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seclogo.jpg (5792 bytes) REFORMING THE PHILIPPINE CAPITAL MARKET
Makati Business Club Forum
Shangrila Manila Hotel, Makati City
04 April 2000

MS. LILIA R. BAUTISTA
Chair, Securities and Exchange Commission

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INTRODUCTION

     Good afternoon, ladies and gentlemen.

     First, let me thank you for having me here today as your Guest of Honor and Speaker. This is actually my first speaking engagement as Chair of the SEC. I'm telling you this hoping that you will be nicer to me later on during the open forum.

    I am a little intimidated by the task you assigned to me today. In your letter of invitation, you requested, in light of the controversies surrounding our stock market, that I make a presentation to, and I quote, "provide guidance and direction to the market and help restore confidence and stability to the Philippine capital markets." I doubt that my presentation can achieve all that. But I would like to share your optimism and give it my best shot. So, let me approach this topic from a perspective I am familiar with, that of global competition.

     I enter the SEC having come from an organization where global competition is a fundamental premise in developing strategies and programs. In fact, my last few speeches as Senior Undersecretary of the Department of Trade and Industry all centered on globalization and the imperative of surviving in what is fast becoming a fiercely-competitive environment for trade and investment.

     I find that in the SEC, we are faced with the same concern. The rapid pace of development in information technology, innovations in financial products and services, integration of markets, and liberalization of capital flows all contribute to a global environment where one has to be competitive in order to survive. And given the mobility of capital, we compete not just for investors but also for investment-seekers. When we find Philippine companies choosing to list in foreign exchanges rather than in the PSE, we have to question the perceived capability and efficiency of our market to raise capital for our corporate sector.

     Therefore, we need to address the issue of capital-building, which will involve broadening public participation and attracting foreign investment in the market. We also need to approach the development of our capital market as a means to increase domestic savings to support long-term and sustainable development. One necessary condition for savings mobilization is a capital market that can provide accessible and economical instruments to encourage savings and lower the costs of financial transactions. As intermediaries of such savings, efficient capital market institutions will improve the allocation of funds to alternative productive investments in the corporate sector.

     Investors will go where they believe their capital will yield the most returns. The confidence of investors to go into the market is dependent both on the availability of information to guide their decisions and manage their risks, and on their perception of market profitability and fairness. Therefore, whatever reforms to be undertaken must address these.

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THE PROPOSED SECURITIES ACT OF 2000

    With the recent controversies surrounding the Philippine stock market, the passage of the proposed Securities Act of 2000 becomes an urgent measure to put in place necessary reforms. The proposed Act seeks to promote full and fair disclosure about public companies and public trading of securities, and uphold high standards of market conduct that are responsive to the current needs of a globally-competitive market. In superceding the Revised Securities Act, the proposed Securities Act aims to promote a more credible, fair and transparent Philippine capital market and enhance investor protection.

    The Senate version (SB No. 1220) has been approved on third reading, while the House version (HB No. 8015) is currently undergoing the period of amendments.

    Let me just enumerate the salient features of the two bills.

1. The shift from merit regulation to a full disclosure regime. Both bills require issuers making a public offering to provide full disclosure of all material facts about the issue and nature of the offering prior to the sale and in accordance with certain disclosure standards.

2. Increased deterrents to prohibitive conduct. The proposed bills raise the civil liabilities to include fraud in securities transactions, insider trading, and fraud in commodity interest contracts and pre-need plans.

3. Codification of the concept of self-regulation. Both bills embrace the concept of self-regulation and authorize various major market players - including exchanges, clearing agencies, organizations composed of regulated persons such as stockbrokers and dealers - to operate as self-regulatory organizations or SROs. The exercise of the SEC's oversight functions over SROs is also defined particularly where it concerns reviewing the regulatory programs of SROs and holding them accountable for policing their ranks.

4. Incorporation of new market developments and practices. Both bills cover newly-developed instruments such as asset-backed securities and derivatives. They also allow flexibility to adopt modern practices and trading technologies such as electronic trading systems and uncertificated securities.

5. Enhancement of SEC rule-making powers and emphasis on SEC's independence. The character of the SEC as a collegial body is institutionalized. The Commission is also given the flexibility to undertake organizational reforms to adapt to the requirements of a highly dynamic capital market.
 

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     To strengthen these features, we have also submitted to Congress our proposed amendments to House Bill No. 8015. Our proposed amendments are intended to achieve the following objectives:

1. Strengthen the SEC to be a more credible and effective market regulator;
2. Reform the PSE to be a more credible market participant; and
3. Provide more effective deterrents to market abuses

     There are other legislative measures relating to capital market reform that are currently pending passage in Congress. These are the proposed Revised Investment Company Act or RICA and the Pre-Need Plan Code. The RICA will strengthen the mutual funds industry and improve the viability of investment companies to serve as savings mobilization schemes and help deepen the Philippine capital market. The proposed Pre-Need Code, on the other hand, aims to provide the proper and effective regulatory framework that will support the growth of the industry, while guaranteeing the protection of planholders.
 
OTHER INITIATIVES

    The passage of the proposed Securities Act will address many of the reforms we want to put in place. However, beyond this, we are also undertaking complementary initiatives.

    We are pleased to have the assistance of development organizations such as the USAID, CIDA, and the ADB and World Bank in defining capital market strategies and programs aimed at enhancing the economic efficiency of our markets and addressing the challenges of global competition.

     Given the rapid pace of change in capital markets, we need technical and financial assistance in undertaking analytical work, adapting international best practices, building capacities of capital market institutions, and upgrading infrastructure particularly through IT-enabled support systems.
 

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SEC Reorganization

     I am also strongly pushing for the institutional strengthening of the SEC to begin with a reorganization that will reorient tasks towards a greater than ever focus on capital market development. At the moment, there appears to be some overconcentration on the corporate registry and quasi-judicial functions. I intend to deploy more people in capital market development. To complement this, I would like to embark on upgrading the competency base of SEC employees to get them on this track.

     As a regulator, we in the SEC must come up with new approaches for working with industry to ensure that our regulation facilitates market innovation while protecting investors. We need to work with the industry to address changes as they evolve, rather than merely reacting after they have happened. By working with industry as it innovates and incorporates new technology, we can gain the information we need for effective oversight. We also need to continuously reappraise our regulation to discard rules that don't work, or are practically impossible to enforce.

     The purpose of regulation is first and foremost to protect investors. But we do investors a disservice if our rules stifle innovation and hinder development. It is our duty to keep our regulatory structures simple, clear, and current.  
Promoting corporate governance

     SEC, by itself, will not be able to take on the responsibility of directly regulating the entirety of capital market players. It is for this reason that we support the delegation of our regulatory powers to SROs, which would be entrusted with the privilege of policing their ranks. As a further initiative, we would like to embark on a campaign to promote strong corporate governance practices. Investor confidence stems partly from a country's or market's reputation for good corporate governance. If investors are not confident with the level of disclosure, or if a country's accounting and reporting standards are perceived as lax, funds will flow elsewhere. Thus, the ability of the market to raise capital is prejudiced.

     But if strong corporate governance is to filter through the marketplace, its practice must extend beyond merely prescribed mandates, responsibilities, and obligations. It is imperative that a corporate governance ethic be recognized and adapted by all market participants: issuers, auditors, rating agencies, directors, underwriters, and exchanges. Its foundation must be an unwavering commitment to integrity, to protecting the investor and to promoting public interest.

    Pardon me, but this is the idealist in me speaking to you. I bring out this issue because I believe I am addressing the right audience for it. After all, the practice of good corporate governance begins with an enlightened and independent board of directors. And I am counting on you to renew this principle within your respective organizations.
 

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Emphasis on information and technology

     I would also like to put a lot of emphasis on making technology work for the SEC and its tasks where capital market development is concerned. We are already undergoing discussions on the matter of infusing current and emerging technologies as they affect our operations, such as, for instance, simultaneous monitoring of market activity, and public access to records of listed companies. I would also like to promote the expanded and more effective use of information technology and the Internet both for information dissemination and transactions with the SEC. The function of corporate registry, for instance, can be declogged if some of the registration can be done online. Disclosure of public companies can also find a more efficient avenue in this manner. Further, the wealth of information and statistics generated by the SEC's operations must be processed for more useful applications, such as investor information and even policy formulation.

     We also intend to bring the SEC closer to the public through investor education and feedback hot lines and electronic access.
 

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THE FIRST 100 DAYS

     In the spirit of optimism, I would like to share with you what will be my priority concerns within my first 100 days as Chair of the SEC.

     First, is the resolution of the BW case. I believe that each one of us is eager to see this case through so that we could finally move on.

     Second, is the passage of the proposed Securities Act. As I have earlier said, we need the mandate to be able to become a more effective regulator and to strengthen the SEC towards a more dedicated focus to the development of capital markets.

     Third, I would like to undertake a review of rules of the PSE and especially their enforcement to ensure that they do establish foundations that ensure fair play and ethical trading in the market. My specific objective in doing this is to find ways where the SEC can step in to enforce the rules where the PSE has failed to do so.

    Fourth, I would like to take very concrete steps towards improving the credibility and image of the SEC and its employees. I believe that a person in government service must not only be honest but above suspicion. Thus, in addition to human resource development programs that will promote values and ethics, I am looking at establishing procedures and systems that will remove discretion, where possible, on the part of SEC personnel over decisions and transactions. Among these are transparency of rules and procedures, automation of some processes, closer monitoring or aging of cases to determine delays and backlogs, and transferring discretion to parties who have a greater stake in the outcome particularly in corporate recovery cases. In this particular task, I would like to count on your support in the private sector. We need your help in eradicating graft and corruption. And I hope you will support our efforts in promoting the integrity of the SEC and its employees.

    Lastly, I would like to take steps to promote competition in the market. Beyond eliminating whatever anticompetitive exchange rules and obstacles that exist in order to allow new market entrants, I would like to study and support initiatives to set up new exchanges and alternative venues for raising capital and funneling investments.
  
CONCLUSION

     As you can see, we do have our work cut out for us. While we have to address the immediate concerns that are serving to test the institution's credibility and capability, we know that beyond this, we have to take quick but deliberate steps to prime the Philippine capital market for global competition.

    I do need and welcome your assistance. We find ourselves in a situation where efforts must be equally directed towards addressing what is actually so and what is perceived to be so. Part of meeting that challenge lies in a candid, straightforward, but cooperative relationship between the industry and us in the SEC. As we take new paths, enter new frontiers, create new opportunities, and welcome new participants, I know we are all looking towards a Philippine capital market which will be defined by innovation as much as by integrity.

    I thank you for your kind attention and I wish you all a good afternoon.

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