SEC Issues Rules for the Financial Products and Services Consumer Protection Act of 2022

On 25 April 2023, the Securities and Exchange Commission (“SEC”) issued Memorandum Circular No. 5, series of 2023, providing for the Rules and Regulations of the Financial Products and Services Consumer Protection Act of 2022 (“SEC FCPA IRR”). The SEC FCPA IRR applies to all financial products and services and financial service providers under the jurisdiction of the SEC. Salient features of the SEC FCPA IRR include the following:

Registration Requirement for Investment Advisers

Investment Advisers are now required to register with the SEC. To this end, no person shall engage in the business of or act as an investment adviser in the Philippines, and/or represent or identify themselves as investment advisers or make use of the words “Investment Adviser” or “Financial Adviser” or variations thereof, descriptive of a position or title, unless registered as such with the SEC.

Under the SEC FCPA IRR, the term “Investment Adviser” shall refer to any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, whether electronically or in any other form, as to the value of investment products or as to the advisability of investing in, purchasing, or selling investment products, or who, for compensation and as part of a regular business, issues, or promulgates analyses or reports concerning investment products.

Those who offer and/or sell financial products and services having investment components or purported as an investment product by itself or as a part of another financial product or service or those who engage in acts pertaining to that of an Investment Adviser, shall also be considered as an Investment Adviser.

Aside from the Financial Products and Services Consumer Protection Act (“FCPA”) and SEC FCPA IRR, Investment Advisers shall be subject to the provisions of Chapters VII (Prohibition on Fraud, Manipulation, and Insider Trading), VIII (Regulation on Securities Market Professionals), X (Registration, Responsibilities and Oversight of Self-Regulatory Organizations), and XIII (General Provisions) of the Securities Regulation Code (“SRC”) and other rules and regulations that will be issued by the SEC. Their operations, any advice and reports issued may also be covered by any rule or order promulgated by the SEC under Section 72 of the SRC. With regard to offenses, Investment Advisers may also be liable for offenses defined and penalized under the SRC.

All persons acting as Investment Advisers as of the effectivity of the SEC FCPA IRR shall file with the SEC an undertaking signifying their intent to register as such within 90 days from the effectivity of the SEC FCPA IRR. Failure to file the said undertaking within the prescribed period shall render their operation in violation of the FCPA and SEC FCPA IRR.

Duties and Responsibilities of Financial Service Providers

The duties and responsibilities of financial service providers shall be lodged with its Board of Directors (“Board”) and Senior Management. The Board and the members of senior management shall ensure conformity with the provisions of the FCPA and SEC FCPA IRR and shall provide the means by which they shall identify, measure, monitor, control, and manage consumer protection risks inherent in their operations, in accordance with the rules and regulations of the SEC.

The Board shall be primarily responsible for approving and overseeing the implementation of the Financial Service Provider’s Consumer Protection Risk Management System (“CPRMS”) while Senior Management shall be responsible for ensuring that the practices of the Financial Service Providers are aligned with the approved CPRMS. 

A Financial Service Provider must have a CPRMS that is integrated into its enterprise-wide risk management processes and risk governance framework. The CPRMS includes the governance structure, policies, processes, measurement, and control procedures to ensure that consumer protection risks are identified, measured, monitored, and mitigated. Such CPRMS must be consistently displayed throughout the Financial Service Provider’s place of business, particularly across all business units that deal directly with consumers.

Cooling-off Period

Financial Service Providers that offer products or services required by the SEC to have a cooling-off period should adopt and implement a clear cooling-off period. The length of the cooling-off period shall be determined by the Financial Service Provider based on reasonable expectation of time required for a financial consumer to fully evaluate all the terms and risks of the financial product or service, and to contact concerned parties who may be affected by its terms and conditions, but in no case shall the period be less than 3 business days or such period as may be prescribed by the SEC, immediately following the execution of any agreement or contract.

The rule providing for the cooling-off period shall not apply to transactions involving the following:

1. Shares or units of participation of investment companies;
2. Securities traded in exchanges, organized over-the-counter markets and alternative trading systems;
3. Securities sold to qualified buyers;
4. Securities sold through crowdfunding intermediaries; and
5. Other transactions, products, and services, as may be determined by the SEC.

Investment Fraud

It shall be unlawful for any person or persons to commit investment fraud as defined in the FCPA and the SEC FCPA IRR. Any person who commits investment fraud shall be subject to the penalties under Section 73 of the Securities Regulation Code and the administrative sanctions under Section 16 of the FCPA. Investment Fraud may refer to any form of deceptive solicitation of investments from the public. In this regard, deceptive solicitation of investments includes, but not limited to, any of the following:

1. “Ponzi Schemes” and such other scheme involving the promise or offer of profits or returns which are sourced from the investments or contributions made by the investors themselves;
2. Boiler room operations;
3. The offering or selling of investment schemes to the public without a license or permit form the SEC, unless such offering or selling involves exempt securities or are considered as exempt transactions as provided for under existing laws; or
4. All other similar or analogous schemes.