SECURITIES DEALERS AND BROKERS: It’s Importance in the Philippine Financial System
I.
Overview: Composition of the Philippine Financial System
Banking Institutions -all financial institutions that obtain funds through the acceptance
of deposits.
Non-Bank Financial Intermediaries (NBFIs) – other financial institutions whose
principal functions include lending, investing or placement of funds or evidences of indebtedness or equity deposited with them either for their own account or for the account of others. An example of an NBFI is a broker dealer in securities. Difference between Capital Market and Money market
Capital Market – where long-term instruments funds are raised through t he bond market which deals with long-term debt securities such as bonds, and the stock market which deals with equity securities.
Money Market – where short-term funds are raised though the buying and selling of short-term debt securities such as commercial papers.
NBFIs or market intermediaries are sometimes referred to as “market participants”
Market participants need to be registered with SEC or secure a secondary license apart from their primary registration or certificate of incorporation.
Market Participants required to be registered with SEC:
Broker/Dealer in Securities
Salesmen and Associated Person
Investment Company Advisers/Cert. Investment Solicitors
Government Securities Eligible Dealers (GSEDs)
Transfer Agents
Exchanges and other trading markets
Clearing Agencies
Securities Depositories
Investment Houses/Underwriters of Securities
DEFINITION OF TERMS Broker –company that buys or sells securities for the account of clients or customers. The broker is the
agent of the client in buying or selling securities for a commission. Dealer –company that buys or sells securities for its own account in the or dinary course of business. Trades for the dealer’s account when it acts as a principal are sometimes called “proprietary” or “house”
account.
Associated Person of a Broker dealer –is an employee thereof who, directly exercises control or
supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely clerical or ministerial. He is the firm’s compliance officer.
Salesman –is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and
sell securities. He takes orders to buy or sell from customers. Exchange member or PSE trading participant – buys or sells shares/equities of companies listed at the
Philippine Stock Exchange. NOTE: You can only exchange in stock trading of listed companies (e.g. SMC, Ayala Corp. Meralco, etc.,) by opening an account PSE-member broker that has a se condary license as a broker dealer in securities form the SEC. Non-Exchange Member –buys or sells other types of securities as enumerated in Sec.3.1 of the
Securities Regulation Code. Non-Exchange Broker may be further classified into:
Broker in Proprietary/Non-proprietary shares –a broker that buys or sells proprietary shares such as golf club membership certificates, time shares etc.
Difference between Proprietary Shares and Non-Proprietary Shares
Proprietary shares –entitles the holder not only the right to enjoy the use of a specific property
but also to dividends or earnings of the company and upon liquidation of the company, a proportionate right over its assets.
Non-Proprietary Shares –only the right to the use of the property
Secondary Licensing: Why the Need to Regulate Market Intermediaries
First, lets discuss the statutory framework for se curities regulation –the SECURITIES REGULATION CODE (SRC) or the Republic Act 8799
The SRC is the law that regulates the sale of securities and operations and conduct of securities market professionals.
Approved on July 19, 2000 and became e ffective on August 8, 2000.
The SRC repealed the Revised Securities Act (B.P. Blg. 178) in it’s entirely and some se ctions of
the Presidential Degree No. 902-A.
The SRC gave the SEC the authority to administer the code and to promulgat e rules that are appropriate in the public interest.
SRC also incorporated international best practice standards.
SRC Objectives:
To develop the Philippine Capital Market
Encourage wider participation of share ownership
Promote self regulation in the securities industry
Ensure full and fair disclosure about securities; and
Minimize and eliminate insider trading and other fraudulent or manipulative devices.
SECURITIES REGULATION CODE CHAPTER III: REGULATION OF SECURITIES MARKET PROFESSIONALS (Market Participants) Sec. 28 Registration of Brokers, Dealers, Salesmen and Associated Persons Sec 28.1 No person shall engage in the business of buying or selling securities in the Philippines as a
broker or dealer or act as a salesman, or an associated person of any broker or dealer unless registered as such with the commission. Sec 28.2 No registered broker or dealer shall employ any salesman or any associated person, and no
issuer shall employ any salesman, who is not registered as such with the Commission. NOTE: Every broker must include its application for registration, applications for its salesman and associated person. CONDITIONS FOR REGISTRATION Sec 28.4 (a) If a natural person, the applicant must satisfactorily pass a written e xamination as to his
proficiency and knowledge in the area of activity for which registration is sought; Sec 28.12 The registration of a salesman or associated person shall be automatically terminated upon the cessation his affiliation with said registered boker or dealer, or with an issuer in the case of a salesman employed, appointed or authorized by such issuer. Promptly following any such cessation of affiliation, the registered broker or dealer, or issuer, as the case may be, shall file with the Commission a notice of separation of such salesman or associated person. Objectives of Licensing General Objectives:
To protect investors
Specific Objectives:
1. To ensure that only the “fit and proper” persons are allowed to perform securities related functions. 2. To ensure that the goals of the SRC will be achieved.
The Pyramid of Regulation The management of every Broker Dealer shall establish and maintain an appropriate and effective compliance function within the firm which is independent of all operational and business functions. (SRC Rule 30.2, par. 6)
Individual Firms
1st level of supervision.
An exchange shall “comply and enforce compliance by its members with the provisions of this Code, its implementing rules and regulations and the rules of the Exchange” (SRC sec 33.1,par.a.)
SRO's
nd
2 level of supervision
Individual Firms
SEC
rd
3 level of Supervision
The Commission… shall have the powers and functions provided by this code… (d) Regulate, investigate or supervise the activities of persons to ensure Individual compliance. Firms (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SRO’s; (f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; … (Sec. 5.1)
SRO's
Every firm has the:
Obligation to supervise The activities of all persons employed, directly or indirectly related to the conduct of its securities business.
II.
Organizational Structure of Broker Dealers
Board of Directors Associated Person President
Front Office
Back Office
Sales
Support Office
C&S
Research
Accounting
Administrative
Branch Office
Trading Operation
SRC Rule 30.2 –Transactions and Responsibilities of B-Ds, par 6A, requires that:
The management of every Broker Dealer –shall establish and maintain an appropriate and effective compliance function within the firm
Which is independent of all o perational 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 company President.
The management shall ensure that the Associated Person/s performing the compliance function possesses sufficient training and experience in securities regulation matters and an understanding of the securities activities of the firm enabling them to effectively execute their duties.
Associated person shall mean –any person employed full time by the Broker De aler
whose responsibilities include: -internal control supervision of –other employees, agents, salesmen, officers, directors, clerks, and stockholders of such Broker Dealer
For compliance with the Code and rules and regulations adopted thereunder.
He cannot perform other duties without Commission approval and;
Subject to the condition that the broker dealer will maintain the appropriate Chinese Wall between the functions of an Associated person and that of his other duties.
Duties of an Associated Person. Taken in conjunction with SRC Rule 30.2 (6), an associated person shall:
i.
Have a general knowledge of the operations of the Broker Dealer without necessarily engaging or actively participating in the day-to-day operations of the firms;
ii.
Supervise and provide trainings as prescribed under SRC Rule 3 0.2 (7) to other employees, agents, salesmen, officers, directors, clerks and stockholders of the Broker Dealer for compliance with the Code and rules and regulations adopted thereunder;
Oversee compliance with legislative and other regulatory requirements (such as notifying the Commission of material changes in information previously filed, maintaining registers, books of accounts and other records, compliance with rules, orders and laws relating to trading , issuing confirmation receipts, compliance with margin rules, net capital and other financial requirements);
Ensure that all salesmen are registered and that the Commission is notified when any salesman is no longer employed.
Develop procedures and monitor on a daily basis compliance with financial resource requirements; and
Ensure that there is an audit trail which e nables compliance with applicable laws, Exchange, clearing agency and other SRO rules.
Associated Person 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 Broker Dealer who are directly or indirectly related to the conduct of its securities business.
Profile of Broker Dealer, Salesmen and Associated Persons (as of July 2006)
III.
Brokers/Dealers –Exchange Trading Participants – 132
Brokers/Dealers of Equity Securities –Non-Exchange Dealers -17
Salesmen for PSE
Associated Persons for BD – 157
Operations of the Broker Dealer
FRONT OFFICE
Part of the brokerage firm that is “client facing” or involves interaction with customers.
The salesmen/traders and clerk are part of the front office.
FUNCTIONS: taking orders to buy or sell securities, inputting orders to the Maktrade facility (PSE
automated trading system), time-stamping of order tickets. BACK OFFICE
Does not deal directly with customers or not directly involved in selling or t rading
Where clearance processing of the trade id done
Transfer of securities and money and tracking of “failure to deliver” is handled
Provides administrative support services.
FUNCTIONS: clearing and settlement; record maintenance; accounting; production of invoices,
receipts, trade confirmations and reports. RESEARCH
---PROVIDES research such as fundamental and technical analysis of the market, valuation reports and making buy/sell and hold recommendations. Job opportunities for BANKING AND FINANCE STUDENTS 1. Salesman/Trader 2. Associated Person 3. Analyst 4. Officer
