The Securities and Exchange Commission (SEC) has ordered the Capital Markets Integrity Corporation (CMIC) to take over the operations of stock brokerage Equitiworld Securities Inc. (EQWORLD) to secure the accounts of its customers.
In a statement, the SEC said it issued the takeover order on Nov. 12 after finding that the current financial condition of EQWORLD was no longer capable to readily meet the demands of the broker’s customers for the delivery of securities and payment of sales proceeds.
The SEC considered the results of a special audit conducted by CMIC, which revealed material discrepancies in the reported stock and cash positions of EQWORLD, among others.
Accordingly, the SEC directed CMIC to promptly take possession and control of all of the books and records, as well as trade-related assets, of EQWORLD.
The commission also directed CMIC to suspend EQWORLD’s membership in the Philippine Stock Exchange, and immediately arrange for another member of the exchange to take over the outstanding contracts relating to securities.
In this light, the SEC directed CMIC to promptly notify the customers of EQWORLD of the transfer of their accounts to another trading participant and provide such customers with the opportunity to transfer their accounts to a trading participant of their choice.
In addition, the SEC authorized CMIC to settle EQWORLD’s liabilities to its customers through the sale of its trading rights and other trade-related assets as may be prescribed by the commission, the liquidation of paid-up capital, and/or the supervision of payment claims against the surety bond.
The commission also directed CMIC to inform Securities Investors Protection Fund Inc. (SIPFI) of the takeover; inform the customers of EQWORLD that they may also claim compensation for losses from SIPFI, subject to the validation of their claims by CMIC and SIPFI; as well as refer to SIPFI the other remaining outstanding liabilities to customers after the settlement and liquidation of EQWORLD’s trade-related assets, and inform the said customers of the steps to be undertaken for their unpaid claims.
“This Take Over Order shall be without prejudice to institution of appropriate administrative, civil or criminal actions against [EQWORLD] for violations of the provisions SRC and/or the SRC-IRR which this Commission, the proper SRO, or the Exchange may, now or hereafter find,” the SEC said.
CMIC found a material discrepancy in the shares appearing in the Stock Position Report and the Business Partner Portfolio Report pertaining to EQWORLD, totaling 154.91 million shares worth P46.14 million.
CMIC also found a material discrepancy in the reporting of EQWORLD’s cash on hand account. The Risk Based Capital Adequacy Requirement/Ratio Report of EQWORLD as of end-June 2024 reflected zero cash on hand, when the trial balance generated from its system software showed cash on hand in the amount of P23.57 million.
“The foregoing affirms the variances and/or discrepancies found by the CMIC, and clearly reveals that EQWORLD doesn’t have these shares (or the shares in its possession are not sufficient to satisfy the demands of its customers) and/or it does not have sufficient cash to pay the proceeds of the sale of shares,” the SEC noted.
The record also showed that EQWORLD failed to comply with the unimpaired paid-up capital requirement.
CMIC has involuntarily suspended EQWORLD’s trading operations, after finding that its continued operation constitutes a grave violation of the securities laws and is inimical to the interests of its customers and the investing public in general.
“EQWORLD’s continued failure, without any valid justification, to address the CMIC’s findings of material discrepancies in the shares and cash on hand account, discloses an obstinate refusal on its part to defy and/or disregard a lawful order of an SRO (self-regulatory organization),” the SEC noted.
The commission also cited the repeated late cash payments and cash fails on the part of EQWORLD; the numerous complaints and claims received by CMIC for the inability of EQWORLD to comply with their demands for the delivery of securities, including the transfer of their securities to other trading participants or payment of sales proceeds.
Moreover, the SEC Markets and Securities Regulation Department also found other violations of Republic Act No. 8799, or the Securities Regulation Code (SRC) and its implementing rules and regulations (IRR) committed by EQWORLD.
Among others, EQWORLD failed to submit required audit documents; to submit its annual financial statements and Written Supervisory Procedure; and to report issues of non-compliance with its Quarterly Compliance Report. It also continued to refuse to comply with the orders of CMIC.
Section 33.1(d) of the SRC provides that “when the Exchange shall have found that the financial condition of its member firm has so deteriorated that it cannot readily meet the demands of customers for the delivery of securities and/or payment of sales proceeds, the Exchange shall, upon order of the Commission, take over the operation of the insolvent firm and immediately proceed to settle the member firm's liabilities to its customers.”
Rule 33.1(d) of the SRC-IRR further provides that the SEC may issue ex parte an order compelling the insolvent or failed trading participant and the exchange or the pertinent SRO to take the necessary action to protect customer accounts including, but not limited to, the preservation of the failed trading participant's books and records.
The same rule allows the SEC after proper investigation or verification, motu proprio or upon verified complaint by any party, to order an exchange or the pertinent SRO to take over the operation of the failed trading participant for the purpose of preserving and protecting its books, records, customer accounts and trade-related assets and of settling its liabilities to its customers.