SEC to Legacy pre-need clients: Don’t expect full sum

abs-cbnNEWS.com
Mar. 19, 2009

Clients of three pre-need firms under the embattled Legacy Group of financial services firms should not expect to get their money back in full, the Securities and Exchange Commission (SEC) said on Wednesday.

In an open letter to planholders of Legacy Consolidated Plans, All Asia Corp., Scholarship Plan Phils., the SEC advised them “not to expect the claims under their plans to be paid in full.”

SEC said that as of December 31, 2008, the three pre-need firms have set aside a total of P360 million in trust funds with various banks. The trust fund is supposed to cover actual obligations to the clients when the plan they have invested in—either for education, pension or memorial—matures.

However, the P360 million—which is supposed to be in cash, invested in real estate, government securities, shares of stocks and other investments—is not enough to cover the companies’ total obligations to clients, the SEC wrote.

The corporate regulator added that these assets may even be worth less than P360 million since these have to be sold based on market rates.

The SEC has supposedly ensured that pre-need firms set aside enough trust funds to cover real-time obligation to the planholders through strict enforcement of accounting and valuation standards determined by actuaries.

However, the industry has lobbied for a more lax enforcement of these standards citing reasons ranging from market volatilities and insurance-like treatment of what are currently considered investment products. Actuarial valuation for insurance, which the Insurance Commission regulates, is more strict than investment products, which the SEC regulates.

The pre-need industry remains under the regulatory care of SEC, which has been blamed for the mess that pre-need firms, particularly the Legacy firms, now find themselves in.

Reimbursement process

The SEC said it hopes to pay all the Legacy clients proportionate sums from the sale proceeds of the assets in Legacy’s trust fund not later than April 30.

SEC has extended the deadline for Legacy clients to file claims to March 31. SEC said Legacy submitted a list of more than 14,000 planholders

After the filing of claims, SEC said they still need to validate these claims and will notify the clients by mail.

as of 03/19/2009 9:08 PM

SEC should function only as a registry

BusinessWorld
March 17, 2009
To Take a Stand by Oscar P. Lagman, Jr.

In answer to questions in the Senate hearings on the Legacy Group of Companies, Securities and Exchange Commission Chair Fe Barin said that they renewed the licenses of several pre-need companies with reserve deficiencies to enable them to find new investors and turn their floundering business around. That statement evinced a lack of business sense on the part of the SEC chair.

How could those floundering pre-need companies find new investors when the grim and critical situation of the pre-need industry was the subject of sensational front-page stories of the dailies as far back as 2001? No investor is going to put more money in an industry on the verge of collapse.

True, Barin was appointed chair of the SEC only in September of 2004 and the problem besetting the pre-need industry may have had no implication to her, but the prominence that media had been giving the mess that pre-need companies had placed themselves in should have caught the attention of a person of her circumstance and therefore she should have been abreast of developments that had great impact on the general public. I am sure Barin had read and heard about it even before she was appointed to the SEC.

Her expecting new investors to infuse money into blundering companies reflects ignorance of business operations, a shortcoming that can be traced to her having spent her entire professional life in government service, as secretary of the Monetary Board for 26 years.

The commissioner overseeing the Non-traditional Securities and Instruments Department, Jesus Martinez, is another lawyer. While he may have directly participated, organized, and acted as adviser in the formation of over 40 local and foreign corporations and may have had extensive experience in mergers and acquisitions, joint-venture negotiations, and investments, he was not involved in the mainstream activity of those corporations.

He may be a good lawyer, but he cannot be regarded as a successful businessman who would be competent to discern if a pre-need company has sound business plans and a long-term investment strategy that would enable it to meet the reserve requirement of the SEC.

He displayed his knowledge of the law when in response to Senator Enrile’s question he rhetorically asked with conspicuous confidence how the sale of a house to his financially independent son by the son of Celso de los Angeles of Legacy or how a Ford Expedition bought from his (Martinez’s) son by a Legacy-owned bank could be connected to him. (His abundant confidence must stem from his belief that the languid Ombudsman Merceditas Gutierrez would not find anything to charge him with.) His rhetorical question is as bald-faced as De los Angeles asking his lawyer if it is illegal to fall in love when a music video showing him singing to his newfound love was exposed publicly.

Barin and Martinez, having spent their entire professional life in the practice of law, may not have the skills to determine the viability of a pre-need company.

However, there was nothing to prevent them from “assembling” the experts who could sift through the jargon and complexities of the pre-need industry and be able to explain in clear layman’s terms the fundamentals of a financially viable pre-need company and the warning signs in a company in danger of failing to meet its financial obligations. That assembly of experts should have constituted the Non-traditional Securities and Instruments Department of the SEC and should have had a director who either had formal training in actuarial science or had substantial work experience in the pre-need industry.

In the hearing conducted by Senator Roxas all by his lonesome, he told, benignly, the director of the Non-traditional Securities and Instruments Department, Jose Aquino, to send someone else knowledgeable about actuarial calculations at the next hearing after Aquino was unable to answer intelligently a series of questions posed by the senator.

In a subsequent hearing, Senator Ponce Enrile, told Aquino bluntly, “I would be ashamed if I were you for always turning to your staff for every question asked you.”

It was obvious from his pathetic appearance in the Senate hearings that Aquino was not at all qualified to be the head of his department, maybe not even as a staff member.

I asked a professional actuary familiar with the management and organizational setup of the SEC if there is a competent actuary in that regulatory body.

He said the SEC has only a bunch of accountants. Accountants are not necessarily knowledgeable of Financial Management, although many Finance managers have an Accounting background. But accountants without grounding or experience in Financial Management are not qualified to determine the viability of pre-need companies.

The trust-fund deficiencies of the pre-need companies were the outcome of flawed actuarial calculations.

A trust fund is considered insufficient when it is less than the estimated total amount of payment for tuition fees or burial costs the pre-need company would have to pay in the future on behalf of its plan holders. This amount is referred to in the industry as the actuarial reserve liability.

The ARL is computed on the basis of assumptions on market demand, interest rates, inflation rates, price trends, competitive pressure, rate of lapsed plans, and in the case of educational plans, tuition increases.

The assumptions must be realistic to compute the ARL correctly. Pure accountants, such as those accountants at SEC, will not come up with realistic projections.

Accountants were brainwashed during their student days with the dictum “Anticipate no profit, provide for all losses.” I know because I am an Accounting graduate. It is very hard to make people with such mind-set to think as managers. I found that out when I was teaching Management Accounting and Controls at AIM (the President’s younger brother Diosdado Jr. was among my students in that course). I had a hard time getting those scholars sent by a large and reputable CPA firm to accept concepts of controllership such as depreciation as a source of funds.

So I say once again, more emphatically this time after hearing SEC Chair Barin and Commissioner Martinez, that the SEC should be relieved of the regulatory function. It should serve as a mere registry. Then one with 30 years service as secretary of the Monetary Board and who happened to be married to someone from Lubao who worked in Diosdado Macapagal’s law office becomes suitable to be head of the agency.