SEC to bar convicts, fraudsters corporate officers

Published December 19, 2021, 7:00 PM

by James A. Loyola

The Securities and Exchange Commission (SEC) is coming out with rules governing the disqualification of directors, trustees, and officers of corporations, as part of its efforts to promote good corporate governance.

The Commission has released for public comment the draft Memorandum Circular on the Disqualifications of Directors, Trustees and Officers of Corporations; and the Guidelines on the Procedure for their Removal.

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This Memorandum Circular seeks to operationalize Sections 26 and 27 of the Revised Corporation Code of the Philippines (RCC).

Section 26 of the RCC provides that a person shall be disqualified from being a director, trustee, or officer of any corporation if, within five years prior to their election or appointment, the person was convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years, as well as for violating the RCC or or The Securities Regulation Code (SRC).

A person shall likewise be disqualified if found administratively liable for any offense involving fraudulent acts, or found liable by a foreign court or equivalent regulatory authority for acts, violations, or misconduct similar to the aforementioned conditions.

The same provision empowers the SEC, as well as the Philippine Competition Commission, to impose other qualifications or disqualifications in its promotion of good corporate governance or as a sanction in its administrative proceedings.

Under the proposed rules, directors, trustees or officers shall be disqualified if, within their tenure, they were convicted by final judgment of an offense punishable by imprisonment for a period exceeding six years, or for violating the RCC or the SRC; found administratively liable for any offense involving fraudulent acts; or found liable by a foreign court or equivalent regulatory authority for acts, violations, or misconduct similar to the aforementioned conditions.

The proposed rules further provide the guidelines for theimposition of sanctions on the board of directors or trustees who, with knowledge of disqualification, failed to remove a disqualified director or trustee.

Section 27 of the RCC provides that the Commission shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered subsequent to an election.

Under the proposed guidelines, an independent administrative action for the removal of a director, trustee, and/or officer of a corporation may be commenced upon the motu proprio issuance of a formal charge by the SEC operating department that has jurisdiction over the subject matter, or upon filing of a verified complaint with the operating department.

The SEC will then conduct an initial examination of the allegations in the complaint. Should the director of the operating department determine that they have authority to act over the complaint, a summons will be issued to the respondent.

A clarificatory hearing may also be conducted for the purpose of ascertaining facts, issues, and other matters necessary for the resolution of the proceedings.

Further, the Commission may remove a director, trustee, and/or officer of a corporation as a sanction in its proceedings if, during its administrative or adjudicative proceedings, it has been established that grounds for their disqualification are present.

The SEC will first issue an order directing the director, trustee, and/or officer of the corporation to show cause why they should not be disqualified from their position or be administratively penalized.

In addition to the removal of the director, trustee, and/or officer, the SEC may also issue a permanent cease and desist order, and/or impose a fine from P10,000 to P400,000 for each violation of the Commission’s orders, or any relevant laws and regulations.

 
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