SEC En Banc Case No. 11-15-391Timson Securities, Inc., Philip Laude, and Abigail C. Lorica, Appellant vs. Capital Markets Integrity Corporation, Appellee

Securities and Exchange Commission Commission En Banc Republic of the Philippines Department of Finance

PHILIP LAUDE and ABIGAIL C. LORICA, TIMSON SECURITIES,INC., Appellants,

-versus SEC En Banc Case No.11-15-391

CAPITAL INTEGRITY CORPORATION, MARKETS

rep. byits President,ATTY. CORNELIO GISON,

Appellee.

-X

DECISION

November 2015 filed by Appellants Timson Securities, Inc.(TSI), Philip Laude, and Abigail C. Lorica praying that the Letter-Decision dated 19 Corporation (CMIC be set aside and an order be issued directing the refund of the total penalty of P40,000.00 paid pursuant to the Assailed Decision. August 2015 (the Assailed Decision)of Appellee Capital Markets Integrity Before this Commission is the Memorandum of Appeal dated 26

THE PARTIES

as a securities broker/dealer. Its business address is at Suite 3310 Robinsons Philippine laws,with SEC Registration No.CS201306194,and duly licensed Tower, ADB Avenue, Pasig City. Appellant TSI is a corporation duly organized and existing under

was made respondent in this case in such capacity,and with business address at Suite 3310 Robinsons Tower, ADB Avenue, Pasig City. Appellant Philip Laude is of legal age, Filipino, a Nominee of TSI and

business address at Suite 3310 Robinsons Tower, ADB Avenue, Pasig City Person of TSI and was made respondent in this case in such capacity, and with Appellant Abigail C. Lorica is of legal age, Filipino, an Associated

to act as a Self-Regulatory Organization (SRO), with SEC Registration No CS201104274. Its business address is located at 10th Floor PSE Tower,5th Ave. Corner 28th St., Bonifacio Global City, Taguig City. Appellee CMIC is a domestic corporation duly authorized and licensed

Timson SecuritiesInc.,Philip Laudeand Abigail C.Loric vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 2 of l1

THE RELEVANT FACTS

TSI is engaged in the business of stock brokerage having an initial paid- up capital of P100 Million when it commenced operations in October 2013.

its letter dated 9 December 2014, and Risk Based Capital Adequacy (RBCA) fully compliant with its rules and regulations. Ratio Spot Audit as per its letter dated 16 February 2015,where it found TSI For the year 2014, CMIC conducted its Annual Regulatory Audit as per

1 of the CMIC Rules in relation to SRC Rule 28.1 (E)(v). the CMIC conducted a spot audit of TSI's RBCA Report as of 31 May 2015 which was found to be deficient as its Unimpaired Paid-up Capital (UPC) only stood at P94,193,923.00 which was below the amount required under Article VIII-C, Section 1 of the CMIC Rules i.e.PhP100,000,000.00.Hence on 22 June 2015,CMIC issued a Show-Cause Letter directing TSI to explain why it should not be held liable for possibly violating Article VIII-C, Section Subsequently, pursuant to Article II, Section 5(b) of the CMIC Rules,

be considered impaired because the decrease in its retained earnings was Earnings amounting to P14,806,077.00.TSI thus argued that its UPC cannot caused by the unrealized loss. deficiency noted in its UPC was a result of an unrealized loss of P19,806.077.00 from marketable securities which resulted to Retained In its Letter-Reply dated 24 June 20151, TSI explained that the

as per its continuous monitoring of TSI's RCBA Report, it found that the to PhP14,557,663.00 as of 30 June 2015, and was asked to explain why it CMIC Rules in relation to SRC Rule 28.1 (E)(v). deficiency in TSI's UPC has increased from P5,806,077.00 as of 31 May 2015 should not be held liable for violation of Article VIII-C, Section 1 of the On 10 August 2015, CMIC issued another show cause letter stating that

realized. Moreover, TSI informed CMIC of its plan to apply for additional not be considered deficient since the unrealized loss from trading securities should be added back to net income computation as the same had not yet been capital in line with its future expansion for online trading. show cause letter where it merely reiterated its position that its UPC should On 11 August 2015, CMIC received TSIs Letter-Reply to the second

1 Annex "B" of the Appeal

Timson Securities, Inc. Philip Laude, and Abigail C.Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No.11-15-391 Page 3 of 11

financial assets at fair value through profit or loss and not as an available-for- sale financial assets, the adjustments to record increase or decrease in market price should be recorded as unrealized gain or loss. that the unrealized loss should not be deducted from its retained earnings however justified its finding of deficiency by applying the International Accounting Standard (IAS)39 which provides that a gain or loss on financial asset/liability classified as at fair value through profit or loss shall be recognized in profit or loss, while a gain or loss on an available-for-sale financial asset shall be recognized in other comprehensive income.The CMIC argued that since the shares held by TSI in its dealer account are classified as TSI's representatives, the latter again reiterated the position of the company considering that TSI did not incur nor realize the said loss. The CMIC During the exit conference conducted by CMIC which was attended by

as follows: On 19 August 2015,CMIC issued the Assailed Decision penalizing TSI

1Fine of P30,000 for the first violation of Article VIII-C E)(v), with a directive to submit a capital build-up plan; Section 1 of the CMIC Rules in relation to SRC Rule 28.1 and

2 Fine of P10,000 for the first violation of Article VI, Section 2 of the CMIC Rules, in relation to SRC Rule 28.1 (4)(G) with a directive to comply with the requirements of the rule.

market price fluctuations and merely a paper loss; (3) that it is willing to infuse additional capital; and (4) that it has a good track record. Decision based on the following grounds: (1) that its RCBA Report showed a ratio of 135%; (2) that the unrealized loss was caused by uncontrollable On 3 September 2015, TSI moved for reconsideration of the Assailed

for lack of merit which resulted in the filing of the instant Appeal. On 10 November 2015, CMIC denied TSI's request for reconsideration

the instant Appeal be denied for lack of merit and basis. On 21 December 2015, CMIC filed its Reply Memorandum praying that

ISSUE/S

Rule 28.1 (E)(v) on the minimum paid up capital requirement. Whether TSI violated Article VIII-C of the CMIC Rules, in relation to SRC

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 4 of 11

SRC Rule 28.1 (4)(G) on the responsibilities of its Associated Person. Whether TSI violated Article VI, Section 2 of the CMIC Rules, in relation to

RULING

same. Commission finds the instant Appeal without merit and hereby denies the After a careful review of the arguments and the evidence presented, the

I The failure of TSI to maintain a

relation to SRC Rule 28.1 (E)(v). constituted a violation of Article VIII-C of the CMIC Rules, in PhP100,000,000.00 UPC

under the International Accounting Standard IAS 39: Financial or financial liability classified as at fair value through profit or loss shall be recognized in profit or loss, while a gain or loss on an available-for-sale financial asset shall be recognized in other comprehensive income. marketable securities should be deducted from TSI's Retained Earnings because its dealer account are classified as financial assets at fair value through profit or loss and not as an available-for-sale financial assets, and Instruments: Recognition and Measurement, a gain or loss on a financial asset In the Assailed Decision, CMIC ruled that the unrealized loss from

retained earnings considering the same are merely paper losses. reversible error in penalizing the company because the same is based on an unimpaired capital on an annual basis. TSI argued that the deficiency noted by CMIC was temporary in nature and was thus reversible given the intricate behavior of stock market prices.2 TSI also reiterated its position that its UPC was not deficient because the unrealized loss should not be deducted from its erroneous interpretation of Rule 49(B) under SEC Memorandum Circular No. 16, series of 2004 which TSI alleged requires an appropriation to maintain In its Appeal, TSI countered by maintaining that CMIC committed

The arguments of TSI fail to convince.

alleged erroneous interpretation of Rule 49(B) under SEC Memorandum At the outset, the Commission notes that TSI's argument relative to the

2 Pars. 23 and 24 of the Appeal

Timson Securities, Inc.Philip Laude,and Abigail C.Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 5 of 11

being penalized not on the basis of the said regulation, but for violating Article Circular No.16, series of 2004 by CMIC is misplaced considering that it is VIII-C of the CMIC Rules in relation to in relation to SRC Rule 28.1 (E)(v). The Assailed Decision could not be clearer on the rules violated, to wit:

sanctions and directives against TSI for its failure to comply with the relevant provisions of the Securities Regulation Code (SRC), its implementing rules and regulations(the SRC Rules),CMIC Rules and other "Based on the above discussion, CMIC resolves to impose the following relevant rules and regulations, viz:

aMajor Violation (please refer to Annex 1)

the receipt of this notice. on how TSI intends to substantially, diligently, and continuously comply with the capitalization requirements and to observe the rules on UPC and such plan shall be achieved by TSI within ninety (90) calendar days from Fine of P30,000 for TSI's first violation of Article VIII-C Section 1 of the CMIC Rules,in relation to SRC Rule 28.1(Ev),with a directive to submit a capital build up plan, within two (2) days from receipt of this letter,

Rules on Supervision,in relation to SRC Rule 28.1 (4(G), with a directive to comply with the requirements of the rule." (Emphasis supplied) Fine of P10,000 for a first violation of Article VI, Section 2 of the CMIC

Article VIII-C, Section 1 of the CMIC Rules provides

Article VIII. Capitalization Requirements of Trading Participants

C. Minimum Paid-up Capital Requirement

Section 1. The unimpaired paid-up capital requirement is One Hundred Million Pesos (PhP100,000,000.00 for the following types of Trading Participants:

(b) Those acquiring the business of existing Trading Participants pursuant (a) First time registrants who will be participating in a registered clearing to SRC Rule 28.1, paragraph 2 and will be participating in a registered clearing agency; agency upon the effectivity of the Code;

Provided, however, that the Commission may authorize a lower capitalization for applicants not participating in a registered clearing agency. (Emphasis and underscoring supplied.)

capital is intended to ensure the financial soundness of the brokers to enable The requirement relating to the maintenance of a minimum paid-up

Timson Securities,Inc.,Philip Laude, and Abigail C.Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 6 of 11

them to comply with their obligations to their clients.3 Section 28.4(b) of the SRC specifically requires as a condition for the registration that broker dealers satisfy the minimum capitalization requirement prescribed by the Commission to ensure compliance with the provisions of the code.

following regulations: Relative thereto, the Commission has implemented and approved the

1)Article VIII,Section 1 of the CMIC Rules:

"Section 1. Definition and Coverage. x x x

2004." (Emphasis supplied) Every Trading Participant is covered by the RCBA rules and requirements under SEC Memorandum Circular No.16 Series of

2Article VIII-C,Section 1 of the CMIC Rules

supplied) "Section 1. The unimpaired paid-up capital requirement is One of Trading Participants: a First time registrants who will be participating in a registered clearing agency upon effectivity of the participating in a registered clearing agency; Provided, however, that the Commission may authorize a lower capitalization for applicants not participating in a registered clearing agency.(Emphasis Code; (b) Those acquiring the business of existing Trading Participants pursuant to SRC Rule 28.1, paragraph 2 and will be Hundred Million Pesos (Php100,000,000.00) for the following types

3)Rule 49.1(A) of SEC MC No.16,Series of 2004

"Rule 49.1 (A) PAID UP CAPITAL REQUIREMENT

Unless otherwise prescribed by the Commission, the paid-up capital by the existing requirement of SRC Rule 28.1 (E)(v) (Emphasis supplied) of every Broker Dealer covered by the RCBA shall be governed

(4)SRC Rule 28.1(E)2)v states:

Million pesos for the following types of Broker Dealers: x x x (Emphasis supplied) a. Unimpaired paid up capital of One Hundred Million 100

3 Decasa, L., Securities Regulation Code Annotated, 2013, p. 110

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica Vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 7 of 11

In relation to the instant case, we agree with CMIC that Article VIII-C. Section 1 of the CMIC Rules and the afore-quoted regulation apply to the nature of a continuing requirement for brokers and dealers provided in Appellant TSI as the prescribed minimum paid-up capitalization partakes of Rule 28.1 (E)(v) which TSI failed to meet. This is shown in the Certificate of Registration issued to TSI which provides that the grant of the license to act as broker-dealer in securities is always subject to TSI's full compliance with the applicable laws,rules and regulations which the Commission may now or hereafter issue. Lest it should be forgotten, the need to update and strictly

would sanction a situation where new regulations on capitalization time of their registration. This certainly, is not the intent of the law. dealers is imbued with public interest as it directly impacts the national economy. To hold otherwise as what TSI is suggesting to this Commission, requirement will no longer bind existing broker dealers who can conveniently argue that they have already complied with the regulation(s) existing at the implement regulations is warranted by the fact that the business of broker

PhP14,557,663.00 short of the required PhP100,000,000.00, and its allegation, devoid of evidence,that its UPC is not deficient was not able to The records show that as of 30 June 2015, the UPC of TSI was

audit report. trounce the evidence presented by CMIC which is embodied in the latter's

Rule 28.1 (E)(v). CMIC that TSI violated Article VIII-C of the CMIC Rules in relation to SRC On the basis thereof, we find no cogent reason to disturb the finding of

had not yet been realized.4 This, according to TSI, was an erroneous treatment not deficient, TSI passed the blame to CMIC by insisting that the shortage of its UPC was brought about by CMIC's erroneous deduction of the unrealized loss from its retained earnings. TSI argued that the unrealized loss from the decrease in the market value of its marketable securities should not be considered in computing the company's Retained Earnings because the same of its unrealized losses. To make up for the absence of proof to support its claim that its UPC is

We do not agree with TSI.

unrealized loss due to decrease in the market value of marketable securities is The applicable standard to determine the proper treatment of the

4 Paragraph 28 of the Appeal

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica vs.Capital Markets Integrity Corporation SECEn Banc Case No.11-15-391 Page 8 of 11

the International Accounting Standard (IAS 39 - Recognition and Measurement of Financial Instruments, to wit:

Par. 9 of IAS 39 on Definitions of four categories of financial instruments --

is a financial asset or financial liability that meets either of the following "A financial asset or financial liability at fair value through profit or loss conditions:

@) It is classified as held for trading. A financial asset or financial liability is classified as held for trading if:

G It is acquired or incurred principally for the purpose

(i On initial recognition it is part of a portfolio of identified short-term profit-taking; or it is a derivative (except for designated and effective hedging instrument). x x x of selling or repurchasing it in the near term; which there is evidence of a recent actual pattern of a derivative that is a financial guarantee contract or a (Emphasis supplied) financial instruments that are managed together and for

with IAS and the Philippine Financial Reporting Standards. Moreover, Par. 46 of IAS 39 on Subsequent measurement of financial assets provides: Section 2 of the CMIC Rules which requires all trading participants to comply The application of the afore-quoted standard is consistent with Rule IX.

transaction costs it may incur on sale or other disposal. x x x "After initial recognition, an entity shall measure financial assets, including derivatives that are assets, at their fair values, without any deduction for

Par. 55 of IAS 39 on Recognition of gains and losses for financial instruments -

asset or financial liability that is not part of a hedging relationship shall be liability classified as at fair value through profit or loss shall be "A gain or loss arising from a change in the fair value of a financial recognized as follows. (a) A gain or loss on a financial asset or financial recognized in profit or loss. (Emphasis supplied)

value of the marketable securities should be recognized in profit or loss and The afore-quoted provisions clearly mandate that changes in the fair

Standards (IAS) and the Philippine Financial Reporting Standards as issued by the Board of International 5Section 2. Accounting Standards. All Trading Participants shall comply with the International Accounting Accounting Standards.

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 9 of 11

closed to retained earnings. Therefore, CMIC properly treated the unrealized losses from marketable securities when it deducted the unrealized losses from TSI's Retained Earnings. CMIC's finding that TSI's UPC is deficient, having been based on a treatment of its unrealized losses prescribed under the IAS, should not be disturbed in the absence of clear showing that the said standard is not applicable.

deficiency in the Retained Earnings account from the total paid-up capital, to is mandated under Article VIII, Section 2 of the CMIC Rules to deduct any Wit: Moreover, the Commission notes that in computing the UPC, the CMIC

framework,CMIC, shall observe the following guidelines: "Section 2. RBCA Guidelines. In monitoring compliance with the RBCA

2.1 Prudential and Financial Measures.

A. Paid Up Capital Requirement.Unless otherwise prescribed by the by the RBCA shall be governed by the existing requirements of SRC Commission, the paid-up capital of every Trading Participant covered Rule 28.1(E(v)

For this purpose, the term paid up capital shall include the following:

(l) Capital contributions of partners or par value or stated value of 6) Additional Paid in capital for both Common and Preferred Stocks 7 Donated Capital (2) Payment made on Subscribed Common Stock (3 Par or Stated Value of Preferred Stock (4) Payment made on Subscribed Preferred Stock 5) Common Stock to be Distributed (arising from a Stock Dividend Declaration) Common Stock

XXX

B. Reserved Fund

XXX

Earnings account." (Emphasis supplied) (4) Consistent with the general usage under SRC Rule 28.1 (E) (v), the term Unimpaired Paid Up Capital shall refer to the firm's Total Paid Up Capital less any deficiency in the Retained

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No.11-15-391 Page 10 of 11

UPC as of 30 June 2015, as follows: Applying the foregoing provision, CMIC correctly computed TSI's

UPC Less: Deficit in Retained Earnings Paid Up Capital PhP 85,442,337.00 PhP109,000,000.00 23,55,663.00

I. TSI and its Associated Person's

failure to implement an effective compliance function and

Rules in relation to SRC Rule 28.1 (4)(G) supervisory Article VI,Section 2 of the CMIC system violated

compliance function and a supervisory system, to wit: (iii) of the CMIC Rules as it shows the concomitant failure on the part of TSI, through its Associated Person, Ms. Abigail Lorica, to implement an effective finding of CMIC that it consequently violated Article VI, Section 2, Paragraph The failure of TSI to comply with the UPC requirement affirms the

and experience in securities regulation matters and an understanding of the securities activities of the firm enabling them to effectively execute their "Section 2. Supervision. (a The management of every Trading compliance function within the firm which is independent of all company President. The management shall ensure that the Associated Person/s performing the compliance function possesses sufficient training Participant shall establish and maintain an appropriate and effective operational and business functions. The compliance function shall be performed by an Associated Person who shall be registered with the Commission and required to report directly to the board of directors and the duties.

(c b ( Although the final responsibility for proper supervision shall rest with Associated Peron/s shall promptly report to management all with the legal and regulatory requirements, as well as with the Associated Persons shall be responsible, in addition to the duties enumerated under SRC Rule 28.1 (4)(G) for maintaining a system to supervise the activities of all persons employed by the Trading Participant who are directly or indirectly related to the conduct of its securities business. the Trading Participant, diligence of a good father of the family is required from the Associated Person/s in the conduct of their occurrences of material non-compliance by the firm or its staff compliance functions.

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica vs. Capital Markets Integrity Corporation SEC En Banc Case No. 11-15-391 Page 11 of 11

notify CMIC. For this purpose, the Associated Person shall maintain a logbook of all material non-compliance reports with the appropriate notation of the action taken by management on said occurrences. Such logbook must be duly registered with the Commission within fifteen 15 days from issuance of the Associated Person/s new/renewal license. xxx" (Emphasis supplied) firm's own policies and procedures. Management shall then promptly

Person failed to address. This violated the afore-quoted provision that warranted the imposition of the appropriate penalty. UPC constitutes a material non-compliance which TSI and its Associated The failure of TSI to maintain the minimum amount prescribed for its

the CMIC and hereby resolves to affirm the Assailed Decision. The Commission thus finds no cogent reason to disturb the findings of

Timson Securities, Inc., Philip Laude, and Abigail C. Lorica is hereby DENIED for lack of merit.The Letter-Decision dated 19 August 2015 of the CMIC is hereby AFFIRMED WHEREFORE, premises considered, the instant Appeal filed by

SO ORDERED

Pasay City, 15 April 2021

EMILIO B.AQUINO Chairpefson

vu EPHYRO LUIS B.AMATONG Commissioner JAVEYPAUL D.FRANCISCO Commissioner

KELVNLESTER K.LEE Commissioner KARLO S.BELLO Commissioner