Accounting Alert

This Accounting Alert is issued to circulate Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 9-2024 dated April 25, 2024, which covers the SEC Strategic Sandbox.

Introduction

The Securities and Exchange Commission (SEC) recognizes the importance of innovation and its role in promoting the advancements in technology and business models that may maximize value, increase efficiency, manage risks better, and improve the lives of Filipinos. Section 37 of the Republic Act 8799, otherwise known as the Securities Regulation Code (SRC), mandates the SEC to encourage competitiveness in the market by promulgating rules for the registration and licensing of innovative and other trading markets or Exchanges including the issuance and trading of innovative securities and technology-based ventures. With this, the commission introduced Regulatory Sandbox which is a tool used by multiple jurisdictions that facilitates the growth of innovative financial products and services in a controlled environment, with appropriate regulatory oversight in place and ensuring investor protection.

Definition of terms

a. Regulatory Sandbox (sandbox) - regulatory tool that will enable a sandbox participant to test its innovative product or service or a new business model in a live and controlled environment, within a defined period.

b. Sandbox Participant - an entity that is duly registered with the Securities and Exchange Commission and has been assessed as eligible to take part in the SEC Regulatory Sandbox.

c. Sandbox Committee - a team of SEC personnel that will administer the conduct of the regulatory sandbox according to this framework, led by the PhiliFintech Innovation Office and supported by other relevant SEC departments.

Objectives

The Securities and Exchange Commission (SEC) aims to develop the financial markets as it seeks to help firms to test their products and services that demonstrate genuine innovation, which may:

1. Increase efficiency;
2. Manage risks better;
3. Create new opportunities;
4. Prevent Fraud;
5. Promote Financial Inclusion; or,
6. Enhance the lives of Filipinos.

Activities allowed in the Sandbox

To provide clarity to potential Sandbox Participants and the public, the SEC may periodically post and maintain on its website sandbox activity guidelines, which will include eligible activities and innovations that may be allowed to enter and operate within the regulatory sandbox.

Interested Sandbox Participants, whose proposed activity/innovation does not completely fall under any of the eligible activities and innovations, are not precluded from submitting an application to the SEC, subject to further evaluation. 

Regulatory Relief

Upon acceptance into the Regulatory Sandbox program, eligible participants may be granted regulatory relief, subject to the conditions specified in the implementing guidelines. The SEC may modify or relax specific licensing, registration, compliance, or other regulatory requirements that would otherwise apply to the Sandbox Participant's innovative activities during the sandbox period. 

Evaluation Criteria

An entity that intends to be a sandbox participant must show, with the necessary supporting information, the following before it can be enrolled in the sandbox:

1. The proposed financial product or service includes new or emerging technology or uses existing technology in a novel way, addresses a problem, or brings benefits to consumers or the overall financial markets, or any other description of innovation;
2. The applicant must clearly identify that the financial product or service is not prohibited by law in the Philippines, and why the enrollment to a regulatory sandbox is appropriate and necessary;
3. The entity has the intention and ability to deploy the proposed financial product or service in the Philippines on a broader scale after successfully exiting the sandbox, if business objectives have been met and if approved by the management of the Sandbox Participant;
4. The entity has the capacity and is ready to test the financial product and service with actual consumers in a controlled environment;
5. Description of the source of funds;
6. A testing plan with test scenarios and expected outcomes of the sandbox experimentation should be clearly defined;
7. The entity must provide Key Performance Indicators (KPIs) or other metrics in monitoring the progress of the sandbox implementation;
8. Appropriate limitations and conditions are clearly defined, for the sandbox to be effectively executed while sufficiently protecting the interest of consumers and maintaining the safety and soundness of the industry, including, but not limited to: a. Profile of target customers for the sandbox and the requirement to assess their suitability prior to availing of the financial product or service; and b. Any limitations in individual and total investment amounts that may be accepted;
9. Significant risks arising from the proposed financial product or service are assessed and mitigated, as well as the entity’s safeguards to assess and mitigate these risks; and,
10. An acceptable exit and transition strategy should be clearly defined in the event that the proposed financial product or service has to be discontinued or can proceed to be deployed on a broader scale after exiting the sandbox.

Effectivity

This Circular shall take fifteen (15) days after its publication in two (2) newspapers of general circulation. 

Please see attached circular for further information including the remaining sections.