SEC En Banc Case No. 02-14-316 GOLDSTAR SECURITIES, INC., Appellant, -versus- MARKETS AND SECURITIES REGULATION DEPARTMENT, Appellee.

curities and Exchange Commission COMMISSION EN BANC Republic of the Philippines Department of Finance

GOLDSTAR SECURITIES, HNC.

Appellant.

-versus-

SEC En Banc Case No. 02-14-316

MARKETS AND SECURITIES REGULATION DEPARTMENT,

Appellee. X

DECISION

Letter-Decision dated 13 August 2013 of the Commission's Market dated 4 February 2014 which was filed on 5 February 2014 by Appellant Goldstar Securities, Inc. (Goldstar), praying that the En Banc reverse the Regulation Department (MRD), now Markets and Securities Regulation Department (MSRD), imposing a fine for material deficiencies and material For consideration of this Commission is the Memorandum on Appeal

misstatements in Goldstar's FY 2010 Audited Financial Statements (AFS).

RELEVANT FACTS

Appellant Goldstar is a company engaged in the brokerage business of stocks, bonds, and other financial securities and in all activities directly or indirectly connected therewith or incidental thereto and to be a member of any stocks or commodity exchange as well as board of realtors, national, regional or local. As with all corporations, Goldstar is obligated to submit its AFS to the Commission.

Markets and Securities Regulation Department SEC EB Case No.02 Goldstar Securities, Inc. v. 1

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On 06 April 2011 Goldstar filed with the Commission its AFS for the year ended 31 December 2010 (2010 AFS) duly audited and certified by its independent public accountant and stamped "received" by the Bureau of Internal Revenue.

cause why it should not be held liable for material deficiencies in its AFS and for non-compliance with the requirements of the rules on audited financial On 26 March 2013, the MSRD issued a letter directing Goldstar to show

statements of the Commission pursuant to SRC Rule 68, as amended, and be penalized in accordance with SEC MC No. 8, series of 2009

The show-cause letter alleged the following deficiencies in Goldstar's 2010 AFS:

a. Appropriation of Reserve Fund - Based on Note 23.2 of the AFS.

appears to be deficient by Php972,088 per our computation the Company appropriated Php1,944,176. Said appropriatior considering that its unimpaired paid-up capital for the year 2010 is Php30,000,000 [Rule 49.1 (B) and SEC Memorandum Circular No 16, series of 2004].

b. General and Administrative (G&A) Expenses - There is no

explanatory note on "Others" amounting to Php3.06 Million per Note 16 (PAS1).

In response to the show cause letter, Goldstar filed on 16 April 2013 a letter-reply explaining that:

a. The appropriation made for 2010 is in order at 20% of audited net

income considering that its total paid up capital was Php30Million. b. "Others" under the (G & A) expenses consists of various expenses

with amounts that are in the range of less than 1% to 4% of the total G & A expenses such as year-end expense, miscellaneous expense! cultural and sports expense, system development cost, membership

publication, messengerial, janitorial and security services, and fines fees and dues, postage and courier services, and advertisement and and penalties which are immaterial.

In its Letter-Decision dated 13 August 2013, the MSRD found the reasons proffered by Goldstar insufficient because it failed to raise reasonable and substantial grounds to reverse MSRD's findings on the materiality of the

Thousand Pesos (P18,000.00). deficiency in its AFS, and thus imposed a penalty in the amount of Eighteer

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maintains that it does not merit the monetary sanction imposed by MSRD. that the appropriation made for 2010 which was 20% of its profit after tax is also provided a breakdown of its "General and Administrative Expenses Others", the amounts of which were allegedly within the range of less than consistent with SEC Memorandum Circular No. 16, series of 2004. Goldstar 1% to 4% of the total G&A expenses. On the basis of the foregoing, Goldstar On 16 August 2013, Goldstar filed another letter reiterating its position

Commission, Goldstar filed the instant Memorandum on Appeal. In compliance with the Order dated 21 January 2014 issued by the

On 12 February 2014, MSRD filed its Reply Memorandum in compliance with the Order dated 06 February 2014 of the Commission. MSRD emphasized that Goldstar's assertion that it merely exercised the option granted to determine the percentage to be applied in settling for 20% of its profit after tax is without merit and basis because it disregarded SRC Rule 49.1 (H)(D(B) which mandated that the choice for the appropriate treatment of financial transactions should be that which would provide a more

dismissal of Goldstar's Memorandum on Appeal. conservative computation of the RBCA ratio. MSRD thus prayed for the

ISSUE

The sole issue is whether MSRD was correct in imposing the monetary. penalty against Goldstar.

DISCUSSION

We find the instant appeal bereft of merit.

On Appropriation of Reserve Fund

(MC No. 16), also known as the Risk-Based Capital Adequacy (RBCA) Rule 49.1 (B)(1) of SEC Memorandum Circular No. 16, series of 2004

Rules, requires the establishment of a reserve fund, to wit:

percentage of its audited profit after tax and transfer the same to the "(1) Every Broker Dealer shall annually appropriate a certain minimum

Appropriate Retained Earnings Account in accordance with the following schedule:

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Unimpaired Paid Up Capital in the Appropriated Retained Earnings Minimum percentage or profit after tax to be place

Between 10-30 3 0% Between 30-50 More than 503 20% 10%

Million Pesos (P30,000,000.00). Under the RBCA Rules, Goldstar could In its 2010 AFS Goldstar reported a total paid-up capital of Thirty

either appropriate thirty percent (30%) or twenty percent (20%) of its audited profit after tax and transfer the same to its Reserve Fund. Records reveal that for the year 2010. Goldstar opted to use 20% of its audited net income which amounted to Php1,944,176.001 for purposes of complying with MC No. 16. In support of the foregoing, Goldstar contends that it (as well as other broker dealers similarly situated) was granted liberality to choose between the 20% or 30%, and it cannot thus be held liable for exercising the option given to it.

determine which percentage to apply in the determination of its Reserve Fund The contention of Goldstar that it has been granted the option to

is patently misplaced and without legal basis. The Commission agrees with the MSRD that Rule 49.1(B) of MC No. 16 should be read and applied in the context of SRC Rule 49.1 (H)(I)(B) of the RBCA Rules (RCBA Rules) which provides that:

reguiations. In case of doubt, the RBCA rules should be interpreted in a manner that is consistent with the SRC and its implementing rules and Securities Regulation Code (SRC) and its implementing rules and regulations and international best practices in financial services regulation. When in need of policy direction or legal interpretation, the Broker Dealer In choosing the appropriate treatment of financial transactions which impact on the RBCA computation, the choice should be that which would provide a more conservative computation of RBCA ratio." (Emphasis supplied) must seek guidance from the Commission's Market Regulation Department. "The RBCA Rules should be applied and understood in relation to the

option to determine the amount representing the percentage of its audited The afore-quoted provision negates Goldstar's position that it has the

profit after tax prescribed under MC No. 16 to be set aside and to form part of its annual Reserved Fund because the mandate and intent of the said provision

reported total paid-up capital of Thirty Million Pesos (P30,000,000.00), conservative computation of RCBA ratio." Simply put, given the option of choosing between 20% and 30%, the RCBA Rules mandate that with a is clear i.e. "the choice should be that which would provide a more

1 Net profit after tax multiplied by 20% (P9,720,882.00 x 20%); Note 23.2 of Goldstar's 2010 Audited Financial Statements

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to be appropriated to the Reserve Fund because the same would lead to or result in a more conservative computation. Goldstar should have chosen 30% instead of 20% in computing for the amount

On Explanatory Note on General and Administrative Expenses - Others

of the deficiency, misrepresentation or misstatement in the financial Commission in, to wit: statements shall be based on the tests set and provided therein by the SEC MC No. 8, Series of 2009 (MC No. 8) provides that the materiality

"HII. Test of Materiality

A. The following shall be considered a material deficiency in the financial statements (FS) or significant non-compliance with SRC Rue 68:

(iv.) There is no accounting policy for a significant account;

For purposes of these Guidelines, a significant account means a Balance Sheet or Income Statement item, the amount of which is equivalent to:

XXX

(6) 5% or more of the Gross Income, Cost of Sales/Services or the Total Operating Expenses, as may be applicable.

For all other corporations, the threshold shall be 10% or more of the items mentioned above." (Emphasis supplied)

Administrative (G&A) Expenses - Others" in its total amount without any breakdown or other disclosures/explanatory notes for the reason that the same consisted of various expenses with involving minimal or insignificant Goldstar insists that : it correctly presented its "General &

amounts in the range of less than 1% to 4% of the total G&A Expenses. The Commission is not persuaded.

Expenses -- Others vis-a-vis the Total Operating Expenses. Pursuant to MC No. 8. the basis should have been the total G&A

Ninety Two Pesos (Php12,209,292.00)3. The G&A Expenses - Others constituted twenty-five percent (25%) of the Total Operating Expenses and amounted to Three Million Sixty Thousand Ninety Seven Pesos (P3,062,097.00)2 while the Total Operating Expenses of Goldstar for 2010 amounted to Twelve Million Two Hundred Nine Thousand Two Hundred The 2010 AFS of Gold'star shows that the G & A Expenses - Others

2 Note 16 of the 2010 Audited Financial Statements of Goldstar 3 Ibid.

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AFS, which Goldstar clearly failed to do. a significant account, the same should have been disclosed and included in the clearly falls within the definition of a significant account under MC No. 8. As

letter issued by the MSRD, cannot negate the fact that its 2010 AFS did not comply with the requirement of SRC Rule 684 and MC No. 8. act of providing the required disclosures/explanatory notes/breakdown of its G&A Expenses The Commission agrees with the observation of MSRD that Goldstar's Others amounting to P3.06 Million after the show-cause

the enforcement of simple of the Commission. Good faith or bad faith hardly comes into the picture in faith with the requirement of providing the coverage of the questioned item does not persuade. It bears emphasis that the defense of good faith is immaterial and irrelevant to violations of the financial reporting requirements Finally, the argument of Goldstar that it immediately complied in good rules. mandating submission of

rule would be qualified by the presence or absence of good faith or bad faith. penalty could be subject to question and every violation based on a clear-cut reportorial requirements. To allow legal notions to intrude at every level in the implementation of these rules would defeat their very purpose, as every or the question of motive or intent.5

imposition of the following penalties under the MC No. 08, thus: The foregoing violations of the Commission's rules on AFS warrant the

Violations Basis of Penalty Remarks Amount

Material the financial deficiencies in Section III (A) (iv) of Circular Memorandum No. & First Offense P9,000.006

with SRC Rule statements and non-compliance 68 series of 2009 in relation to Section I

balance sheet and income statement, and the methods to be followed in the preparation of accounts, appraisa! regulations as may be necessary to carry fout the provisions of this Code, including rules and regulations 6 Retained Earnings for FY 2010 is P53,177,055.00 the form or forms in which required information shall be or valuation of assets and liabilities, deternfination of depreciation and depletion, differentiation of recurring the Cominission deems it necessary or desirable, of consolidated balance sheets or income accounts of any person directly or indirectly controlling or controlled by the issuer. or any person under direct or indirect 5 In re Clearwater Country Club, Inc., SEC EN Banc Case No. 08-07-111, March 25, 2010 4 "The Conimission shall have the authority to make, amend, and rescind such accounting rules and governing registration statements and p accounting. technical and trade terms used in this Code. Anong other things, the Commission may prescribe and non-recurring income, differentiation of investment and operating income, and in the preparation, where common control with. the issuer prospectuses for various classes of securities and issuers, and defining set forth. the items or details to be shown in the

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provide the required (For failure to

G&A Expenses- Other) disclosures on

Material the financial misstatement in statement Section III (B) of relation to Section I Memo Circular No. 8, Series of 2009 in First Offense P9,000.007

appropriation of Reserve Fund) (For insufficient (E)

PESOS (P1 8,000.00) within ten (10) days from receipt of this Decision. (MSRD) is hereby AFFIRMED and the instant appeal is DENIED for lack of DIRECTED TO PAY the assessed penalty of EIGHTEEN THOUSAND August 2013 issued by the Markets and Securities Regulation Department merit. WHEREFORE, premises considered, the Letter-Order dated 13 Consequently, the Appellant Goldstar Securities, Inc. is hereby

SO ORDERED.

Pasay City, Philippines; it: December 2019

EMHL O B. AQUINO

iairperson

EPHYRO LUIS B. AMATONG Commissioner JAWEY PAUL D. FRANCISCO Commissioner

KELVIN LESTER K.LEE Commissioner KARLQ S.BELLO Commissioner

P9,000, whichever is higher 7 P9,720,882.00 x 10% = P972,088 Deficiency in appropriation 1/10 of 1% of deficiency amount = P972.08 or amount based on the above scale (material deficiency)