[Vantage Point] The end of perpetual seats: Why the SEC is right on broker limits

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The Securities and Exchange Commission’s (SEC) proposed term limits on broker directors of the Philippine Stock Exchange (PSE) are not a technical fix – they are a structural intervention that aims to rectify a long-standing market governance anomaly. By limiting tenure and requiring rotation, the SEC is tackling the possibility of board entrenchment in an institution that operates not solely as a private corporation but as a vital market infrastructure.

In a market where stakeholder engagement is shallow and liquidity limited, governance credibility is not discretionary; rather, it is the bedrock. Opposition to the measure is about a deeper difference between institutional independence and regulatory responsibility. But international experience and the standards set by the International Organization of Securities Commissions (IOSCO) are clear: exchanges must move beyond broker-dominated rule if they expect to retain the trust of investors.

The SEC’s action marks a shift toward a modern, investor-oriented capital market — one where representation is balanced, oversight is credible, and no one constituency retains lasting control over the system it works through.

The objection being raised by some long-serving PSE broker directors is being dangled as a defense of shareholder rights, institutional autonomy, and market expertise. It is none of those things.

It is essentially a defense of tenure without end. And that is exactly what the SEC is now working to dismantle. The draft circular would limit broker-director service to a cumulative 10 years, impose a two-year cooling-off period after five cumulative years, and impose penalties of P1 million per broker director per year plus P30,000 for each month of continuing violation.

To me, it is not regulatory excess, but a necessary belated correction of governance. Having said that, legal issues raised by the proposal will eventually be dealt with by the courts; the issue being discussed here is the market structure and governance.

The first objection to the proposal is that the PSE is a private corporation and brokers, as shareholders, have a property right to choose whomever they want for as long as they want. That argument collapses the moment one remembers what the PSE actually is. It is not just any private company selling soap or real estate. It serves as the only securities exchange in the country, and engages in self-regulatory activities that shape price discovery, market surveillance, discipline, and investor confidence in the market.

The PSE’s own corporate governance framework even acknowledges that its board exists not just for shareholders, but also for investors and other stakeholders, with a minimum of 51% of members being non-brokers and a minimum of one-third being independent directors. In other words, the structure of the exchange itself already acknowledges that pure broker control cannot square with modern market governance.

That is also why the SEC is a stronger agency than some argue it is. The draft itself makes the assertion that the measure rests on the SEC’s policy-making authority under the Securities Regulation Code, its statutory powers under the Revised Corporation Code to promote corporate governance and protect minority investors, and the IOSCO principles that require fair representation and regulatory oversight of self-regulatory organizations. IOSCO is the global standard-setter for securities regulation.

When an institution — like the PSE — is allowed to perform regulatory functions (such as monitoring trades, enforcing rules, or disciplining brokers), it is no longer just a private company. It is acting partly on behalf of the public. Because of that, the Securities and Exchange Commission has the authority to step in and set rules on how that institution is governed—including who sits on its board and for how long.

Why? To prevent what’s called “regulatory capture.”

That’s when the people being regulated (in this case, brokers) end up controlling the system that is supposed to regulate them, potentially shaping rules in their favor. Thus, if you are given public power, you must accept public oversight. The SEC isn’t interfering in a private company — it’s protecting the integrity of a market institution that affects the investing public.

The claim that the SEC is somehow “legislating” through mere circular ignores how securities regulation actually operates. Regulators don’t wait for a corporate by-law to volunteer discipline. Instead, they impose it when public-interest market infrastructure requires it.

The second argument is the old refuge of entrenched boards everywhere: institutional memory. We are told that the exchange requires people who know the intricacies of trading, settlement, and broker operations. While that may be a fine consideration, it is important to remember that expertise does not stand for permanent occupation. If the only way for the PSE to preserve technical proficiency is to retain the same broker directors for 6, 12, 25, or 28 years, then what that reveals is not the quality of its governance pipeline, but its inability to build one.

Brokers will not be sidelined

The SEC proposal does not rule out brokers. It maintains broker representation while rotating power. A board seat is not a hereditary franchise. That is the point. It is a fiduciary function. It is reported that the proposal would affect long-serving PSE broker directors, including Ma. Vivian Yuchengco at 28 years, Eddie Gobing at 25, Wilson Sy at 12, and Diosdado Arroyo at 6. In no serious governance system could that be called an ordinary renewal. (READ: The high stakes showdown between the SEC and Vivian Yuchengco over PSE board term limits)

The third argument is that term limits shrink shareholder choices. That reads like a democratic approach until you turn to a more pressing question: choice for whom? For the investing public, or for a narrow circle of incumbent brokers who have had decades to consolidate influence?

The stronger defense of the SEC proposal was issued not by ideologues but by mainstream market institutions. The Management Association of the Philippines (MAP), the Financial Executives Institute of the Philippines (FINEX), the Institute of Corporate Directors (ICD), the Capital Markets Development Foundation Inc. (CMDFI), and the Investment House Association of the Philippines (IHAP) have publicly supported the reform, claiming that imposing term limits does not curtail shareholder choice. Having a term limit, they say, drives shareholder choice by requiring the board to periodically choose a wider array of qualified brokers.

The Fund Managers Association of the Philippines (FMAP), whose members manage about P8 trillion on behalf of investors, expounded on the line of argument that the PSE is not an ordinary private company. According to FMAP, a sustained concentration of board seats creates governance risks even without clear evidence of misconduct and, at this point, broker directors are the only group on the exchange board without tenure limits. That is a crucial factor.

Clearly, the SEC is not creating asymmetry — it is removing one.

Market scandals

History proves that relying on brokers to police themselves is naïve, justifying the SEC’s distrust in this model. In March 2000, the SEC revoked the PSE’s self-regulatory organization license following the 1999 BW Resources stock manipulation scandal.

An assessment made by the International Monetary Fund (IMF) thereafter added that demutualization and a majority non-broker board were reforms needed in the aftermath of the scandal, further noting that residual doubts abounded as to whether a broker-owned exchange was in the best interests of investors rather than brokers.

More than 20 years later, a Pasig court convicted stockbroker Johnny Yap of Solar Securities for wash-sale transactions involving BW shares, and sentenced him to 14 years imprisonment and a P1 million fine. The SEC said the trades created a false or misleading appearance of active trading.

This is not a myth, but a matter of record. The market already sees what happens when broker power, poor oversight, and conflicting incentives are allowed to coexist for prolonged periods.

But the BW Resources issue was not the final word. In 2019, the SEC ordered the takeover of collapsed brokerage R&L Investments after allegations of unauthorized transfers of proprietary and client shares, with later reports putting the value at more than P700 million. The firm’s license was eventually revoked.

This is not the lesson that every long-standing broker director is engaged in misconduct. The secret to the problem is, securities markets are uniquely vulnerable to abuse when oversight is treated as simply a courtesy extended among insiders rather than a discipline imposed in the public interest.

The danger lies not in universal corruption among veteran broker directors. The core problem is that securities markets become highly susceptible to abuse when regulation is treated as a friendly, professional courtesy among industry insiders rather than a mandatory, public-interest discipline.

Distinction sans consequence?

Governance rules exist because regulators cannot wait for every risk to escalate into a scandal before taking action. What critics of the SEC proposal really want is a distinction without consequence. They accept that publicly listed companies should be subject to the idea of rotating their directors, that independent directors should have limits on their tenure, and that sectoral directors on exchange boards shouldn’t become permanent fixtures, but insist broker directors alone should remain exempt because they are uniquely knowledgeable. That’s not a principle of governance. It’s a carve-out for incumbency. And incumbency, in its veneer of expertise, soon becomes the most durable form of capture.

SEC Chair Francis Lim has every reason to stand his ground. The SEC is not weakening the exchange. It is trying to modernize it. A stock exchange cannot demand investor trust while defending board arrangements that look less like stewardship than occupation.

Fair representation does not mean indefinite residence. Corporate autonomy does not mean immunity from regulation. And institutional memory is no substitute for institutional accountability. The real choice before the market is not between expertise and reform. It is between a securities exchange governed as modern public infrastructure and one that is still haunted by the habits of an ‘All Boys Club’.

The SEC is acting on firm legal footing, which is the only standard that counts for any capital market aiming to sustain investor trust and integrity. – Rappler.com

This column discusses fair comment on matters of public interest involving capital-market governance and regulatory policy. It does not aim to prejudge, sway, or intervene in any judicial proceeding pending. All legal matters related to the Securities and Exchange Commission’s proposed regulations will be settled in courts. The views discussed are, however, limited to the more general implications about market structure, protection of investors, and institutional governance.