Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 5, S. 2014)
Section 2 of the SRC declares that it is the policy of the State to establish a socially conscious, free market that regulates itself, and to promote the development of the Philippine securities market.
No person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman or associated person of any broker or dealer unless registered as such with the Securities and Exchange Commission.
Broker dealers can only outsource their back office functions, which include administrative or operational functions such as clearing and settlement functions, IT, finance and accounting, marketing, and legal services. They must not outsource material activities or any activity involving direct contact with clients for buying or selling securities, except as permitted by law.
Material activities are those requiring a license from the Commission, such as buying and selling of securities, acting as a salesman or associated person of a broker or dealer, or activities of such importance that weakness or failure in the conduct thereof significantly affect the entity's compliance with statutory obligations.
Broker dealers must assess the service provider's ability and capacity to perform outsourced activities effectively and reliably, financial condition, and risk management practices. For foreign service providers, enhanced due diligence is required including monitoring performance, data confidentiality, contingency plans, exit strategies, and assessment of economic, social, or political risks.
The outsourcing broker dealer, its management, and officers retain full legal liability and accountability to the Commission and relevant self-regulatory organizations for the outsourced functions as if the activities were performed by the broker dealer itself.
The contract must include provisions on subcontracting limitations, confidentiality, responsibilities and warranties, IT security and data protection, intellectual property ownership, liability for breaches, obligations to provide records, dispute resolution, business continuity, and contract termination and exit strategies.
Broker dealers must ensure that service providers have procedures to protect proprietary and customer information, prevent unauthorized access and data tampering, and maintain sufficient and updated emergency procedures and disaster recovery plans.
Broker dealers must notify the Commission within ten days from the execution, amendment, or termination of any outsourcing contract, submit a copy of the contract, certification of compliance with guidelines, and amended Written Supervisory Procedures reflecting the outsourcing arrangements and safeguards.
Violations are penalized in accordance with Section 54 of the Securities Regulation Code. Broker dealers must terminate outsourcing contracts if service providers fail to comply with Philippine laws, and the Commission may initiate actions against non-registered service providers violating laws or regulations.