Choose your stockbroker wisely

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Don’t invest in a white elephant

It was recently reported that a stocktrader* has run off with PhP 100 million of investors’ money. The investors were allegedly duped into coursing their money through the stocktrader personally, to be invested in stocks. Unknown to these investors, said trader was no longer affiliated with the stock exchange. That’s when he allegedly ran off with the money. It is therefore important to choose your stockbrokers wisely.

 

Check if your broker is registered with the SEC

The Securities Regulation Code (“SRC”) defines a “Broker” as a person engaged in the business of buying and selling securities for the account of othersThe SRC specifically provides that:

No person shall engage in the business of buying or selling  securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the Commission.”

Ideally, your stockbroker (usually a corporation due to the capitalization requirement)  should be registered as such with the Securities Exchange Commission (“SEC”). The SEC is the government agency mandated to regulate brokers and other securities market professionals. Prior to transacting, you may demand to see your broker’s Certificate of Registration with the SEC. You should also check with the SEC’s online facility, the SEC iview (for a minimal fee), to check if your broker is really registered with the SEC.

The SEC iview also has a facility for you to check the financial health of your broker by viewing its financial statements (check if the broker has a positive net worth). Ideally,  you want to transact with a stockbroker that has a large paid-up capital that is sufficient to cover its liabilities, should its business go south.

Be wary of transacting with solo traders because they usually have little to no capital or assets, (as the trader above reported to have run off with people’s money). It would be difficult for you to recover your millions from these solo traders who have little assets for you to take.

Check if your broker is accredited by and is in good standing with the PSE

Naturally, your broker will be buying and selling shares within the Philippine Stock Exchange (“PSE”) environment. The PSE is a publicly-listed corporation that operates our one and only stock market. Thus,  if the broker is legitimate, it should be accredited by the PSE and is in good standing with it. This is simple enough to check through pse.com, which lists down the accredited brokers.

Some brokers may be suspended from trading for several reasons, such as, the failure to comply with the PSE or SEC’s compliance rules or due to a pending insolvency or rehabilitation proceeding.

Check if the stockbroker is adequately liquid

As mentioned above, you can check your stockbroker’s financial health by reading its financial statements, which can be downloaded from the SEC iview website. Your broker should have adequate assets to cover its liabilities.

Understand that your cash in your brokerage account is insured

The PSE provides safeguards to protect investors trading with the PSE. Personally, I emailed my stockbroker and inquired about this. My broker’s response was copy-pasted from the PSE website, to wit:

“Another tool created for the protection of investors is the Securities Investors Protection Fund, Inc. or SIPF. The SIPF, which is comparable to the Philippine Deposit Insurance Corp. providing insurance for bank deposits, seeks to build and enhance investors’ confidence in the market and is envisioned to protect the investing public from extraordinary losses, other than the ordinary market fluctuations, arising as a result of fraud, failure of business, or judicial insolvency of PSE-accredited stockbrokers.

Protection to investors is automatic upon the opening of an account with a PSE-accredited stockbroker and given by way of compensation for trade-related obligations of stockbrokers to its customers.

These safeguards, along with other investor protection initiatives of the PSE, serve to protect the health of the equities market and the integrity of capital formation process, making investing in the Philippine stock market secure.

The PSE continues to perform its functions and duties under the law in ensuring that the market operates in an orderly, efficient, and transparent manner, and that investors are properly protected.”

I am currently in the process of inquiring from my broker as to how much of my cash in my brokerage account is insured (cf. PDIC, which insures deposits up to PhP 500,000.00). In any event, I keep low cash balances in the brokerage account.

As to our stock certificates, I understand that the broker is required to deposit these with a custodian that is usually a corporation. In the Philippines, we currently have two depository services providers, the Philippine Depository and Trust Corp. and the Securities Clearing Corporation of the Philippines, a wholly-owned subsidiary of the PSE.

As with other investments, stock trading entails some risk. It is our responsibility to mitigate risk by educating ourselves. Choose your broker wisely.

xoxo,

20 something lawyer

*A stock trader and broker should not be used interchangeably as these have technical differences under the law. The trader reported in Rappler appears to have unlawfully misrepresented himself to be a broker. The SRC defines a “Broker” as a person engaged in the business of buying and selling securities for the account of others.

A stock trader, who buys shares for the account of others, is akin to a “Salesman” that is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities.

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