose between the two (2) main options of opening characteristics,purposes, advantages and risks,a cash account cannot be types of investments, consists of either a cash account or a margin either a cash account or a margin account. Owing to their unique
maintain a margin account, which is separate from the former. treated as a margin account and vice versa. Thus,an investor who has a cash account but wants to avail of credit has the option to open and
In the interest of providing a proper context and better appreciation of the afore-quoted provisions of the SRC-IRR, We will discuss the basic concepts of cash account and margin account.
account) to buy securities, pay the full cost of an investment with funds actually existing in his account. A cash account has been considered to be an investor who has deposited funds (which is required in opening such As the name suggest, a cash account is a brokerage account where
account or the total amount invested; and since buying on margin is not of Investor Education and Advocacy of the US Securities and Exchange a more conservative investment choice since transactions in securities, as well as the potential losses, are necessarily limited to the cash in his allowed with cash accounts.126 In an Investor Bulletin issued by the Office investor using a cash account from borrowing funds from his/her broker- dealer in order to pay for transactions in the account.127 The reason for this is found in Regulation T Section 220.8 (Cash Account) of the US which Commission, it was emphasized that existing regulations prohibit an
https://www.finra.org/sites/default/files/NoticeDocument/p003091.pdf https://www.sec.gov/investor/alerts/ib marginaccounts.pdf. See also the Notice to Members, Credit 126 Indeed Editorial Team. Cash Accounts vs Margin Accounts: What's the Difference. 16 August 2024. Accessed at: https://www.indeed.com/career-advice/career-development/cash-account Extension/DayTradingRequirements, USSEC,Officeof theInvestorEducation issued by FINRA (May 2024. Accessed at: ang Advocacy. Accessed-at
In the Matter of:R&L Investr ntsIn Investigation and Review Committee vs Venture Securities, Inc., et. al SEC En Banc Case No.05-22-495 Page 53 of 69 DECISION
requires full payment of the securities purchased in a cash account. In our jurisdiction, we find this rule embodied in Rule 50.1 of the SRC-IRR.
A margin account, on the other hand, is a brokerage account in
collateral, to purchase securities. An investor who buys securities using which the broker/dealer lends the investor cash, using the account as credit extended by the broker/dealer is known as trading on margin Investors may purchase up to 50% of stock on margin. An investor who maintains a margin account must own at least 25% of assets in the said account. The broker/dealer will charge the investor interest on the borrowed portion of the investment, and use the value of his stocks and other investments as collateral. Moreover, the investor is required to maintain a specific margin ratio, or minimum balance, after a securities purchase;and stands to forfeit all his assets if his/her account falls below that limit, and fails to add more cash or securities to the account. Thus, while a margin account increases an investor's purchasing power, it also exposes such investor to the potential for bigger losses. It is recognized in the securities brokerage industry, and even by regulators, that margin accounts can be very risky and are not appropriate for everyone,as they are subject to more stringent regulations.
application, and must not be applied, to cash accounts. The Rules on approval and those that are existing. The Rules on Margin have no Margin expressly prohibit any broker/dealer from extending credit to a 48.2 (Margin) apply only to margin accounts i.e. those that are pending From the foregoing, it becomes readily clear that Rules 48.1 and
customer without a collateral which must consist of securities,unless the same falls under the exceptions provided in Rule 48.2.2 of the SRC-IRR Moreover, the Rules on Margin requires that a credit extended to a margin account shall not exceed fifty percent (50%) of the current market value of the security at the time of the transaction. In all
the Rules on Margin, as well as the other applicable rules and regulations issued by the Commission. circumstances where a credit is extended on securities under a margin account, Rule 48.2.1 requires the all broker/dealers to fully comply with
It is equally readily apparent from the discussion on cash vs margin accounts that Rules 50, 50.1 and 50.2 (Purchases and Sales in Cash Account) of the SRC-IRR only applies to cash accounts. The said Rules expressly require customers maintaining a cash account to pay in full,any and all purchases of securities, within three (3) business days after the trade date. If the customer fails to comply with the same i.e. if the account is not funded, the broker/dealer is directed to cancel or liquidate the
Investigation and Review Committee vs Venture Securities, Inc. et. al. In the Matter of:RL Investments,Inc SEC En Banc Case No. 05-22-495 Page 54 of 69 DECISION
transaction starting on the next business day, but not beyond ten (10 business days.
Accounts were cash accounts. VSI also expressly admitted that In the instant case, VSI expressly admitted that the Sulapas VSI
notwithstanding such classification, it extended credit, through a Credit Line Agreement, to clients, including Mr. Sulapas, with good trading and credit profile, to wit:
"The account of Mr. Sulapas is a cash account with certain features that are extended to clients with good trading and credit profile with the Company such as the Credit Line Agreement."128 (Emphasis supplied)
a judicial admission,129 discloses a policy of VSI that allows the grant of line not on the basis of the type of account that he/she maintains i.e. credit to cash accounts maintained by its clients who have good trading and credit profile.Thus,in VSI,a client becomes qualified to enjoy a credit The afore-quoted admission of VSI, which partakes of the nature of
margin account as required by the SRC/SRC-IRR. Using the standard of
and all of its existing clients (and this Commission can only imagine how "good trading and credit profile",VSI has,in effect, allowed Mr. Sulapas
many they are, as well as the aggregate amount of credit that VSI has agreed to extend,which is the extent of its exposure to risk of loss) who are maintaining cash accounts, to trade on margin.
to margin accounts,which are created and determined at the time of the The Rule on Margin is clear that its provisions are only applicable
opening thereof.VSI (together with the client) has no discretion to modify the features of a cash account or create a hybrid cash account (and accord the account holder the benefits and/or the inherent risks attendant therein) by the simple expedient of executing a Credit Line Agreement
fact admitted. It may be contradicted only by showing that it was made through palpable mistake or 128 Motion for Reconsideration dated 28 June 2021. Par. 3.34 129 "A judicial admission is an admission, verbal or written, made by a party in the course of the proceedings in the same case, which dispenses with the need for proof with respect to the matter or that no such admission was made.
A party who judicially admits a fact cannot later challenge [the] fact as judicial admissions are a waiver of proof; production of evidence is dispensed with. A judicial admission also removes an admitted fact from the field of controversy.Consequently,an admission made in the pleadings cannot be The allegations, statements or admissions contained in a pleading are conclusive as against the pleader. A party cannot subsequently take a position contrary to or inconsistent with what was pleaded." (Gonzales-Saldana vs Niamatali. G.R. No. 226587. November 21, 2018) controverted by the party making such admission and is cannot be controverted by the party making such admission and is conclusive as to such party, and all proofs to the contrary or inconsistent therewith should be ignored,whether objection is interposed by the party or not
Investigation and Review Committee vs Venture Securities,Inc.,et.al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No. 05-22-495 Page 55 of 69 DECISION
allowing clients with cash accounts to trade on margin, VSI has clearly violated the purpose of the margin requirements in the SRC/SRC-IRR has a "good trading and credit profile". By extending credit to, and which was emphasized by the Supreme Court in Abacus Securities after determining that a client is qualified to enjoy credit because he/she Corporation vs Ampil,130 to wit:
agency an effective method of reducing the aggregate other more desirable uses of commerce and industry x x "The main purpose is to give a [g]overnment credit amount of the nation's credit resources which can be directed by speculation into the stock market and out of
X
margins is the stabilization of the economy. Restrictions objectives of the government with due regard for the excessive credit." A related purpose of the governmental regulation of on margin percentages are imposed "in order to achieve the promotion of the economy and prevention of the use of
secondary purpose is to protect small investors." are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities. Their recognized Otherwise stated, the margin requirements set out in the RSA (Emphasis supplied)
renders it liable for violation of the Rule on Margin. transactions, contrary to the insistence of VSI. The fact that Mr. Sulapas were maintaining cash accounts made him unqualified to trade on margin; and the fact that VSI allowed Mr. Sulapas to trade on margin by his "good trading and credit profile", qualified to be granted credit under the Rules on Margin,or has not availed of his credit line for all his On the basis thereof, it is therefore immaterial that Mr. Sulapas has
line beyond T+3,131 instead of cancelling or liquidating the same, when the Rule is clear that the same had to paid in full within three (3) business fifty-nine (559) transactions during the Covered Period using his credit days after the trade date,VSI clearly violated Rule 50 of the SRC-IRR.The In the same vein, by allowing Mr. Sulapas to settle five hundred
131 See pages 66 to 183 of the Decision. 13 G.R. No.160016.February 27,2006
Investigation and Review Committee vs Venture Securities,Inc.,et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 56 of 69 DECISION
contention of VSI that "Mr. Sulapas was able to settle his obligations eventually within a reasonable amount of time"132 does not suffice for
payment within three (3) business days after the trade date. purposes of complying with Rule 50.1.of the SRC-IRR which requires full
V. VSIviolatedRule52.1.1
(Books and Records Rule) of the SRC-IRR
In the Assailed Decision, the SHP found that VSI violated Rule 52.1.1.(Books and Records Rule) of the SRC-IRR (a) after it facilitated the "transfer in"and"transfer outtransactions of the Sulapas VSI Accounts sans the written request of Mr. Sulapas; and (b) by its failure to keep current the books and records relating to its business as shown by the discrepancies in the number of shares in the stock (In) CM and EQ Trade Forms of Mr. Sulapas. Again, this Commission notes that, similar to the other violations discussed earlier,the SHP modified the amount of the fine imposed for this violation in the Assailed Resolution on the basis of a finding of absence of bad faith on the part of VSI.
violated the Books and Records Rule,arguing that the evidence on record In its defense,VSI maintained that the SHP erred in finding that it
complied with the requirements of the Books and Records Rule.133 As allegedly showed that it maintained adequate records and information. VSI insists that since it was able to show that (a) the transactions of the Sulapas VSI Accounts were duly documented in an Account Ledger; (b) the "transfer-in" EQ Trades of Mr. Sulapas were documented by Stock duly documented by Stock Out Credit Memos, VSI is deemed to have Credit Memos;and (c) the"transfer-out"EQ Trades of Mr.Sulapas were
regards the discrepancies in the Stock-in Credit Memos and EQ Trade Forms of Mr. Sulapas,VSI maintained that the same are "miniscule and
record the transactions.134 dwarfed in comparison to the total buy and sell transactions" of the Sulapas VSI Accounts,which allegedly negates the finding that it failed to properly
We do not agree with VSI.
SRC-IRR provides: The relevant provisions of the Books and Records Rule under the
"52.1.1. Books and Records Rule
134 Ibid. see page 223 132 Comment/Opposition. par. 4.39 133 Comment/Opposition. Ssee page 214
Investigation and Review Committee vs Venture Securities, Inc.,et. al. In the Matter of: R&L Investments, Ing SEC En Banc Case No. 05-22-495 Page 57 of 69 DECISION
52.1.1.1.A Broker Dealer shall make, keep current and maintain in its principal office the following books and records relating to its business:
XXx
52.1.1.1.1.2.An In/0ut Receipts Book setting forth the receipt and delivery of the securities to and from other Broker Dealers and securities depository in case of stock dividend distribution, including information on the date of receipt or
another Broker Dealer,the Broker Dealer should obtain In/Out Receipt number,name of security, number of shares, and description of such receipt and delivery of securities (e.g. with the Broker Dealer to/from his other account with delivery of the securities to or from Broker Dealers, the lodgment or upliftment of shares, transfer request by a customer). If the receipt and delivery of shares refer to a transfer of shares by a customer from/to his account
a written transfer request from the customer prior to executing the transfer and keep the documents on file. (Emphasis supplied)
documents covered under Rule 52.1.1 which include the In/0ut the general obligation to keep current,among others, the books and The Books and Records Rule imposes upon broker/dealers
Receipts Book.
required under the rule. The second obligation applies in all SRC-IRR requires from broker/dealers the performance of two (2) to-case basis). The first relates to general obligation to keep and maintain an In/Out Receipts book which contains the information instances when the receipt and delivery of shares refer to a transfer to his other account with another Broker Dealer (Outward obligations (the performance of the second obligation is on a case- of shares by a customer (a) from his account with a Broker Dealer Transfer),or (b) to his account with a Broker Dealer from his other As regards the In/0ut Receipts Book,Rule 52.1.1.1.1.2.of the
account with another Broker Dealer (Inward Transfer).In either case, the rule specifically requires the broker/dealer to obtain a written transfer request from the customer prior to executing the transfer, in addition to the obligation of keeping the documents on file.
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, In SEC En Banc Case No.05-22-495 Page 58 of 69 DECISION
52.1.1.1.1.2. only requires broker/dealers to keep a record of the The foregoing negates the argument of VSI that Rule
broker/dealers.135 Moreover, the use of the words"Broker Dealer" in the second portion of Rule 52.1.1.1.1.2. of the SRC-IRR without receipt and deliveryof securities to and from other
any qualification only means that in both Inward Transfer and
are required to obtain a written transfer request from the customer prior to executing the transfer. This is a regulatory mechanism which the SRC/IRR is using to ensure that the Books and Outward Transfer, the broker dealers involved in the transaction
Records, specifically the entries in the In/Out Receipts Book of all broker/dealers are current.
that VSI executed "transfer-out" transactions without the written request of Mr. Sulapas. This finding was impliedly admitted by VSI, In the instant case, the Committee and the SHP both found
comply with a clear provision of the SRC-IRR which warrants the who maintained that the duty to secure the consent of Mr. Sulapas in transfer-out transactions was with R&L, the"transfer-out Broker Dealer"136 This,clearly constituted a failure on the part of VSI to
imposition of the appropriate penalties.
buy and sell transactions" of the Sulapas VSI Accounts, will not which it found in the number of shares in the stock (In) CM and EQ Trade Forms of Mr. Sulapas constitute a violation of the Books and with the general obligation of keeping current its books and records. In this regard, the claim of VSI that the entries showing a Records Rules inasmuch as they show VSI's failure in complying discrepancy are "miniscule and dwarfed in comparison to the total Moreover, We agree with the SHP that the discrepancies
operate to negate its violation, which it in effect admitted. It bears special laws, are classified as malum prohibitum, and if shown to emphasis that acts/omissions violative of the SRC/SRC-IRR, being
sanctions. have been committed,justifies the imposition of the appropriate
If this Commission is to sustain the proposition of VSI that minor violations of the law or regulations by market participants should simply be ignored, the same will result in catastrophic consequences as it will certainly compromise the integrity of the
135 "Clearly, what is required is that a Broker Dealer keeps a record of the "receipt and delivery of number ofshares and description of the mode ofreceipt/delivery." (see Comment/Opposition. page 214) Securities to and from other Broker Dealers" including the In/Out Receipt Number, the name of security 136 Ibid.see page 216
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No.05-22-495 Page 59 of 69 DECISION
and enforce the laws and regulations; more importantly, it will capital market, and the capability of this Commission to implement
negate the core objective of our securities laws, which is to protect investors.
VII.VSI violated Rule 52.1.6.16. IRR Information Rule) of the SRC- (Customer Account
In the Assailed Decision,the SHP,giving due weight to the Report
transactions to the Anti-Money Laundering Council, the transactions involving the Sulapas VSI Accounts.137 The SHP ruled that again,on the Resolution with the reduction of the same to PhP200,000.00. of the CMIC,found that VSI violated Rule 52.1.6.16.(Customer Account Information Rule) of the SRC/IRR,when it failed to report as suspicious basis of its finding that VSI's violation was not attended by bad faith/fraud,the SHP modified the amount of the fine in the Assailed
VSI maintained that it did not violate Rule 52.1.6.16.(Customer
absence of facts or circumstances known to it,which could have caused Account Information Rule) of the SRC/IRR, reasoning out that the
apprehension or mistrust of the Sulapas VSI Account, did not warrant the tagging of the transactions as "suspicious transactions".
IRR provides: Rule 52.1.6.16. (Customer Account Information Rule)of the SRC-
"52.1.6.16. The Broker Dealer, its directors, officers, and
Act (RA 9160, as amended). associated persons are required to report any suspicious client transaction to the Anti-Money Laundering Council, pursuant to the provisions of the Anti-Money Laundering
person to have a feeling of apprehension or mistrust about For purposes of this section, a suspicious client transaction shall mean any transaction which causes any ordinary
the transaction considering (a) its unusual nature or circumstances, or (b) the person or group of persons with whom they are dealing,and based on the bringing together of all relevant factors including knowledge or the person's or
137 Decision. Pages 58 to 59
Investigation and Review Committee vs Venture Securities, Inc.,et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No.05-22-495 Page 60 of 69 DECISION
person's business or background (as well as behavioral factors)."(Emphasis supplied)
curtailing money laundering and other financial crimes which can be Anti-Money Laundering Act (AMLA)138, by recognizing the important contribution that broker/dealers can make in effectively preventing or The afore-quoted provision is clearly intended to supplement the
carried out through the brokerage industry. The use of the phrase "pursuant to the provisions of the Anti-Money Laundering Act" highlights the fact that the securities regulations in the country is aligned with the primary objective of the AMLA of protecting and preserving the integrity and stability of the Philippine financial system by making it difficult for criminals to disguise illegally obtained funds as legitimate income.
determining suspicious transactions, this Commission holds that in the application and implementation of the said rule, due regard and Thus, while the foregoing rule provides for a guideline in
AMLC for after all, the purpose of this regulation is to prevent or curtail consideration should always be made to the applicable regulations of the
money laundering and other financial crimes.
In this regard, the Commission is cognizant, and can take administrative notice, of that fact that all broker/dealers are covered persons under the AMLA and its IRR, and are complying with its provisions. Broker dealers are thus familiar, or even well-versed with the provisions and requirements of AMLA and its IRR.
The 2018 Implementing Rules and Regulations of Republic Act No
transaction, regardless of the amount. where any of the suspicious 9160 (AMLA-IRR) defines a "suspicious transaction" as referring to "a circumstances, as herein defined, is determined based on suspicion or, if
following circumstances, among others, are considered "suspicious available, reasonable grounds, to be existing." In the AMLA-IRR, the
circumstance"which must be reported as a suspicious transaction: (i) the amount involved is not commensurate with the business or financial capacity of the client; and (b) taking into account all known
structured in order to avoid being the subject of reporting requirements circumstances, it may be perceived that the client's transaction is under the AMLA.
138 R.A. No. 9160
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 61 of 9 DECISION
the SRC-IRR, in relation to the foregoing provisions of the AMLA-IRR, this Applying Rule 52.1.6.16. (Customer Account Information Rule) of
Commission finds and so holds that VSI violated Rule 52.1.6.16.
showing that VSI reported a single transaction involving the Sulapas VSI There is not an instance, and the records are bereft of any evidence
Accounts as a suspicious transaction. However, the circumstances and
tell an "ordinary person" that the transactions of the Sulapas VSI the pieces of evidence on record,considered in their totality,will readily
Accounts are suspicious from the start. The following factual circumstances support the finding of this Commission:
First,Mr.Sulapas,who declared in his CAIF that he only had a liquid net worth and annual income of less than PhP1,000,000.00, effected on 30 May 2012 (the very same month when the Sulapas VSI Accounts were opened) his first two (2) buy transactions for CAL shares which amounted to PhP2,210,759.23.139 On 2 July 2012 or barely 2 months from the time that he first traded), Mr. Sulapas
in between. The amount involved in such transactions was clearly effected a buy transaction for 1Million MEG shares in the amount of PhP2,252,800.00,in addition to his other numerous transactions
not commensurate with the business or financial capacity of Mr. Sulapas. It is not ordinary for a person who has a declared liquid net worth and annual income of less than PhP1,000,000.00 to invest everything (and more) that he/she has in securities;
Second, Mr. Sulapas expressly declared that he did not have other account with other broker(s). However,the records show that a considerable amount of shares from the Sulapas R&L Account which had huge price tags when traded, were being transferred to the Sulapas VSI Accounts. Had VSI seriously considered Mr. Sulapas' declaration that he had no other account with other brokers, coupled with the fact that there was practically no instance that Mr. Sulapas requested for a check payment resulting from his trades in excess of PhP500,000.00,it would have realized that from
made the proper report to the AMLC. An ordinary person would the start, such transfers were already suspicious and it should have
the subject of reporting requirements under the AMLA; have easily seen,very much like how this Commission sees it, that Mr. Sulapas' transactions were structured in order to avoid being
139 See Decision. Page 40
Investiga rion and Review Committee vs Venture Securities, Inc. et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 62 of 69 DECISION
liquid net worth and annual income of less than PhP1,000,000.00, Third, Mr. Sulapas,who declared in his CAIF that he only had a
was trading from day one (1) in shares that only a sophisticated or an institutional investor would consider i.e. CAL, EW,VMC, LCB, RFM,OV, NI,MEG,MER,CHIB,ABS,EAGLE, SECB,DIZ,GERI,ABA, ELI,CPG,TDY,CMT,BHI,MAB,SFI,PX and,EG,to name a few.How could these circumstances have escaped the attention of VSI, a seasoned broker/dealer?; and
Fourth, Mr. Sulapas, who declared in his CAIF that he only had a liquid net worth and annual income of less than PhP1,000,000.00, didn't secure,even once during the Covered Period,an investment advice from VSI (and there is no evidence to that effect),and yet he was transacting shares worth hundreds of thousands and even millions.
What is worse, by ignoring the foregoing red flags and staunchly defending Mr. Sulapas' transactions as regular, VSI has effectively prevented the AMLC, which has the necessary capability and expertise, from performing its job.VSI,in effect,took it upon itself to determine (and
AMLA from stopping money laundering which had been perpetrated Rule 52.1.6.16. (Customer Account Information Rule)of the SRC-IRR. firmly stood by that belief) that there was nothing wrong with the transactions of the Sulapas VSI Accounts; and as a result, prevented the during the Covered Period. Thus,VSI should be held liable for violating
VIII. The SHP erred in modifying the amount of the monetary
penalties.
In the Assailed Decision and the Assailed Resolution, the SHP applied Section 54.1 of the SRC in determining and imposing the monetary penalties on VSI. In modifying the amount of the monetary for each violation from PhP1,000,000.00, the SHP ruled that the absence penalties imposed upon VSI,with the reduction thereof to PhP200,000.00
of bad faith on the part of VSI justified the same.
imposing even the reduced amount of PhP200,000.00 per violation, VSI however, remains resolute in positing that the SHP erred in
arguing that the same is contrary to Memorandum Circular No. 6, series of 2005(MC No.6)which provides for the Consolidated Scale of Penalties for violation of the SRC/SRC-IRR.140 VSI maintains that the Commission is
140 Comment/Opposition. page 238
Investiga n and Review Committee vs Venture Securities,Inc.,et.al In the Matter of: R&L Investments, Inc. SEC En Banc Case No. 05-22-495 Page 63 of 69 DECISION
absolutely bound to implement MC No. 6, impliedly suggesting that Sec. 54.1 of the SRC is subservient to the same.
We do not agree with both the SHP and VSI.
if there is a finding that the provisions of the SRC/SRC-IRR, or even its which the Commission, after notice and hearing, is mandated to impose Section 54 of the SRC provides for the administrative sanctions
orders, have been violated, to wit
"Section 54.Administrative Sanctions. - 54.1. If, after due
a violation of this Code, its rule, or its orders; (b) Any notice and hearing, the Commission finds that: (a) There is
untrue statement of a material fact, or omitted to state any registered broker or dealer, associated person thereof has failed reasonably to supervise,with a view to preventing violations, another person subject to supervision who commits any such violation; (c) Any registrant or other person has, in a registration statement or in other reports, law or rules to be filed with the Commission, made any applications, accounts, records or documents required by
the statements therein not misleading; or, in the case of an and complete in all material respects;or (d) Any person has sanctions as may be appropriate in light of the facts and material fact required to be stated their or necessary to make underwriter,has failed to conduct an inquiry with reasonable diligence to insure that a registration statement is accurate refused to permit any lawful examinations into its affairs,it shall, in its discretion, and subject only to the limitations hereinafter prescribed, impose any or all of the following
circumstances:
i Suspension, or revocation of any registration for the
(ii) A fine of no less than Ten thousand pesos pesos (P2,000.00) for each day of continuing offering of securities; P1,000,000.00 plus not more than Two thousand (P10,000.00) nor more than One million pesos violation; (iii In the case of a violation of Sections 19.2,20,24,26 and functions,of an issuer required to file reports under 27,disqualification from being an officer,member of the Board of Directors, or person performing similar
Investigation and Review Committee vs Venture Securities, Inc.,et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No.05-22-495 Page 64 of 69 DECISION
regulation administered by the Commission; Section 17 of this Code or any other act, rule or
iv) In the case of a violation of Section 34,a fine of no more v Other penalties within the power of the Commission to than three (3) times the profit gained or loss avoided as result of the purchase, sale or communication proscribed by such Section,and
impose.
54.2. The imposition of the foregoing administrative sanctions shall be without prejudice to the filing of criminal charges against the individuals responsible for the violation." (Emphasis supplied)
the SRC, to wit: sanctions (including suspension and revocation of franchise), for the SRC. Thus, consistent with the hierarchy of authority, the following Commission to impose administrative penalties provided in Section 54 of Sec. 72141 of the SRC, is self-executory, is the source and legal basis for the violation of laws, rules and regulations granted in Section 5 (f) and (m) of provision in MC 6 itself expressly recognizes the discretion of the Commission's actual exercise of the power and authority to impose It bears emphasis that the afore-quoted provision, which, under
sanctions or to the filing of criminal charges against "The imposition of the foregoing penalties shall be without person/s responsible for the violation."(Emphasis supplied) prejudice to the imposition of other administrative
quoted provision can only refer to the sanctions provided in Section 54 of the SRC, being the only other source of imposable sanctions. The use of the words "other administrative sanctions" in the afore.
Philippines, Inc.142 the Supreme Court sustained the application of Sec. 54 Thus, in Securities and Exchange Commission vs G. Cosmos
information required in registration statements, applications, and reports to the Commission shall be the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules other matters within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, 142 G.R. No. 167435. April 20, 2015 141 "Section 72. Rules and Regulations; Effectivity, - 72.1. This Code shall be self-executory. To effect and regulations and orders necessary or appropriate, including rules and regulations defining accounting, technical, and trade terms used in this Code, and prescribing the form or forms in which security, or transaction, or class or classes of persons, securities or transactions, from any or all set forth. For pu provisions of this Code. 0 oses of its rules or regulations, the Commission may classify persons, securities, and
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of: R&L Investments, Ing SEC En Banc Case No.05-22-495 Page 65 of 69 DECISION
of the SRC notwithstanding the fact that on the year of its promulgation i.e. 2015, MC 6 was already in effect.
Section 54 of the SRC expressly grants the Commission full
persons found to have violated its provisions. Thus, if the Commission discretion to determine the appropriate penalties to be imposed upon the
SRC directs the Commission to consider the attendant facts and decides that appropriate penalty to be imposed is a fine, Sec. 54 of the
continuing violation. violation, and to limit the amount thereof within the range provided nor more than One million pesos (P1,000,000.00), plus an incremental fine of not more than Two thousand pesos (P2,000.00) for each day of circumstances which disclose the seriousness and/or gravity of the therein i.e.a base fine of not less than Ten thousand pesos (P10,000.00)
Applying the foregoing standards to the instant case, this Commission finds and so holds that the SHP committed reversible error in modifying the amount of fine imposed upon VSI. We cannot by VSI which were exhaustively discussed above. The number of the overemphasize the gravity and seriousness of the violations committed
provisions of the SRC/IRR that were violated, all of which are crucial in
is the appropriate fine to be imposed upon VSI. promoting the integrity of the capital market and protecting investors, the number of transactions as well as the aggregate amount involved, and the long period when these violations were committed, convinces this Commission that the maximum amount of PhP1,000,000.00 per violation
IX. The violations by VSI of the
SRC/SRC-IRR fraud. attended by bad faith or were not
latter of the handling of the Sulapas VSI Accounts.143 this regard, the SHP enumerated the circumstances which showed the and circumstances, found that the revocation of the license of VSI was not warranted on the ground that bad faith, which is required under absence of bad faith on the part of the Board of Directors of VSI (the "Board"),as well as the absence of participation in,or toleration by the Section 29 of the SRC,did not attend the commission of the violation.In In the Assailed Resolution, the SHP, after re-examining the facts
We agree with the SHP.
143 Resolution. see pages 32 and 33
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of:R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 66 of 69 DECISION
VSI is a corporate entity with a personality separate and distinct from that of its shareholders or directors.As a juridical entity having been granted a license to operate and conduct business as a broker/dealer,VSI essentially made a commitment, and was duty-bound to fully comply with the SRC/SRC-IRR, and other securities laws. Necessarily, VSI is equally deemed to have agreed to assume liability for any violation that will be proven to have been committed by it in the course of its operation.
Relative thereto, it bears emphasis that Section 22 of the Revised Corporation Code144 vests in the board of directors the power to bind a corporation by its exercise of corporate powers, the conduct of all business,and control of all its properties.A corporation that benefits, and
powers by its board, may equally be exposed to the risk of liability for is allowed to profit from the proper exercise and discharge of corporate
violation of applicable laws, rules or regulations resulting from negligence, fraud or even bad faith of the board. Thus, in determining if a
which resulted in, or relates to the commission of such violation. corporation can be held liable for violation of a law,rule or regulation and can be validly made to answer for the same, it is important to examine the relevant resolutions and/or actions of its board of directors
In the instant case, the evidence showed that the Board of VSI approved policies and standards which, to its mind, were compliant with existing laws, rules and regulations. This was shown by the (Board) approved written manuals, codes and procedures which management implemented in operating the company.The evidence however,equally showed that VSI carried out policies and practices that clearly violated
requirements of the Information About Clients Rule and the Books and the SRC/SRC-IRR i.e. allowing clients with cash account to trade on margin,using and implementing a self-made standard on who becomes eligible to obtain credit, executing a transaction sans compliance with the
Records Rule, etc.
the relevant provisions of the SRC/SRC-IRR which have been established It is important for this Commission to determine if the violations of
record if the Board of VSI consciously, deliberately, and willfully was attended with bad faith as to warrant the imposition of the penultimate penalty of revocation of its registration/license as broker/dealer. In doing so,We need to determine from the evidence on
practices and processes that violated the SRC/SRC-IRR. approved and/or assented to the implementation of the policies,
144 Republic Act No. 11232
Investigation and Review Committee vs Venture Securities, Inc., et. al. In the Matter of:R&L Investments, Inc SEC En Banc Case No.05-22-495 Page 67 of 69 DECISION
After a careful and meticulous review of the evidence on record, this Commission finds nothing therein that would show the Board expressly approving and/or assenting to the implementation of the policies,practices and processes that violated the SRC/SRC-IRR. In other words, the evidence on record suggests that these policies, practices and processes that violated the SRC/SRC-IRR, while fully known to the management (and employees involved in the process),being operational in nature, may not have reached, or have been properly/accurately reported to the Board.
Be that as it may, this Commission is cognizant that one of the essential, if not critical, functions of the board is to effectively monitor management, and oversee risk management systems and mechanisms
regulations,145 The evidence on record shows that the Board of VSI was designed to ensure compliance with applicable laws, rules and
clearly remiss in performing this important function. While the Board of VSI can argue that management failed to voluntarily provide it with the relevant information or report, the Board could have nonetheless obtained the same had it proactively and conscientiously performed its function of effectively monitoring management, as well as the risk management systems and mechanisms being implemented by VSI. As discussed earlier, mere approval and submission of manuals, codes and procedures are not enough. VSI, through its Board, is duty-bound to regularly evaluate the same (or cause the evaluation of the same by management, subject to its final determination) to ensure its
14s "The corporate governance framework should ensure the strategic guidance of the company. the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.
XXx
companies have found it useful to explicitly articulate the responsibilities that the board assumes and Together with guiding corporate strategy, the board is chiefly responsible for monitoring and mechanisms designed to ensure that the corporation obeys applicable laws, including security, data privacy and personal data protection, and health and safety. In some jurisdictions, managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation. In order for boards to effectively fulfil their responsibilities, they must be able to exercise objective and independent judgement. Another important board responsibility is to oversee the risk management system relating to tax, competition,labour, human rights, environmental, equal opportunity, digitai those for which management is accountable
stakeholder interests including those of the workforce, creditors, customers, suppliers and affected en& csp =7a1eca165fad928a70a0300d1e07c36f&itemIGO=oecd&itemContentType=book The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests. In addition, boards are expected to take account of, and deal fairly with communities."(Principle V. Responsibilities of the Board. OECD/G20 Principles of Corporate en/1/2/5/index.html?itemId=/content/publication/ed750b30 Governance 2023.) Accessed at: https://www.oecd-ilibrary.org/sites/ed750b30-
Investigation and Review Committee vs Venture Securities,Inc., et. al. In the Matter of: R&L Investments, Inc SEC En Banc Case No. 05-22-495 Page 68 of 69 DECISION
effectiveness which ultimately results in compliance by the corporation with the applicable laws, rules and regulations. All of these,VSI failed to do.
Does such failure on the part of the Board of VSI constitute or amount to bad faith or willful violation of the SRC/SRC-IRR that will warrant the revocation of VSI's registration or license under Section 29 of the SRC?
We answer in the negative.
connotes negligence, but is attended by a dishonest purpose or some It is settled in jurisprudence that bad faith does not simply
moral obliquity and conscious doing of a wrong, which partakes of the nature of a fraud146, to wit:
"The legal concept of bad faith denotes a dishonest purpose
established by clear and convincing evidence."147 therefore, a question of intention, which can be inferred from faith under the law cannot be presumed; it must be moral deviation, and a conscious commission of a wrong. It includes "a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud. It is, one's conduct and/or contemporaneous xxx statements". Bad
In the instant case,the abject neglect by the Board of VSI to perform its function of effectively monitoring management, and overseeing the reprehensible as the same is reasonably expected to result in risk management systems and mechanisms of the company, while clearly
compromised performance or even violation of the SRC/SRC-IRR, does
penalty,appears to have no legal basis.On account thereof,We therefore not amount to bad faith as defined by jurisprudence. Thus,the revocation of the license of VSI, which the Appellant is arguing to be the correct
sustain the Assailed Resolution.
WHEREFORE,premised considered,the Memorandum of Appeal
modified the amount of the fine imposed upon VSI. The monetary filed by the Investigating Committee is PARTIALLY GRANTED. The Assailed Resolution is hereby REVERSED and SET ASIDE in so far as it
penalties imposed upon VSI in the Assailed Decision are hereby reinstated as follows:
147 Tocoms Philippines, Inc.vs Philips Electronics and Lighting, Inc. (G.R. No. 214046.February 5, 2020) 146 Suba vs Sandiganbayan (G.R.No.235418.March 3,2021)
Investigation and Review Committee vs Venture SecuritiesInc., et al. In the Matter of: R&L Investments, Inc. SEC En Banc Case No.05-22-495 Page 69 of 69 DECISION
(3) A fine of One Million Pesos (P1,000,000.00) for violation of (1) A fine of One Million Pesos (P1,000,000.00) for violation of (2) A fine of One Million Pesos (P1,000,000.00) for violation of Rule 30.2.1.2.4 (Information About Clients) Rule 30.2.1.(Ethical Standards Rules) Rule 30.2.1.1.2.3 (Capabilities)
(4) A fine of One Million Pesos (P1,000,000.00) for violation of
(5) A fine of One Million Pesos (P1,000,000.00) for violation of Section 50 of the SRC and SRC Rule 50 (Purchases and Sales in Section 48.2 and SRC Rule 48.2 (Prohibition on Extension of Credit)
( A fine of One Million Pesos (P1,000,000.00 for violation of Cash Account)
(7) A fine of One Million Pesos (P1,000,000.00) for violation of (8) A fine of One Million Pesos (P1,000,000.00) for violation of Rule 52.1.1 (Books and Records Rule Rule 52.1.6 (Customer Account Information Rule) Rule 30.2.6. (Supervision)
aside the penalty of revocation of the registration/license of VSI. The Assailed Resolution is however AFFIRMED in so far as it set
SO ORDERED.
Makati City,Philippines
EMILIOBAQUINO Chairperson Ww V
JAVEY PAUL D.FRANCISCO KARLO S.BELLO
Commissioner Commissioner
MCJILL BRYANT T. FERNANDEZ Commissioner ROGEYIO V.QUEVEDO Commissioner
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