(Article published in the Aug 23, 2006
issue of Manila Standard Today)
Pardon my Tarzan-like chest-thumping, but I cannot resist the temptation (among others) of crowing that I have arrived. I received a very serious and sober e-mail last week from an esteemed reader who seemed to care, providing me with some international perspective to the topic of “functional regulation” (Vide, The Trust Guru, in the 02 Aug 2006 issue of the Manila Standard Today) of Unit Investment Trust Funds (UITFs).
Mr. Fernando Jose Sison III, past president (2003, 2004) and current president (2006) of Investment Company Association of the Philippines (ICAP) has thus elevated my writing carreer, began a little more than five years ago to the level of those who have at least one reader. Two more rungs and I will be at the pinnacle. I still need to be sued for libel. And then, for the top rank, to put in the hit list of some public official allergic of criticism.
Mr. Fernando Jose Sison III advances the proposition that “capital markets development and investor protection are better served under a single regulator of the funds industry.” The unsaid preference as the single regulator in the Philippines is, naturally, the regulator of investment companies, namely the Securities and Exchange Commission.
A scan of the international situation is presented to support the contention. To give you the full force and flavor of his argument, I quote hereunder the relevant paragraphs of his exposition:
“In Europe, European Union members each have a single regulator which
regulates the CIS of that country. The EU members have come up with
"Undertakings for Collective Investments in Transferable
Securities" (or UCITS, pronounced "you-sits") starting in
1985 (UCITS I) up to 2001 (UCITS III). UCITS are a set of uniform
regulations that aim to allow CIS to
In the U.S., which boasts of the world’s largest investment funds industry (US$9.3 Trillion in net assets as of June 30, 2006), both UITs and MFs are regulated by the SEC.
In our part of the world (Asia-Oceania), one regulator regulates the unit trusts and investment companies in Australia, Bangladesh, China, Hongkong, India, Indonesia, Japan, Korea, Malaysia, Pakistan, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam. In this listing, the Philippines is among the smallest in funds volume, coming in 3rd after Bangladesh and Vietnam.
While most countries in Asia-Oceania have their SEC as the regulator, other countries have established a single regulatory body which is not the SEC. These countries are Japan (Financial Services Agency), Korea (Financial Supervisory Commission), and Taiwan (Financial Supervisory Commission). In contrast, the Philippines has three regulators – the BSP for UITFs (contractual structure), the SEC for mutual funds (corporate structure), and the Insurance Commission for unit-linked insurance funds (contractual structure).
The Philippines is headed in the direction of best global practices and standards if it adopts functional regulation of the investment fund industry under one regulator, the way other developing countries as well as developed countries have recently done. For instance, it was only in 2003 that Korea passed a single law and adopted a single regulator to govern their unit trusts, investment companies, and unit-linked assurance schemes which had heretofore been covered by different laws.”
I have no problem with only one regulator for all schemes primarily designed for collective investment. Too many regulators, in my view, per se spell bad news and one of my more difficult clients, Mr. Roberto R. Romulo (not because like my boss Dick, his surname is Romulo; but because in temperament he is so unlike Dick) can confirm with his experience. Recently, he got a generous serving of the spoiled broth that too many regulators had cooked.
Bobby was nominated by the Nominations Committee (with the affirmative vote of the GSIS representative) and subsequently elected as Independent Director of the Board of Equitable PCI Bank in 2004 in compliance with the Securities Regulations Code. His election as such was confirmed by the Bangko Sentral ng Pilipinas. Someone with power, however, complained to the Securities and Exchange Commission SEC that Bobby was not really qualified as an Independent Director and asked that he be criminally prosecuted. The SEC, in SEC RES. NO. 226 s. of 2006, approved the recommendation of its own Compliance and Enforcement Department that “no criminal sanction should be imposed on” him and the other members of the Nominations Committee.
But not satisfied, the powerful complainant brought the same complaint to the Department of Justice. Last week, directly contrary to the position of the SEC and obliquely in repudiation of the BSP’s, the handling investigator recommended, and his chief approved, prosecution for violating the Securities Regulations Code, forcing Bobby to quickly file his motion for reconsideration. Though the case is still pending, it illustrates what happens when there are too many regulators of the same activity: Too many cooks spoil the broth; too many regulators could very well cook your goose.
Thus, I could not agree more with Mr. Sison’s advocacy of one regulator, i.e. the SEC, for all structures that are identical to mutual funds. We both are in that together.
But we part ways, I regret, when the UITF, established by trust entities under BSP Circular No. 447, series of 2004 is asserted to be identical to a mutual fund. It simply is not.
The authoritative characterization of a UITF is BSP Circular 447 itself. Subsection UX410.1/U4410Q.1(a) of the Manual of Regulations, as inserted by Circular No. 447, says: “The term Unit Investment Trust Funds is synonymous to common trust funds (CTFs).” In turn, a CTF, as defined by Sec. X403(p), is “a fund maintained by a bank authorized to perform trust functions under a written and formally established plan, exclusively for the collective investment and reinvestment of certain money representing participation in the plan received by it in is capacity as the trustee.”
Thus, the defining characteristic of a UITF (formerly known as a CTF) is that it is a fund maintained by a trust entity exclusively for the collective investment of “certain money…received by it in its capacity as trustee.” Such receipt may, of course, be on account of a contract but not exclusively. Money may also be received in trust unilaterally, as in the case of wills and donations. Thus, although, under present practice, enjoyment by a trustor of the benefits of participation in a UITF is often the consequence of a contract, it is theoretically possible, legally, to have a UITF that collectively invest funds from testamentary trusts, living trusts, or any kind of trust fiduciary arrangement.
In contrast, units in the CITS of Europe, in the UITs of the US and the UTs of the Asia mentioned above by my good reader are not real or genuinely trust funds. The “Ts” in those schemes are not fiduciary trusts. The “T” in those schemes are not fiduciary trusts. They are trusts only in name since the trustees therein do not assume the duty of a fiduciary who has to exercise his personal judgment for the good of his beneficiary. They are called “Trustees” only because they hold legal title only and do not claim any beneficial interest in the res; but they hardly exercise trust fiduciary discretion.
In this our country, I have no objections to putting any thing that quacks like a duck, walks like a duck, and looks like a duck, under the functional regulation of the SEC as a duck. But, a UITF created under BSP Circular No. 447 is not a duck. It is a swan and thus should be left undisturbed in the fiduciary lake tended by the BSP.