Scope and Application
- Guidelines apply to outsourcing arrangements between broker-dealers and service providers.
- Brokers and dealers are limited to outsourcing back office functions only.
- Outsourcing of material activities (licensed functions like securities trading, solicitation) and client-facing sales activities is prohibited except as allowed by law.
- Clearing and settlement activities may only be outsourced to SEC-authorized service providers.
- Outsourced activities may be sub-contracted but subject to the same guidelines and prior SEC notification.
Key Definitions
- Back office functions: Administrative/operational functions such as clearing and settlement, IT, finance, accounting, marketing, and legal services.
- Material activities: Licensed activities including buying/selling securities and solicitation, which if breached can materially affect compliance.
- Outsourcing: Use of a service provider for functions normally performed by the broker-dealer, excluding mere purchasing contracts without transfer of proprietary or customer data.
- Service provider: Entity supplying goods or services, licensed or unlicensed, affiliated or not.
- Foreign service provider: Not licensed in the Philippines and performs services outside Philippine jurisdiction.
- Exit strategies: Procedures for orderly transfer of functions/documents upon termination.
Due Diligence and Monitoring of Service Providers
- Broker-dealers must conduct due diligence before engagement, assessing capability, financial condition, and risk management.
- Enhanced due diligence required for foreign service providers focusing on monitoring ability, confidentiality, contingency planning, and country risk.
- Ongoing monitoring of service provider performance is required, including annual reviews.
- Broker-dealers bear responsibility to ensure providers comply with Philippine securities laws.
- Failure to comply necessitates termination of contract and reporting to SEC.
Accountability and Legal Liability
- Broker-dealers, including management and officers, retain full legal liability for outsourced functions as if performed in-house.
- Brokers must ensure outsourcing arrangements do not hinder SEC’s regulatory and supervisory functions.
Outsourcing Contract Requirements
- Contracts must be legally binding with provisions on:
- Subcontracting limitations
- Confidentiality obligations
- Responsibilities and warranties
- IT security and breach reporting
- Intellectual property ownership
- Liability for breaches
- Access to records for audit and regulatory review
- Dispute resolution and applicable law
- Business continuity and exit strategies detailing termination causes and transition procedures
IT Security and Business Continuity
- Service providers must have safeguards to protect data confidentiality, prevent unauthorized access, and have updated disaster recovery plans.
Client Confidentiality
- Broker-dealers must ensure service providers protect confidential customer and proprietary information.
- Where customer data transfer is involved, client notification or consent is required under applicable rules, with SEC informed.
Right of Inspection and Recordkeeping
- SEC, broker-dealer, and auditors have access rights to service provider records related to outsourced functions.
- Foreign service providers must maintain records accessible within the Philippines; electronic or microfilm records acceptable under prescribed standards.
- Service providers must file undertakings required by SRC.
- Broker-dealers liable for any failure by service providers to provide access to relevant records.
Reporting Obligations
- Broker-dealers must notify SEC within 10 days of outsourcing contract execution, amendment, or termination.
- Submission of the outsourcing contract, compliance certification, and amended supervisory procedures is required.
- Notification also required for third-party contracts supplementing the broker-dealer’s organizational structure outside strict outsourcing.
Penalties for Non-Compliance
- Violations by broker-dealers or registered persons punishable under Section 54 of the SRC.
- Broker-dealers must terminate contracts if providers fail to comply with laws.
- SEC may pursue action against non-registered service providers violating regulations.
Transitional Provisions
- Within six months of guideline effectivity, broker-dealers must submit all existing outsourcing contracts with comprehensive details.
- Contracts not compliant with guidelines must be terminated or renegotiated to comply.
Effectivity
- Guidelines take effect fifteen days after publication in two newspapers of general circulation.