(Article published in the July 19, 2006
issue of Manila Standard Today)
live in the age of convergence. Gone
are the boyhood days of the King of Siam, as portrayed by Yul Bryner in The
King and I, when “what was so was so and what was not was not.”
not all the 10 fingers of both your hands are enough to count the
functions that manufacturers have been able to put into your cellphone.
Your television set that was originally meant to provide visuals to
the radio when connected to just a couple of externals also serves as a
home entertainment center, if not a videoke.
The Internet, earlier known only as an information highway, is now
a market place sprawled in virtual space.
with products, so too with services.
One hardly enters a restaurant nowadays to have something to eat.
Instead, one goes for a dining experience.
A gym is not where you just pump iron; it is a wellness center
where one picks up the latest on nutrition, spiritual wellness and
intermediation is no exception. Savings
and investments are features of cash value insurance. Insurance is bundled
with deposits accounts. Some
debts are “quasideposit substitutes”; some stocks are like IOUs.
that question, probably elicited by the events of May, was asked of the
unit investment trust funds. Specifically,
the issue is which agency, the Bangko Sentral ng Pilipinas
or the Securities and Exchange Commission, ought to have the
mandate to regulate and supervise trust funds?
I submit that the regulation and supervision of trust funds, for
the purpose of seeing to it that public interest is served and the
investing public is protected, ought to remain with the central bank.
are four basic approaches provided by statute and employed by regulators
over financial intermediaries to protect the public.
They are (a) requiring disclosure requirements; (b) mandating
portfolio-shaping; (c) regulating institutional structure; and (d)
imposing fiduciary standards of conduct.
Professor Howell Jackson of Harvard Law School identified these
strategies in the United States, but it is easy to recognize them in the
Philippine regulatory landscape.
Disclosure requirements have long ago been with the then Central Bank of the Philippines, now the BSP. The more obvious instances are its implementation of the Truth in Lending Act, in effect since
and, the whole slew of reports that the BSP asks banks to submit, some
daily, under the authority of the General Banking Law of 2000 and the
earlier New Central Bank Act passed in 1993.
and Exchange Commission regulations are, of course, the epitome of
disclosure requirements. The commissions’ entire regulatory posture is
driven by the premise that an informed decision is the first line of
defense against securities fraud. Registration
is thus its main tool of enforcing compliance.
portfolios, both the institutions’ own as well as those that they manage
for others, is the forte of the central bank.
Rules in the General Banking Law that
impose the single borrower’s limit, that prescribe (almost
proscribe) the way of handling of Dosri loans, that lay down the extent of
collateral cover, that define the scope of major investments, that fix the
profile of the banks’ balance sheet, and
Section 88 that, prescribes the asset composition of funds held in
trust are portfolio-shaping regulations.
in the Securities Regulation Code, which is the primary statute that can
used as a platform for the SEC’s oversight over financial products, is
there similar authorization for the regulator to intervene to that overt
extent in the way the regulated entities utilize their powers and
property. As far as I know,
the only time SEC essayed into portfolio shaping was in the case of
listing the proper investment outlets for preneed companies.
That, however, did not prevent the crisis that the preneed industry
is currently facing.
Similarly, the central bank appears to be the only financial regulator to have the specific authority to regulate, in a dynamic way, the capital structure of a financial institution. As distinguished from portfolio shaping that focuses on the assets and liabilities devoted to a particular activity of the business enterprise, dynamic regulation of capital structure zeroes in on the sufficiency of the business enterprise’s net worth to absorb the adversities of the endeavor.
The central bank and SEC do this type of regulation when they require the banks and brokers/dealers, respectively, to adjust the amount of capital in the enterprise according to the risks that they face. The enterprises as thus asked to maintain what is known as “risk-based capital.
the BSP, under Section 34 of the General Banking Law, has specific
authority to require risk-based capital. SEC, on the other hand, has had
to rely on its general regulatory powers under Section 5 of the SRC.
imposition of fiduciary standards and seeing to it that the standards are
met are traditional domains of the BSP.
Since the passage of the General Banking Act in 1948, the
supervision of the business of fiduciary service has been lodged with the
central monetary authority. Only lately, in the wake of the
commoditization of a number of financial services and marketing thereof by
entities which are not banks has SEC ventured into requiring the conduct
of a fiduciary on its constituencies engaged in advisory and portfolio
management activities. But
still, the description of “fiduciary” as the latters’ role is, at
best, a loose rendition of the term’s meaning and since the brokers and
investment managers under the aegis of the SEC are no more than agents,
the fiduciary nature of their roles still falls short of the quality
required of trustees who, per se, hold the legal title in their own names.
these four basic regulatory strategies and the differing specialties of
the BSP and the SEC, the question of which is the better choice as
regulator of trust fund hinges, I submit, on the suitability of the
protection offered to the needs of the publics of trust funds.
And since these funds are no more and no less than collective
investment vehicles for the funds of trusts managed by trust banks, then
the question resolves itself into which regulatory strategy or strategies
are best suited to protection of trust beneficiaries.
universe of trust beneficiaries is evident from this description of what
trusts do. According to US
Judge William Rhodes Harvey, in a case he decided in the 1920s, a trust
“protects the living and serves the dead, befriends the widow and
orphan, guides the aged, strengthens the weak, curbs the improvident,
represents the incompetent, advises the hesitant, plans for the
inexperienced, encourages the timid, administers to charities, gratifies
whims of the eccentric and otherwise justifies its claim to be an
Given the wide range of diversity among those who need or make use of
trusts, it is obvious that the mandate to regulate institutional trustees,
and their tools of trust administration and operation like the UITF, ought
to be lodged on that regulator that has sufficient statutory authority,
personnel experience and institutional memory to effectively employ any
and all, as warranted, regulatory strategies described above.
As things now stand, that mission lies on the shoulders of the central bank and I see no compelling reason, at this time, to transfer it elsewhere.