SEC shares Guidelines and Procedures for the Disqualifications of Directors, Trustees, and Corporate Officers

The Securities and Exchange Commission (SEC) gives stricter guidelines and procedures regarding the disqualification of directors, corporate officers, and trustees by releasing SEC Memorandum Circular 04-2022 (SEC MC). 

This SEC MC implements Section 26 of  Republic Act No. 11232 or the “Revised Corporation Code of the Philippines” (RCC) which states that:

“A person shall be disqualified from being a director, trustee, or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was:

(a) Convicted by final judgment:

1. Of an offence punishable by imprisonment for a period exceeding six (6) years.
2. For violating this Code.
3. For violating Republic Act No. 8799, otherwise known as "The Securities Regulation Code”.

(b) Found administratively liable for any offence involving fraudulent acts.

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct similar to those enumerated in paragraphs [a] and [b] above."

Adding to Section 26, the SEC MC further lists the following causes of disqualification:

1. Within five years prior to the election or appointment, the director, trustee, or officer was convicted by final judgment of an offence punishable by imprisonment for a period of exceeding six years.
2. Within the tenure, the director, trustee or officer was convicted by final judgment of an offence punishable by imprisonment for a period exceeding six years.
3. Within five years prior to the election or appointment, the director, trustee or officer was convicted by final judgment for violating the RCC.
4. Within the tenure, the director, trustee or officer was convicted by final judgment for violating the RCC.
5. Within five years prior to the election or appointment, the director, trustee or officer was convicted by final judgment for violating the Securities Regulation Code (SRC).
6. Within the tenure, the director, trustee or officer was convicted by final judgment for violating the SRC.
7. Within five years prior to the election or appointment, the director, trustee or officer was found administratively liable, by final judgment, for any offense involving fraudulent acts punishable under the RCC, SRC, and other laws, rules and regulations enforced or implemented by the SEC.
8. Within the tenure, the director, trustee or officer was found administratively liable, by final judgment, for any offense involving fraudulent acts punishable under the RCC, SRC, and other laws, rules and regulations enforced or implemented by the SEC.
9. Within five years prior to the election or appointment, the director, trustee or officer was convicted or found administratively liable by a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) of Section 26 of the RCC.
10. Within the tenure, the director, trustee, or officer was convicted or found administratively liable by a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) of Section 26 of the RCC.
11. Within five years prior to the election or appointment, or within the tenure, the director, trustee or officer was found administratively liable, by final judgment, for refusal to allow the inspection and/or reproduction of corporate records.

Highlights of the SEC MC

Applicability to Close Corporations

The SEC MC also state that if the articles of incorporation of a close corporation state that the business will be managed by the stockholders of the corporation rather than by a board of directors, the said stockholder removed shall be excluded from being part of the governing body which exercises the corporate powers, conducts all business, and controls all properties of the corporation.

Applicability to One-Person Corporations

When the corporation’s sole proprietor is removed following the rules, the chosen nominee will take the single stockholder’s place as director and will be responsible for managing its affairs, subject to rights, obligations, and responsibilities. This is on the condition that the nominee will have all the necessary qualifications and none of the previous director’s disqualifications.

Penalty for Violations

In addition to their removal, the SEC may also issue a permanent cease and desist order or impose a fine ranging from Ten Thousand pesos (PHP 10,000.00) to Four Hundred Thousand pesos (PHP 400,000.00) for every single violation of its Orders or any of the RCC provisions regarding the disqualifications. These penalties will take into consideration the extent of participation, nature, effects, frequency, and seriousness of the violation.

Effect of Withdrawal of a Complaint

The proceedings will not be dismissed outright nor discharge the Respondent from the imposition of any administrative sanction or penalty.  The SEC can continue the proceedings where documentary evidence shows that there exists a prima facie case.

Index of Removed Directors, Trustees, and Officers

The SEC shall maintain an Index of the removed director, trustee or officer which will be kept confidential.  However, the contents may be accessed by outside parties with the authority of  the individual subject of the removal, together with the approval of the relevant operating department of the SEC.  The said authority must be notarized.