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(Article published in the Dec  3,2004 issue of TODAY, Business Section)

Gone are the days when the officers in the trust department were envied by their counterparts in the commercial bank proper for being able to do their thing in a regulation-free environment.  This year alone, the Bangko Sentral turned its regulatory eyes on three major areas of trust operations, instituting structural reforms, all for the protection of investors.

The first area tackled was the lucrative business of securities custodianship and securities registry.  Circular No. 428, issued on 27 April 2004 and clarified further by Circular No. 457, dated 14 October 2004, raised the qualifying bar for securities custodians and registers and imposed strict prudential standards on their operations.  Seeking to avert a repeat of the Bancap scandal that rocked the system more than ten years ago, the BSP, over the howling and screaming of the big banks that played the double role of keeper and vendor of securites to their clients, required that custodians and registers to be third parties, i.e. with no subsidiary or affiliate relationships to the issuers or sellers of the securities they handle.

This was followed by Circular No. 447 on 03 September 2004, sending trust departments of banks into wailing and weeping as they  foresaw the impending death of the common trust fund (CTF).  Over the years, that laudable  mechanism for the collective investment of small funds permutated, at great risk to the banking system as demonstrated by the Urban Bank/Urban Corporation experience, into a substitute for deposit-substitutes.  Circular No. 447 required marking to market the investments of the funds thereby forcing trust banks to disclose to their trust clients the true valuation of their holdings.

With Circular No. 447, the CTF was all but dead and Circular No. 452 left no doubt that the Bangko Sentral was, pardon the pun, dead serious.  Effective 01 April 2005,  all CTFs then still surviving will be subjected to the same legal and liquidity reserves as deposit-substitutes.  This treats a spade exactly like a shovel and removes the CTF’s cost-saving allure in the area of reserves.  Moreover, investments in securities of all currently existing CTFs were required to be  turned over since 31 October 2004 to a BSP-accredited third party custodian, as prescribed by Circular No. 447.

Finally, last week, the Monetary Board trained its sights on banks and non-bank financial institutions acting as trustee on any mortgage or bond issued by any municipality, government-owned or controlled corporation or any body politic.   Corporate trustees had to be accredited with the BSP and qualifications were made more stringent; independence of the trustee better safeguarded; investment and management of funds pending utilization and sinking funds severely circumscribed; and operational transparency, at least to the BSP, required.

Fourteen bars need be hurdled before an aspiring institution could be  accredited.  It must be under BSP supervision and a holder of a trust license.  It’s capital accounts must comply with a schedule of minimums, depending on the category of the applicant, and its risk-based capital adequacy ratio must be not lower than 12%.

The articles of incorporation and by-laws must have provisions specifically authorizing the activity of acting as a trustee as well as mandating a trust unit or department, with the concomitant responsibility and accountability.

These are then followed by a list of efficiency and good behavior benchmarks.  Operations must have been profitable for the last three years; the trustee must have no net weekly reserve deficiencies for the last eight weeks.  Serious compliance must be shown with good governance standards, such as election of two independent directors, attendance by directors of accredited seminars on their duties and responsibilities, observance of DOSRI rules, keeping liquidity floor requirements, respecting single-borrower’ loan limit, and hewing to the line on investment in bank premises and other fixed assets. 

Moreover, the applicant  must not have had outstanding float items exceeding 1% of total resources in the “Due From/To Head Office/Branches/Other Offices” for more than 60 calendar days.  It ought to have in place a sufficient risk management system.  Its CAMELS composite rating must be at least 3 in the last regular examination and management must not have scored lower than 3, too.  And if the applicant is a bank, it must be a member of the PDIC, although it is not required to be proud to be so.

All the requirements must be met not only at the time of application; they must be maintained up to the time of the grant of authority.  And even after the grant of authority, more rules fall into place.

To prevent conflict of interest, a bank or non-bank financial institution is prohibited from acting as a trustee or a mortgage or bond issuance of entities where an elective or appointive official of the issuer or his related interest own such number of shares enough to elect one board member or is directly or indirectly the registered or beneficial owner of more than 10% of any class of the trustee’s equity.

The management of the funds received by must be in accordance with the Trust Indenture or Agreement.  However, funds pending utilization in accordance with the agreement as well as sinking funds, from which the payment of the bond issues are expected to come, may be invested only in deposits with duly authorized banks, other than the trustee, or invested in peso-denominated treasury bills acquired from third party dealers.

In the interest of transparency, i.e. to ensure that the Bangko Sentral get accurate reports and is enable to verify, the trustee is required to waive the confidentiality provisions of the law on Secrecy of Bank Deposits (R.A. No. 1405, as amended) and comply with future reportorial requirements from the Bangko Sentral.  In a suppletory manner, the other rules relating to the conduct of trust business, not inconsistent with the new rules, are also made applicable.

Threat of punishment is severe enough to discourage flirting with short cuts.  Without prejudice to the institution of criminal and administrative proceedings, a gradually increasing system of penalties is set up, with sanctions ranging from a fine of Php 10,000 per day and reprimand to the directors, for the first offense, to Php 30,000 per day, suspension of directors and offices, without pay for 120 days, and suspension or revocation of trust license, for the third and subsequent offenses.

And 2004 isn’t over yet.  And there is no telling what more proposed regulations are in Nesting Espenilla’s briefcase.  No wonder trust officers have been wearing long faces recently.  But then, no wonder too investors have been wide smiles lately.