528 Phil. 169
SANDOVAL-GUTIERREZ, J.:
Primary PurposeAfter two years of operation, respondent received a letter dated November 28, 2000 from the SEC, herein petitioner, requiring it to appear before the Compliance and Enforcement Department (CED) on December 14, 2000 for a clarificatory conference regarding its business operations. Respondent's officers complied and explained before the CED the nature of their business.
To operate as a broker/agent between market participants in transactions involving, but not limited to, foreign exchange, deposits, interest rate instruments, fixed income securities, bonds/bills, repurchased agreements of fixed income securities, certificate of deposits, bankers acceptances, bills of exchange, over-the-counter option of the aforementioned instruments, Lesser Developed Country's (L.D.C.) debt, energy and stock indexes and all related, similar or derivative products, other than acting as a broker for the trading of securities pursuant to the Revised Securities Act of the Philippines.
Secondary Purpose
To engage in money changer or exchanging foreign currencies into domestic currency, Philippine currency or other foreign currencies into another currencies.
WHEREFORE, pursuant to the authority vested in the Commission, PERFORMANCE FOREIGN EXCHANGE CORPORATION, its officers, directors, agents, representatives, and any and all persons claiming and acting under their authority, are hereby ordered to immediately CEASE AND DESIST from further engaging in the solicitation of funds for foreign currency trading and operating as a foreign currency futures merchant/broker, upon receipt of this Order.On January 25, 2001, respondent filed with petitioner SEC a motion[6] praying for the lifting of the Cease and Desist Order, alleging that: (a) it has not violated any law or regulation in the conduct of its business; (b) it has been operating in accordance with the purposes for which it was organized, which purposes were duly approved by petitioner; (c) it has not engaged in currency futures contracts trading; and (d) its business involves "spot currency trading which is not a form of currency futures transaction."
In accordance with the provisions of Section 64.3[5] of Republic Act 8799, otherwise known as the Securities Regulation Code, the parties subject of this Cease and Desist Order may file a request for the lifting thereof within five (5) days from receipt hereof.
SO ORDERED.
WHEREAS, on February 19, 2001, PFEC filed with the Commission its "Manifestation with Urgent Motion to Temporarily Suspend Implementation of Order dated 09 February 2001," which Manifestation was denied by the Commission en banc during its meeting on February 22, 2001, and the said denial was conveyed verbally to the corporation;On May 4, 2001, respondent filed a motion[12] praying that the said Order be set aside. Petitioner, however, did not act on the motion. This prompted respondent to file with petitioner a notice[13] dated June 14, 2001 that it is withdrawing its motion in order to seek a more appropriate and speedy remedy.
WHEREFORE, premises considered, and pursuant to the authority vested in the Commission, the Cease and Desist Order is now made permanent, and Performance Foreign Exchange Corporation is hereby directed to show cause within thirty (30) days from receipt of this Order why its certificate of registration should not be revoked for violation of the Securities Regulation Code, and/or PD 902-A specifically on the ground of serious misrepresentation as to what the corporation can do or is doing, to the great prejudice or damage to the general public. (Underscoring supplied)
Dear Ms. Bautista,On February 11, 2002, the Court of Appeals rendered a Decision[16] in favor of respondent, thus:
This refers to your letter dated February 8, 2001 requesting for a definitive statement that the foreign currency leverage trading engage in by private corporations, particularly, Performance Foreign Exchange Corporation (PFEC), is a financial derivatives transaction and that it can only be undertaken by banks or non-bank financial intermediaries performing quasi-banking functions and/or its subsidiaries/affiliates.
As indicated in your description of the transactions and the documents submitted, the foreign currency leverage trading, subject of your query, is essentially similar in mechanics to currency future trading, particularly with respect to the margin requirements, standard contract size, and daily market-to-market of open position. However, it does not fall under the category of futures trading because it is not exchange-traded. Further, we can not classify it as being financial derivatives transactions as we consider the transaction as plain currency margin trading, which by its mechanics, involve the set-up of margin and non-delivery of the currencies involved.
In view of the foregoing facts, the activities of the aforesaid corporation are not covered by BSP guidelines on derivative licensing.
We hope we have satisfactorily clarified your concerns.Very truly yours,
(Sgd.)
AMANDO M. TETANGCO, JR.[15]
WHEREFORE, premises considered, the instant petition is GRANTED and accordingly, the assailed Orders dated January 16, 2001, February 9, 2001, February 22, 2001 and April 23, 2001 of the Securities and Exchange Commission are SET ASIDE.The Court of Appeals ruled that petitioner acted with grave abuse of discretion when it issued its challenged Orders without a positive factual finding that respondent violated the Securities Regulation Code.
SO ORDERED.
Sec. 64. Cease and Desist Order. - 64.1. The Commission, after proper investigation or verification, motu proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.Under the above provision, there are two essential requirements that must be complied with by the SEC before it may issue a cease and desist order: First, it must conduct proper investigation or verification; and Second, there must be a finding that the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
x x x. (Underscoring supplied)
The Securities and Exchange Commission has been investigating corporations which engage in foreign currency trading abroad. The following illustrates their operations:Petitioner's act of referring the matter to the BSP is an essential part of the investigation and verification process. In fact, such referral indicates that petitioner concedes to the BSP's expertise in determining the nature of respondent's business. It bears stressing, however, that such investigation and verification, to be proper, must be conducted by petitioner before, not after, issuing the Cease and Desist Order in question. This, petitioner utterly failed to do. The issuance of such order even before it could finish its investigation and verification on respondent's business activity obviously contravenes Section 64 of R.A. No. 8799 earlier quoted.
x x x
Enclosed are pertinent documents which were submitted by a corporation showing how its transactions operate. It is claimed by the corporation in question that theirs are all spot transactions and are not covered by the Bangko Sentral ng Pilipinas. We understand, however, that in other jurisdiction, this type of activity can only be done by banks.
Previous inquiries from the Bangko Sentral ng Pilipinas, specifically Department of Commercial Banks II, and your department, Commercial Banks I, lead to conclude that this kind of trading in foreign currencies may be a form of financial derivatives.
May we, therefore, request a definitive statement that the above-described transactions, and as illustrated in the attached documents, are a form of financial derivatives and, therefore, can only be undertaken by banks, or non-bank financial intermediaries performing quasi-banking functions and/or its subsidiaries/affiliates.[20] (Underscoring supplied)
In the light of the above circumstances, and the fact that the Commission cannot determine whether such transactions are actually executed in Singapore or Hongkong as alleged, and whether the foreign currency rates used in the transactions are verifiable, it is our position that the same be endorsed to the BSP.And worst, without waiting for BSP's action, petitioner proceeded to issue its Order dated April 23, 2001 making the Cease and Desist Order permanent. In the same Order, petitioner further directed respondent "to show cause x x x why its certificate of registration should not be revoked for alleged violation of the Securities Regulation Code and/or Presidential Decree No. 902-A, specifically on the ground of serious misrepresentation as to what the corporation can do or is doing to the great prejudice or damage to the general public." Obviously, without BSP's determination of the nature of respondent's business, there was no factual and legal basis to justify the issuance of such order.
In view of the foregoing, the cease and desist order stays against the corporation until the latter shall be able to submit the appropriate endorsement from the Bangko Sentral ng Pilipinas that it can engage in financial derivative transactions.
SO ORDERED.[21] (Underscoring supplied)