Draft FCP Act IRR includes cryptos, disgorgement

THE Securities and Exchange Commission has released the draft implementing rules and regulations for public comment on the Financial Products and Services Consumer Protection Act (FCPA).

The draft IRR will operationalize the newly-signed law that aims to protect the interests of financial consumers by strengthening the country’s financial regulators by providing them with rule-making, surveillance, inspection, market monitoring and more enforcement powers.

The SEC, the Bangko Sentral ng Pilipinas and Insurance Commission, have the authority to issue its own standard and rules for the application of the provisions of the new law within its jurisdiction.

The draft rules will cover all financial products and services and financial service providers under the jurisdiction of the SEC. These financial products and services include credit, securities and investments, including digital financial products or services which pertain to the broad range of financial services accessed and delivered through digital channels.

The proposed guidelines provide that securities, beyond their definition under the Securities Regulation Code (SRC), now include tokenized securities products or “those which grew with the abstraction of key characteristics from cryptocurrency’s underlying distributed ledger technology” and applied in the traditional financial sector.

The draft rules also expands the enforcement actions that may be conducted by the SEC. These include the following: restrictions on the ability of the financial service provider to collect excessive or unreasonable interests, fees or charges; disqualification and suspension of directors, trustees, officers or employees; imposition of fines, suspension or penalties; issuance of cease and desist orders; suspension of operation; and, disgorgement.

The Cornell University defines disgorgement as “a remedy requiring a party who profits from illegal or wrongful acts to give up any profits they made as a result of that illegal or wrongful conduct. The purpose of this remedy is to prevent unjust enrichment and make illegal conduct unprofitable.”

The SEC may enter an order requiring accounting and disgorgement of profits obtained or losses avoided, as a result of a violation of the FCPA and other existing laws, including reasonable interest, in addition to penalties it may impose for such violation.

The draft IRR, which is open for public comment through February 7, authorizes the SEC to further adopt rules and regulations concerning the creation and operation of a disgorgement fund, payments to financial consumers, rate of interest, period of accrual and other matters related to the disgorgement fund.

Persons who violate provisions of the FCPA or the rules pursuant to its implementation will be punished by imprisonment of not less than one year, but not more than five years or by a fine of not less than P50,000 but not more than P2 million or both, at the discretion of the court

Persons found responsible for investment fraud may also be subject to administrative sanctions, from a fine of P50,000 to P10 million for each instance of investment fraud plus not more than P10,000 for each day of continuing violation, in addition to other administrative sanctions under Section 54 of the SRC.

In case profit is gained or loss is avoided as a result of the violation of the FCPA or investment fraud, a fine not more than three times the profit gained or loss avoided may also be imposed by the SEC. In addition to the administrative sanctions that may be imposed, the authority of the financial service provider to operate in relation to a particular financial product or service may likewise be suspended or cancelled.

The SEC may institute an independent civil action on behalf of aggrieved financial consumers for violations of the FCPA and its IRR, depending on the nature, effects, frequency and seriousness of the violation.