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URCOIN developments an indictment of trust industry in the Philippines
(Article published in the December 11, 2000 issue of TODAY, Opinion Today Section)

The past three weeks gave investors in URCOIN, the common trust fund that was operated by Urbancorp Investments, Inc., two reasons to rejoice. The first was an order issued by the Securities and Exchange Commission directing the Interim Receiver of the failed investment house to make a thorough accounting of the fund’s assets and liabilities as of 25 April 2000, the last day prior to the closure of Urban Bank, Inc. as well as an accounting of its transactions prior to and collections after that date. The second was the week-long road show conducted by the Bank of Commerce designed to convince Urban Bank creditors, to approve its proposal for the rehabilitation of Urban Bank, Inc. The proposal involved, in addition to Urban Bank, the rehabilitation also of Urbancorp Investment, Inc. These twin developments, however, constitute a serious indictment on how the trust industry in the Philippines discharges its responsibilities to its constituencies.

The SEC order was issued on 09 November 2000, on motion for accounting filed by several account owners (represented by the law firm of Romulo Mabanta Buenaventura Sayoc and De Los Angeles) and investors in URCOIN. In prompt compliance, the Interim Receiver filed the required accounting on 21 November 2000. The result of the order and compliance is to enable the movants, and those similarly situated, to acquire an accurate idea of their trust placements and learn of the significant transactions, particularly in those made in fateful days of April 19, April 24 and April 25, 2000, that affect the value of their units of participation in URCOIN. They also can now examine the payments and collections made on their behalf by the Interim Receiver after Urban Bank was closed by the BSP.

In the other development, the Bank of Commerce roadshow informed its audiences nationwide during the week of 13 November that Urban Bank and Urbancorp’s clientele will, under the proposed rehabilitation plan for both institutions, get paid as follows: (a) within 30 days from date Urban Bank is opened, they will be paid up to Php 500,000 of their consolidated accounts, per depositor, as of April 25, 2000. From this will be deducted amounts previously received by depositors from the PDIC as well as matured obligations owed the Bank; (b) at the end of one year (or 365 days) from the same opening date, the depositor will be paid 30% of his consolidated accounts, net of what was already paid to him, under item (a), above; (c) another 30% of the consolidated accounts will be paid at the end of the next 365 days; and, (d) the last 40% will be paid at the end of the third year after opening.

Peso-account holders will earn interest, from date of opening (and not from the time Urban Bank was closed) equivalent to the average of the previous three months’ 91-days T-Bill rate less 4% as well as applicable taxes; the interest of dollar-denominated accounts will be the average previous 3 months’ 90-day SIBOR less 3% as well as applicable taxes. The depositors and investors stand to gain additional interest of up to 3% for peso-denominated deposits and 2% for dollar-denominated ones (less of course, the taxes) if certain identified properties are sold and cash is collected from non-performing assets. In sum, the depositors and investors are assured that they will not suffer any haircut, but only if one were to disregard the time value of money and any possible differential between the stipulated rate (as well as the dangled possible increment) and the rate that will prevail in the market in the next three years.

Prudence naturally requires trust investors to evaluate the payment schedule under BOC’s rehab plan as well as the credit worthiness of the Bank of Commerce against the state of their trust accounts as reported by the Interim Receiver to the SEC. In any case for the first time since 26 April 2000, depositors and investors can take charge of their own funds and intelligently decide in favor of what they consider to be good for them. That’s the good news.

The bad news, however, is that the SEC order (coupled with the Interim Receiver’s compliance) and BOC’s roadshow nevertheless together constitute, in my mind, a serious indictment on the way trusts are managed by corporate trustees in the Philippines. The trust investor’s right to know what is going on with his funds is the rationale for the duty of the trustee, imposed by the trust regulations of the BSP, to submit adequate accounting at least once every quarter. This report is to be made available to the trust investor no later than 20 days after the end of the relevant quarter. While a corporate trustee, may if it so wishes, render its accounts more often and sooner than required, human nature being what it is, the majority of corporate trustees comply only with the minimum. Thus, no accounting is usually made less often than quarterly and no accounting is usually submitted to clients earlier than 20 days after quarter end.

The Urban fiasco unequivocably demonstrates that the reglementary period for an accounting is too long. Unknown to their other co-participants, many of URCOIN’s investors massively withdraw their placements starting January 2000. This was coupled with the steady deterioration of the quality of its loan portfolio due to the non-payment by its many borrowers. Because these negative developments occurred within the three-month accounting period prior to Urban Bank’s closure, the first time that many URCOIN investors became aware of their damaged holdings was when it was too late to do anything. And since the trust license of Urbancorp Investment, Inc. was also revoked, it is only now, after they have examined the report submitted by the Interim Receiver will the trust investors know the extent of that damage. The purpose of accounting to enable investors to act, when the Urban accounting, courtesy of the SEC and the Interim Receiver, there was nothing they could do.

The BOC rehabilitation proposal, however, delivers the sadder commentary on the country’s trust industry. Trust placements in URCOIN and in trade receivables, mortgage backed securities, and NFA papers, sold by Urbancorp Investments, Inc. on a without recourse basis will be treated all alike and converted into deposit substitutes. No distinction is proposed to be made between the creditor-debtor relationship that exists when an investor makes a deposit or a money market placement with recourse and the fiduciary nature of the trustee’s obligation to those who had trusted it with their money. In effect, the BOC proposed payment scheme brutally ripped off the fragile fiduciary veil that has been wrapped around Urbancorp Investments, Inc.’s trust operations and exposed its true nature as nothing more than a mode of gathering funds, more akin to borrowing from the public than to the prudent management of the clients’ money. That nary a timid protest against the hidden premise of the BOC’s payment scheme came from the leaders of the trust industry is an admission that, for many of the industry’s players, trusts are just another way of raising money to fund loans. The fiduciary nature of trusts, at best, is, for all practical intents and purposes, merely secondary to fund generation.

My proposal is that trust accounting be required on a quarterly basis; and corporate trustees found to have misused their trust license be heavily punished and their management be considered unfit to serve as fiduciaries.