Outsourcing Guidelines for Broker Dealers

Legal basis and regulatory framework

Section 1 establishes that the Guidelines prescribe principles and standards for broker dealers’ outsourcing arrangements with service providers.
The Circular is anchored on Section 2 of the Securities Regulation Code (SRCaSRCa), which declares State policy to establish a socially conscious free market that regulates itself and to promote the development of the Philippine securities market.
The Circular also tracks Section 28.1 of the SRC, which prohibits engaging in the business of buying or selling securities in the Philippines as a broker or dealer, or acting as a salesman or associated person of any broker or dealer, unless registered with the Commission.
The Circular is issued pursuant to SEC authority under the SRC to formulate policies, recommendations, and rules, regulations, and orders to make SRC provisions effective.

Policy goal and risks addressed

The SEC recognizes that outsourcing by brokers and dealers can be more cost-effective as the capital market expands and activity volume increases.
The SEC recognizes that breaches by service providers in outsourcing arrangements can disrupt the Philippine securities market and cause negative consequences to the public.
The Guidelines require broker dealers to adopt outsourcing controls designed to protect regulatory supervision and customer impacts.

Coverage, scope, and who may outsource

Section 1 provides that the Guidelines govern outsourcing arrangements entered into by broker dealers with service providers.
Section 3 provides that a broker dealer may outsource only its back office functions, subject to the outsourcing principles and standards in the Guidelines.
Section 3 prohibits a broker dealer from outsourcing (i) material activities and (ii) any activity involving interaction or direct contact with clients for purposes of buying and/or selling securities or solicitation of investments in securities, except in cases permitted by the Securities Regulation Code, the Anti-Money Laundering Act, as amended, or other law, rule, or regulation.
Section 3 allows outsourcing of clearing and settlement activities only to service providers authorized by the Commission to conduct such activities.
Section 3 allows service providers to sub-contract outsourced functions, but the same principles and standards apply to the sub-contractor.
Section 3 preserves the broker dealer’s right to prohibit further sub-contracting by the service provider.
Section 3 requires prior notice to the Commission before implementing any further sub-contracting, as provided in Section 10.

Core definitions that control interpretation

Back office functions mean administrative or operational functions other than material activities, including clearing and settlement functions, information technology (IT), finance and accounting, marketing and legal services.
Commission means the Securities and Exchange Commission of the Republic of the Philippines.
Exit strategies are procedures upon termination of the outsourcing arrangement for orderly transfer of the outsourced documents, materials, and activities back to the broker dealer or to another service provider, with transfer to another service provider subject to the Guidelines.
Foreign service provider means a service provider not licensed to do business in the Philippines that performs outsourced services outside Philippine jurisdiction.
Material activities are activities requiring a license from the Commission, such as buying and selling securities as a broker or dealer, acting as a salesman or associated person, and other activities of such importance that weakness or failure significantly affects the broker dealer’s ability to comply with statutory obligations.
Material activities are assessed using factors including financial, reputational and operational impact on the broker dealer; potential impact on adequate services to customers; potential losses to customers in case of breach; and impact on the broker dealer’s ability to conform with regulatory requirements and changes.
Outsourcing means a broker dealer’s use of a service provider to perform activities normally undertaken by the broker dealer itself, excluding purchasing contracts or acquisition of services, goods, or facilities without transfer of non-public proprietary or customer information from the broker dealer.
Service provider is the entity supplying goods, services, or facilities to the broker dealer, whether or not it is licensed by the Commission to engage in buying or selling of securities, and whether or not it is affiliated with or connected to the broker dealer.
Sub-contracting is the further transfer by a service provider of outsourced functions to another service provider.
Sub-contractor is the third party service provider contracted by the service provider to perform outsourced functions in a sub-contracting arrangement.

Required due diligence, monitoring, and accountability

Section 4 requires broker dealers to conduct suitable due diligence when engaging a service provider, including assessing the provider’s ability and capacity to perform effectively, reliably, and according to the broker dealer’s standards; financial condition; and risk management practices.
Section 4 requires enhanced due diligence for foreign service providers, focusing on the broker dealer’s ability to monitor performance; confidentiality of customer and proprietary information; ability to execute contingency plans and exit strategies; and analysis of economic, social, or political conditions that might adversely affect performance.
Section 4 requires broker dealers to monitor the service provider’s performance, establish standards, and adopt measures identifying non-compliance or unsatisfactory performance, including annual review of the service provider’s processes, performance, and compliance with the outsourcing contract.
Section 4 requires broker dealers to ensure service provider compliance with applicable Philippine securities laws and regulations.
Section 4 imposes a broker dealer duty to terminate the outsourcing contract upon failure of the service provider to comply with Philippine laws and regulations, and to report such failure and the measures taken to remedy it to the Commission.
Section 5 provides that outsourcing broker dealers, their management, and officers retain full legal liability and accountability to the Commission and relevant self-regulatory organization for any functions outsourced, to the same extent as if performed by the broker dealer itself.
Section 5 requires broker dealers to ensure the outsourcing arrangement does not impair or hinder the Commission’s exercise of regulatory and supervisory powers.

Contract controls, IT security, confidentiality, and inspection

Section 6 requires a broker dealer and service provider to execute a legally binding written contract containing, among others, provisions on specified control areas.
Section 6 requires contract provisions addressing limitations/conditions on the service provider’s right to subcontract; firm and client confidentiality and disclosure restrictions to agents and employees; and delineated responsibilities and warranties of the broker, service provider, and subcontractor (if any).
Section 6 requires contract provisions on IT security and data protection, including the service provider’s duty to report breaches in security or similar events to the broker dealer.
Section 6 requires contract provisions clearly delineating ownership of intellectual property rights in books, records, hardware, software, and other material used in the outsourcing arrangement.
Section 6 requires contract provisions on the service provider’s liability to the broker dealer for breaches; and the service provider’s obligation to provide (upon request) records, information, and/or assistance to the broker dealer, its auditors, and/or the Commission.
Section 6 requires contract provisions on dispute resolution mechanisms and choice of law provisions (if applicable); business continuity; and contract termination and exit strategies, including:
- events causing pre-termination,
- termination rights in insolvency, liquidation, receivership, ownership changes, non-compliance with regulatory requirements, or poor performance,
- transition periods, and
- intellectual property rights and procedures for return of information/materials to the broker dealer.
Section 7 requires broker dealers to ensure service providers have procedures to protect proprietary and customer-related information and software; prevent unauthorized access to and destruction/alteration/tampering of broker dealer data; and maintain sufficient up-to-date emergency procedures and disaster recovery plans.
Section 8 requires broker dealers to ensure service providers protect confidential customer and other proprietary information.
Section 8 requires broker dealers, when confidential customer and proprietary information is transferred, to notify clients or secure their consent when required by statutory and/or regulatory requirements and to notify the Commission, including the steps taken to ensure confidentiality.
Section 9 grants the Commission, the broker dealer, and its auditors access to service provider records related to outsourced activities, including records and reports identified under SRC Rule 52.1(1) and (2) (if applicable).
Section 9 requires the Commission, upon request, be granted information relevant and proper to the conduct and exercise of its regulatory and supervisory powers.
Section 9 requires broker dealers, for foreign service providers, to ensure originals or certified true copies of books and records relating to outsourced activities are maintained within the Philippine jurisdiction and accessible to the Commission.
Section 9 allows records to be maintained and preserved on microfilm or electronic form and requires compliance with SRC Rule 52.1(2)(F) for microfilm or electronic substitution.
Section 9 requires the service provider to file with the Commission the written undertaking required under SRC Rule 52.1(2)(H) if the service provider prepares or maintains the records on behalf of the broker dealer.
Section 9 provides that the Commission may hold the broker dealer liable for failure of the service provider to provide copies of or access to required books and records, without prejudice to the broker dealer’s right to proceed against the service provider.

Reporting deadlines and transitory listings

Section 10 requires broker dealers to promptly notify the Commission of any outsourcing arrangement involving the broker dealer, including any change or termination, within ten (10) days from execution of the outsourcing contract or from approval of any amendment or termination.
Section 10 requires simultaneous submission to the Commission of: a copy of the outsourcing contract duly signed by parties; a certification that the outsourcing arrangement complies with the Guidelines’ principles and standards; and an amended Written Supervisory Procedure incorporating the nature of outsourced activities and the safeguards and processes adopted by the broker dealer.
Section 10 requires broker dealers to notify the Commission within ten (10) days of execution of any contractual arrangement not falling within “outsourcing” where third-party services are availed of to supplement the broker dealer’s current employee or organizational structure.
Section 10 requires prior notice to the Commission before implementing further sub-contracting under Section 3 (via this same reporting framework).

Penalties and enforcement consequences

Section 11 provides that violations of the Guidelines committed by a broker dealer or other registered person are penalized under Section 54 of the Securities Regulation Code.
Section 11 requires termination of the outsourcing contract in case of any failure by the service provider to comply with Philippine laws and regulations, as mandated in Section 4.
Section 11 provides that the Commission is not precluded from initiating proper action against a non-registered person acting as a service provider who violates a law or regulation.

Existing contracts and transition choices

Section 12 requires that within six (6) months from the effectivity of the Guidelines, broker dealers submit a list of all existing outsourcing contracts detailing the service providers involved, services outsourced, terms of the contracts, and other information necessary to show compliance.
Section 12 gives broker dealers outsourcing contracts not in accordance with the Guidelines an option within the transition framework:
- preterminate the subject contract(s), or
- renegotiate and/or amend the outsourcing contract to comply with the Guidelines’ requirements.

Standalone effectivity rule

Section 13 states the Circular takes effect fifteen (15) days after completion of publication in two (2) newspapers of general circulation.