Ateneo Law School Class Handout

T HE F IT & P ROPER R ULE AS A PPLIED TO B USINESS S ECTOR AND GOCC S :

A C OMPREHENSIVE A SSESSMENT

WHAT IS THE FIT & PROPER RULE?

− It lays down the minimum and ideal qualifications of directors of to ensure that they possess the necessary qualifications and competence needed for their positions.
− It is made to ensure that covered entities have directors that are “fit & proper” to hold their positions.1
− It also establishes the standards for determining whether a member of the Board of Directors/Trustees or CEO is fit and proper - which shall include, but shall not be
limited to, standards of integrity, experience, education, training and competence;2

Fit and Proper Rule in the Business Sector and GOCCs

Department of Finance Department Order D.O. 054-2015 GCG Memorandum Circular 2012-05
“BUSINESS SECTOR” “GOCCs”
• Insurance Companies • All the Appointive Directors and the CEOS of GOCCS and Subsidiaries; and
• Public companies • All the Appointive Directors of Affiliates.
Coverage
The nomination of prospective appointees to become Appointive Directors in the
Boards of Directors/Trustees of GOCCS are included in shortlists to be submitted to
the President of the Philippines for approval.

ln the same manner, an incumbent Appointive Director who no longer has all the
qualifications and/or has incurred any of the disqualifications provided in this Rule
shall not be qualified for re-appointment.

• “To adopt a system for recognition of exemplary public companies • To ensure that the governing boards of every GOCC and its subsidiaries are
and insurance companies employing the highest standards in competent to carry out its functions, fully accountable to the State as its
corporate governance, with particular emphasis on ensuring that fiduciary, and acts in the best interest of the State.
the directors of said covered entities are fit and proper to hold
such position, in order to encourage members of the private
Objectives sector to aspire for said highest standards3; “
• “To build a strong and stable financial system, the National
Government is interested to promote good governance in the
private sector4 “

1
GCG Memorandum Circular 2012.
2
Sec 3 (j), RA 10149.
3
Department of Finance, Department Order D.O. 054-2015.
4
Id.
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a) At least twenty-five (25) years of age at the time of his
election or appointment;
b) At least a college graduate OR has at least five (5) years
experience in business;
Minimum c) Has attended a special seminar on corporate governance for
Qualifications board of directors conducted or accredited by SEC or IC as may be
applicable; and
d) Must be fit and proper for the position of a director of the
covered entity, taking into account the following factors:
integrity/probity, competence, relevant education/training,
physical and mental fitness, diligence, and knowledge/experience.
Sec Memo Circular No. 20.
a) Any person convicted by final judgment or order by a competent
judicial or administrative body of any crime that:
(i) involves the purchase or sale of securities, as
defined in the Securities Regulation Code;
(ii) arises out of the person’s conduct as an
underwriter, broker, dealer, investment adviser,
principal, distributor, mutual fund dealer, futures
commission merchant, commodity trading advisor,
or floor broker;
(iii) arises out of his fiduciary relationship with a bank,
quasi-bank, trust company, investment house or as
Permanent an affiliated person of any of them;
Disqualifications b) Any person who, by reason of misconduct, after hearing, is
permanently enjoined by a final judgment or order of the SEC,
Bangko Sentral ng Pilipinas (BSP) or any court or administrative
body of competent jurisdiction from:
(i) acting as underwriter, broker, dealer, investment
adviser, principal distributor, mutual fund dealer,
futures commission merchant, commodity trading
advisor, or floor broker;
(ii) acting as director or officer of a bank, quasi-bank,
trust company, investment house, or investment
company;
(iii) engaging in or continuing any conduct or practice in
any of the capacities mentioned in sub-paragraphs
(a) and (b) above, or willfully violating the laws that
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Class Handout
a) Be a Filipino citizen;
b) Be at least thirty (30) years of age at the time of appointment to the
governing board
c) Be of good moral character, of unquestionable integrity, and of known
probity;
d) Have a college degree, with at least five (5) years relevant work
experience, except for a sectoral representative who only needs to be a
bonafide member
e) Possess management skills and competence preferably relating to
the operations of the GOCC to which he/she is appointed; and
f) Have attended, or will attend within three (3) months from the date of
appointment, a special seminar on public corporate governance for
Directors conducted by the GCG or any individual or entity accredited by the
GCG.
a) Persons who have been convicted by final judgment of a court or tribunal
of:
(i) a crime or offense involving dishonesty or breach of trust
(ii) a crime or offense where the sentence imposed is a term of
imprisonment of at least six (6) years and 1 day;
(iii) a violation of the laws, rules and regulations particularly
applicable to the sector under which the GOCC is classified,
and in other related sectors;
b) Persons who have been judicially declared insolvent, spendthrift or
incapacitated to contract;
c) Directors, CEOS and Officers of GOCCS who have been:
(i) found by a competent administrative body as administratively
liable for violation of laws, rules and regulations particularly
applicable to the sector of the GOCC concerned
(ii) determined by the Commission on Audit (COA) pursuant to a
Notice of Disallowance which has become final and
executory, to have, by virtue of their office, acquired or
received a benefit or profit, of whatever kind, using the rights,
options or properties of the GOCC for their own benefit,
receiving commission on contracts from the GOCC'S assets,
or taking advantage of corporate opportunities of the GOCC;
(iii) found to be culpable for a GOCC'S insolvency, closure, or
ceasure of operations, as determined by the GCG in
consultation with the appropriate Government Agency;
d) Directors and officers of private corporations, or any person found by the
GCG in consultation with the appropriate Government Agency, to be unfit for
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govern securities and banking activities. the position of Appointive Director because they were found
administratively liable by such Government Agency for:
c) The disqualification should also apply if: (i) violation of laws, rules and regulations relevant to the sector
(i) such person is the subject of an order of the SEC, of the GOCC concerned, as well as in related sectors; or
BSP or any court or administrative body denying, (ii) any offense/violation involving dishonesty or breach of trust;
revoking or suspending any registration, license or
permit issued to him
(ii) such person has otherwise been restrained to
engage in any activity involving securities and
banking; or
(iii) such person is the subject of an effective order of a
self-regulatory organization suspending or
expelling him from membership, participation or
association
d) Any person convicted by final judgment or order by a court, or
competent administrative body of an offense involving moral
turpitude, fraud, embezzlement, theft, estafa, counterfeiting,
misappropriation, forgery, bribery, false affirmation, perjury or
other fraudulent acts;
e) Any person who has been adjudged by final judgment or order of
the SEC, BSP, court, or competent administrative body to have
willfully violated, or willfully aided, abetted, counseled, induced or
procured the violation of any provision of the Corporation Code,
Securities Regulation Code or any other law, rule, regulation or
order administered by the SEC or BSP;
f) Any person judicially declared as insolvent;
g) Any person found guilty by final judgment or order of a foreign
court or equivalent financial regulatory authority of acts, violations
or misconduct similar to any of the acts, violations or misconduct
enumerated previously;
h) Conviction by final judgment of an offense punishable by
imprisonment for more than six years, or a violation of the
Corporation Code committed within five years prior to the date of
his election or appointment; and
i) Other grounds as the SEC may provide.

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Ateneo Law School Class Handout

INDEPENDENT DIRECTORS
Department of Finance Department Order D.O. 054-2015 SEC Memorandum Circular No. 19 Series of 2016

SEC. 5
An Independent Director refers to a person who, ideally:
a) Is not more than eighty (80) years old, unless otherwise found
fit to continue serving as such by SEC or IC;
a) Not/ has not been a senior officer or employee of the covered company
b) Is not or has not been a member of the executive committee
unless there has been a change in the controlling ownership of the
of the board of directors, or an officer or employee, of the covered
entity, its subsidiaries, affiliates or related companies during the company;
Ideal b) Not and has not been a director of the covered company; a director/officer/
Qualifications three (3) years immediately preceding the date of his election;
employee of the covered company’s subsidiaries, associates, affiliates or
c) Is not a director, officer, or employee of the related companies of
related companies or the covered company’s substantial shareholders and
the covered entity’s majority shareholders;
d) Is not a “substantial shareholder”, i.e., does not own/hold shares its related companies in the 3 years immediately preceding the election
c) Has not been appointed in the covered company, its S/As/Af/R companies
of stock sufficient to elect one (1) seat in the board of directors of
as Chairman “Emeritus,” “Ex-Officio” Directors/Officers or Members of any
either the covered entity, its subsidiaries, affiliates, or any related
Advisory Board, or otherwise appointed in a capacity to assist the Board in
companies of its majority corporate shareholders;
e) Is not a relative within the fourth degree of consanguinity the performance of its duties and responsibilities within 3 years
immediately preceding his election;
or affinity, legitimate or otherwise, of a director, officer, or
d) Not an owner of more than two percent (2%) of the outstanding shares of
substantial shareholder of the covered entity or any of its related
the covered company, its subsidiaries, affiliates, associates or related
companies;
f) Is not retained, within the three (3) years immediately preceding the companies
e) Not a relative of a director, officer, or substantial shareholder of the covered
date of his of his election, either in his personal capacity or through a
company or any of its related companies or of any of its substantial
firm, as a professional adviser, consultant, agent or counsel of the
shareholders.
covered entity, any of its related companies or substantial
shareholders; is otherwise independent of management and free f) Not acting as a nominee or representative of any director of the covered
company or any of its related companies;
from any business or other relationship within the three (3) years
g) Not a securities broker-dealer of listed companies and registered issuers of
immediately preceding the date of his election; and
securities. A securities broker refers to any persons holding officer or trust
g) Does not engage or has not engaged, whether by himself or with
other persons or through a firm of which he is a partner, director or and responsibility in a broker-dealer firm.
h) Not retained, either in his personal capacity or through a firm, as a
substantial shareholder, in any transaction with the covered entity or
professional adviser, auditor, consultant, agent or counsel of the covered
any of its related companies or substantial shareholders, other than
company, any of its related companies or substantial shareholder, or is
such transactions that are conducted at arm’s length and could not
materially interfere with or influence the exercise of his judgment. otherwise independent of Management and free from any business or other
relationship within the three years immediately preceding the date of his
election;
i) Does not engage or has not engaged, whether by himself or with other
persons or through a firm of which he is a partner, director or substantial
shareholder, in any transaction with the covered company or any of its
related companies or substantial shareholders, other than such
transactions that are conducted at arm’s length and could not materially
interfere with or influence the exercise of his independent judgment;

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Ateneo Law School Class Handout

j) Not affiliated with any non-profit organization that receives significant

funding from the covered company or any of its related companies or
substantial shareholders; and
k) Not employed as an executive officer of another company where any of the
covered company’s executives serve as directors.

Related companies under this section refers to (a) the covered entity’s
holding/parent company, its subsidiaries, and subsidiaries of the parent company.

• At least twenty percent (20%) but not less than two (2) members of • The Board should have at least three independent directors, or such
the board of directors shall be independent directors: number as to constitute at least one-third of the members of the Board,
IDEAL MINIMUM • Any fractional result from applying the required minimum whichever is higher.
NUMBER OF proportion, i.e., 20%, shall be rounded up to the nearest whole
INDEPENDENT number.
DIRECTORS • For publicly-listed corporations, the number of independent
directors shall be proportionate to the percentage of shares held by
the public.
• An independent director shall ideally serve for five (5) • The Board’s independent directors should serve for a maximum
consecutive years. cumulative term of nine (9) years.
• After completion of five (5) consecutive years, the covered entity • After which, the independent director should be perpetually barred from re-
shall ideally consider him ineligible for re-election, which ineligibility election as such in the same company, but may continue to qualify for
IDEAL TENURE may be lifted after the lapse of a “cooling period” of two (2) years: nomination and election as a non-independent director.
Provided, that during such period, he has not engaged in any activity • In the instance that a company wants to retain an independent director who
that, under existing rules, disqualifies a person from being elected has served for nine years, the Board should provide meritorious
as independent director in the same entity. justification/s and seek shareholders’ approval during the annual
• The former independent director who has undergone the shareholders’ meeting.
aforementioned cooling period may be re-elected to another term of
five (5) years. After serving for a cumulative period of ten (10) years,
an independent director is ideally perpetually barred from being
elected in the same covered entity.

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SEC CORPORATE GOVERNANCE TRAINING REQUIREMENTS
SEC MEMORANDUM CIRCULAR NO. 20,
SERIES OF 2013
− Mandates all key officers and members of
the board of publicly-listed companies to
attend, at least once a year, a program on
corporate governance conducted by
training providers that are duly accredited
by the Commission.
− The participants should also submit a
CERTIFICATE OF ATTENDANCE within 10
days from completion.
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SEC MEMORANDUM CIRCULAR NO. 13, SERIES OF
2014
− Recognizes that financial statements filed with the
Commission are primarily the responsibility of the
management.
− The fairness of the representations in the financial
statements is an implicit and integral part of the
management’s responsibility
− Mandates all SEC accredited corporate governance
providers to include the following units on financial
reporting:
1) BASIC COURSE
• Framework for financial Statement
Reporting
• Principal Financial Statements and their
uses
• What Decision-Makers Need To Know
About the Financial Statements
• Income Statement, Balance Sheet,
Statement of Cash Flows
• Financial Statement Analysis
• Issue Spotting
2) ADVANCE COURSE
• Provisions of Philippine Financial
Reporting Standard Provisions that are
relevant to the company’s specific
industry
Class Handout
SEC MEMORANDUM CIRCULAR NO. 2, SERIES OF 2015
ADDITIONAL GUIDELINES ON CORPORATE GOVERNANCE
TRAINING PROGRAMS AND LECTURES
I. REQUIREMENTS FOR RESOURCE PERSONS
− All Speakers shall have relevant experience/training on the
subject matter to be discussed. Their most recent
curriculum vitae shall be submitted to the SEC for
evaluation.
− All speakers shall attend at least once a year a roundtable
discussion conducted by the Commission.
− Only speakers who shall obtain an average mark of at least 4
or above average shall be accredited.
II. REQUIREMENTS FOR TRAINING PROVIDERS
− The training program shall be submitted to the Commission
for approval at least 1 month before the scheduled training
program;
− The accredited training provider shall not change any of the
speakers/resource persons included in the list approved by
the Commission.
o In case of inability of the speaker to lecture on the
scheduled date, the company shall inform the
Commission in writing of the reason for the same.
o It shall also name a replacement speaker, who
must also be SEC accredited, and submit
his/her curriculum vitae at least 5 days before the
scheduled training;
− In case of cancellation or postponement of scheduled
training/seminar the Commission must be notified at least
ten (10) days prior to date of seminar/training and provide
reason for cancellation of the same;
− In case of changes in the course outline and materials, the
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Ateneo Law School Class Handout

Commission shall be furnished with the revised outline and

materials at least 7 days prior to date of seminar/training
− The Certificates of Attendance of participants in the
training/seminar shall be released by the accredited training
providers within 3 days from conclusion of training/seminar;
− Within 15 days from completion of the training/seminar, the
accredited training provider shall submit the following to the
Commission:
o Completion Report of Training;
o Signed attendance sheet of participants;
o Filled-up SEC authorized evaluation forms of
participants; and
o Summary of the evaluation results.
− The Commission shall have the option to send 1
representative to observe and monitor the conduct of a
training program; and
− The accredited training providers shall not allow non-
accredited speakers to give lectures in any of its training
programs. Further, it shall ensure the accreditation of its
speakers by requiring them to attend at least once a year a
roundtable discussion given by the Commission and by
submitting the SEC authorized evaluation form mentioned in
number four (4) to this Commission.

III. GUIDELINES FOR IN-HOUSE TRAINING

Those conducted by a company on its own:

− The Corporation shall file with the SEC a written request for
approval of each in-house corporate governance training at
least 1 month before a scheduled training;
− It shall also file a Certification that it has been conducting
in-house corporate governance training for the company
and that it can guarantee a qualified line-up of SEC
accredited trainers, which include at least one experienced
corporate director/CEO, who can effectively deliver, as a
minimum, the required training in accordance with the
Revised Code of Corporate Governance with special
emphasis on the mandated topics.
− The Corporation shall submit for the Commission's
examination the following:
o a. Copy of its course outline and training
materials for its own training programs
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o b. Credentials of its resource speakers;

− Only lectures/trainings conducted by SEC accredited
trainers or approved foreign speakers shall be counted as
compliance with the mandatory Corporate Governance
Training Program
− A processing fee P2,000.00 shall be paid for each
application for approval of in-house corporate governance
training filed;
− Prior notice of at least five (5) days must be given before any
change in speaker/resource person is made.
− In case of cancellation or postponement, the company shall
notify the Commission at least 10 days prior and provide
reason for such cancellation;
− In case of changes in the course outline and materials, the
Commission shall be furnished with the revised outline and
materials at least 7 days prior to date of seminar/training
− Within 10 days from completion of the training/seminar, the
company shall submit the following to the Commission:

o a. Completion Report of Training;

o b. Signed attendance sheet
o c. Filled-up SEC authorized evaluation
forms of participants
o d. Summary of the evaluation results;
o e. Certificate of Attendance of participants;
− The Commission shall have the option to send one (1)
representative to observe and monitor the conduct of the
training program

2. Those conducted in partnership with accredited training

providers.

− The same guidelines provided under “Additional Guidelines

for Accredited Institutional Training Providers” will apply.
−
DURATION

− All key officers and directors of publicly-listed companies

are required to attend a minimum of four (4) hours of
training every year. .

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Ateneo Law School Class Handout

Sources Used:

Department of Finance D.O. No. 054-2014

GCG Memorandum Circular 2012-05
SEC Memorandum Circular No. 20 Series of 2013
SEC Memorandum Circular No. 13 Series of 2014
SEC Memorandum Circular No. 02 Series of 2015
SEC Memorandum Circular No. 19 Series of 2016

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