6.1 Registration of Brokers, Dealers, Associated Persons, and Salesmen

6.1 Registration of Brokers, Dealers, Associated Persons, and Salesmen

In the Philippine capital markets, market intermediaries serve as the vital link between issuers seeking capital and investors seeking financial returns. Because intermediaries handle customer monies, execute orders on national exchanges, and provide financial recommendations, they occupy positions of public trust. To protect investors and ensure market integrity, the Securities Regulation Code (SRC / Republic Act No. 8799) and its Implementing Rules and Regulations (SRC-IRR) establish a comprehensive licensing and regulatory framework administered by the Securities and Exchange Commission (SEC) of the Philippines.

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Statutory Mandate: Section 28 of the Securities Regulation Code

The fundamental statutory foundation governing securities professionals is codified in Section 28 of the SRC:

Section 28.1 Mandate: 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.

Operating as an unregistered broker, dealer, associated person, or salesman is a direct criminal violation of the SRC. Under Section 73 of the SRC, willful violations of the Code or any of its rules carry severe criminal penalties, including fines ranging from ₱50,000 to ₱5,000,000 and imprisonment of not less than seven (7) years nor more than twenty-one (21) years, in addition to administrative sanctions imposed by the SEC.

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Intermediary Classifications and Functional Roles

Philippine securities law distinguishes between corporate intermediary entities and the licensed individuals who represent them:

Broker-Dealer Entity (Corporate License)
  ├── Associated Person / Compliance Officer (Supervisory / Regulatory Oversight)
  └── Salesmen / Registered Representatives (Order Solicitation & Client Execution)

1. Broker vs. Dealer

Under Section 3 of the SRC, the law defines the two operational capacities in which a securities trading firm operates:

• Broker (Agent Capacity): Any person engaged in the business of effecting transactions in securities for the account of others. A broker acts strictly as an agent for the client, executing customer orders on the Philippine Stock Exchange (PSE) or secondary fixed-income platforms, and receives remuneration in the form of a commission.
• Dealer (Principal Capacity): Any person who buys and sells securities for their own account in the ordinary course of business, through a broker or otherwise. A dealer acts as a principal, holding inventory at its own risk, and earns compensation through markups (when selling from inventory) or markdowns (when buying into inventory).
• Broker-Dealer Firm: In practice, modern Philippine securities firms operate as Broker-Dealers (BDs), maintaining corporate registration under SRC Rule 28.1 to execute agency orders while maintaining proprietary trading desks. The firm must disclose in writing to each client whether it acted as broker (agent) or dealer (principal) in every single trade.

2. Associated Person (Compliance Officer)

Under SRC Rules 28.1.2.5.2(e) and 28.1.5, every registered broker-dealer must employ at least one licensed Associated Person (AP). The Associated Person functions as the firm's compliance officer and supervisory executive. Key statutory characteristics of an Associated Person include:

• Responsibility for monitoring and enforcing the broker-dealer's compliance with the SRC, its IRR, the rules of self-regulatory organizations (such as the PSE and the Capital Markets Integrity Corporation / CMIC), and the Anti-Money Laundering Act (AMLA).
• Mandatory operational independence from sales and trading desks.
• Direct reporting line to the firm's Board of Directors or Audit Committee.

3. Salesman (Registered Representative)

Under Section 3.13 of the SRC, a Salesman is defined as a natural person employed, appointed, or authorized by a broker, dealer, or issuer to buy or sell securities on its behalf. For current SEC examination and application purposes, the equity-market track is called Equities Securities Salesman (ESS). A salesman interacts directly with retail and institutional investors, opens customer accounts, gathers financial profiling information, and solicits or accepts buy and sell orders.

4. Certified Investment Solicitor (CIS)

Under the Investment Company Act of the Philippines (Republic Act No. 2629) and SEC implementing circulars, individuals who solicit, market, or sell shares of open-end mutual funds must be licensed as Certified Investment Solicitors (CIS). While salesmen licensed under the SRC can sell general equity and debt securities, investment company solicitors specialize in collective investment schemes.

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Qualification Examination Framework: Phase 1 and Phase 2

To ensure market professionals possess adequate professional competence, the SEC administers the SEC Certification Examinations. The current SEC examination page describes computerized multiple-choice examinations, with a passing score of 65% for Phase 1 and 75% for Phase 2. For the current applicant tracks, certification proceeds through a common Phase 1 examination and the applicable role-specific Phase 2 examination:

Phase 1: General Examination

The Phase 1 General Examination is a mandatory, comprehensive prerequisite for all prospective capital market professionals in the Philippines. It evaluates foundational knowledge across six core areas:

1. Fundamentals of Securities
2. Economic Principles and Market Theories
3. Risk Management
4. Fundamentals of Securities Regulation
5. Corporate Governance
6. Anti-Money Laundering

Phase 2: Role-Specific Examinations

The SEC currently identifies applicant tracks for Certified Investment Solicitors (CIS), Equities Securities Salesmen (ESS), Fixed Income Market Salesmen (FIMS), and Compliance Officers / Associated Persons (CO/AP) for broker-dealers in the equities market. After Phase 1, an applicant takes the Phase 2 examination applicable to the role sought. Because the SEC publishes current examination coverage and schedules, candidates should use the current SEC notice for their chosen Phase 2 track rather than assume that one generic salesman syllabus applies to every role.

Exam Watch: Passing an SEC qualification examination does not automatically grant a license to practice. For a first-time salesman or Associated Person application under SRC Rule 28.1.5.5.5, the applicable examination must have been passed within the three years immediately preceding the application. Registration still requires the employing broker-dealer to file the application and sponsor the applicant; other professional tracks follow their applicable SEC registration rules.

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Fit-and-Proper Rule and Statutory Disqualifications

Under Section 29 of the SRC, the SEC exercises broad authority to refuse, suspend, or revoke the registration of any broker, dealer, associated person, or salesman if it determines that the applicant or registered professional fails to meet the fit-and-proper standards of integrity, competence, financial soundness, and trustworthiness.

Statutory Disqualifications

The SEC will deny registration or revoke an existing license if the applicant or registered person:

1. Criminal Conviction: Has been convicted by final judgment by a domestic or foreign court of an offense involving moral turpitude, fraud, embezzlement, fraudulent conversion, misappropriation, forgery, or violations of securities, banking, or commodities laws.
2. Regulatory Sanctions: Has been enjoined, suspended, or barred by a competent court, the SEC, the BSP, the Insurance Commission, or a foreign regulatory authority from acting as an intermediary, investment adviser, or financial professional.
3. Willful Falsehoods: Has willfully made a false statement, omitted a material fact, or misrepresented information in any registration application or report submitted to the SEC or an SRO.
4. Expulsion from SRO: Has been expelled or suspended from membership in a registered securities exchange (such as the PSE) or self-regulatory organization (such as CMIC) for violation of just and equitable principles of trade.
5. Insolvency and Bankruptcy: Has been declared insolvent or bankrupt by a competent court, indicating an inability to manage personal or fiduciary financial responsibilities.

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Registration Is Tied to the Sponsoring Broker Dealer

Philippine rules attach a salesman's or associated person's registration to a specific employing firm. (Section 28.3 of the SRC is not a dual-registration rule; it lets the Commission exempt brokers, dealers, salesmen, or associated persons from Sections 28.1 and 28.2 by rule or order.)

• Section 28.2: No registered broker or dealer, and no issuer, may employ a salesman or associated person who is not registered with the Commission.
• Employer-filed application: The SRC Rule 28.1 application for a salesman (SEC Form 28-S) or associated person (SEC Form 28-AP) is verified under oath by the employing broker dealer and must include written evidence that the broker dealer will employ the applicant once registered.
• Registration ends with the employment: The registration ceases when the person is no longer employed by the broker dealer identified in the application.
• Associated persons are full-time: An associated person is employed full time and cannot perform other duties without SEC approval, subject to a Chinese wall between the compliance function and other duties.

Why the Link Matters

1. Clear Supervisory Accountability: The employing broker dealer supervises its salesmen and answers for failure to supervise. A registration tied to one identified employer keeps that responsibility clear.
2. Loyalty and Conflicts: Acting for an unregistered or undisclosed second firm would divide loyalties over order routing and recommendations and fall outside the registered relationship.
3. Investor Verification: Customers and regulators can confirm which registered firm stands behind the salesman.

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Continuing Registration, Annual Fees, and Employment Changes

Registration is not a free-standing permit to solicit securities for any employer. A registered salesman or associated person remains tied to the broker-dealer identified in the registration and may act only within that sponsored relationship. Under SRC Rule 28.1.5, the registration remains valid unless revoked, suspended, or voluntarily surrendered, subject to compliance with the registration conditions. Each registered salesman and associated person pays the prescribed annual fee every November; this is different from saying that every license automatically expires on December 31.

Termination, Resignation, and Transfer Protocols

When a salesman or associated person stops working for the sponsoring broker-dealer, SRC Rule 28.1.5.3 requires the employer to file SEC Form 28-T, state the reason for discontinuation, and surrender the original registration certificate no later than five (5) business days after the discontinuation of employment. The individual may not continue soliciting or handling securities business under the former firm's registration.

A move to another firm requires registration under the new sponsor before the professional resumes regulated activity. Passing the examination establishes technical eligibility; it does not create an independent right to transact without a registered sponsoring firm.

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Summary Comparison Table: Intermediary Licensing Roles

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Practical Exam Traps & Regulatory Pitfalls

• Trap 1: Believing Passing the Exam Grants a License. An exam question may present a candidate who passed Phase 1 and Phase 2 and asks if they can immediately solicit orders as an independent financial agent. This is illegal. A candidate cannot execute trades or solicit clients without formal employment and sponsorship by an SEC-registered broker-dealer.
• Trap 2: Selling for a Firm That Is Not the Sponsor. Test questions often describe a salesman registered through one broker dealer who also solicits orders for a sister dealer. The salesman's registration covers the broker dealer identified in the application, so soliciting for another firm is unregistered activity under Sections 28.1 and 28.2 unless that firm separately registers and employs the person. Do not attribute this rule to Section 28.3, which is the Commission's exemption power.
• Trap 3: The Five-Business-Day Notice. After a salesman or associated person leaves, the broker-dealer files Form 28-T and surrenders the original certificate no later than five business days after discontinuation. Do not confuse this event filing with annual fees or unrelated corporate reports.
• Trap 4: Confusing Broker and Dealer Capacities. When a firm trades from its own proprietary inventory, it acts as a dealer (principal) and earns a markup or markdown. When it executes orders on behalf of clients on the exchange without using its inventory, it acts as a broker (agent) and earns a commission. Mixing these terms on an order confirmation violates SEC disclosure rules.