From Proposal to Policy
In our prior article, we noted that the Securities and Exchange Commission is drafting a circular proposing much stricter term limits for independent directors in corporations. At the time, the objective was clear:
- Promote accountability & integrity
- Improve board independence
- Restore corporate oversight
As of today, such a proposal is no longer an initiative; Rather, it is a binding regulation.
With the issuance of the SEC Memorandum Circular No. 7, series of 2026 on January 26, 2026 — the SEC has formally enforced a 9-year maximum cumulative term for independent directors, along with the computation rules, penalties, and transitory provisions.
Who Is Covered by the New SEC Rule?
The Circular applies to companies whose equity is listed for trading on an exchange, as defined under the Securities Regulation Code (SRC). In simpler terms, publicly listed entities fall within the scope of the regulation.
Hence, if your company structures its governance by having independent directors, as required by SRC Rule 38 (Requirements on Nomination and Election of Independent Directors) and Section 38 of the SRC, this issuance directly affects your board composition and planning. The SEC has effectively implemented the circular on February 1, 2026
Key Provisions Every Board and Corporate Secretary Should Note
1. Annual Election, Nine-Year Maximum Tenure
According to the circular, as Independent Directors (IDs) are elected annually, they will only be limited to a total cumulative service of 9 years in the same company, regardless if such service is:
- Continuous or consecutive, or
- Intermittent or broken
For IDs elected prior to the effectivity of the Circular, the nine-year count will be based on calendar year 2012, unless otherwise provided.
2. How the Nine-Year Term Is Computed
Furthermore, the Circular provides detailed guidance to avoid ambiguity or any confusion about the term limit:
- Continuous service – The nine-year limit falls on the date of the Annual Stockholders’ Meeting (ASM) as provided in the by-laws of the corporation, or on another ASM date previously approved by the SEC.
- Intermittent service – Even if such service is non-consecutive, the total tenure must not exceed nine years, with the cutoff again based on the ASM date.
- Fractional years matter – Any fraction of service exceeding six (6) months is counted as one full year, regardless of how or why the position was open for vacancy.
3. Cooling-Off Rule for Role Changes
If an independent director has been elected as a non-independent director or officer within the 9-year period, they may only be re-elected in the same company after a two-year cooling-off period, provided that the nine-year maximum term has not been fully exhausted.
Indeed, this prevents a role-switching scheme from circumventing a corporation’s term limits.
4. Permanent Bar After the Maximum Term
Once an independent director has exhausted the allowed maximum cumulative years, they are:
- Permanently barred from re-election as an independent director of the same company
- Still allowed to serve other positions (e.g., non-independent director or officer), with no cooling-off period required.
Indeed, this reinforces the SEC’s position that independence must be both implemented and perceived accordingly.
5. Continuing Qualifications Remain Mandatory
Aside from the stricter term limits, companies remain obliged to ensure that their independent directors:
- Meet all qualifications, &
- Possess none of the disqualifications under SRC Rule 38 and other applicable regulations or issuances
Notably, serving as an independent director in one company does not preclude an individual from serving as an independent director in another company, including subsidiaries or controlled entities.
6. Follow the Stricter Rule in Case of Conflicts
If an issue arises with other regulatory agencies that impose different term limits, the SEC requires applying the shorter maximum term to ensure consistency with the highest applicable governance standard across companies.
The Cost of Non-Compliance
The Circular introduces burdensome penalties in cases of violation of the said rule:
- PHP 1,000,000 basic penalty per independent director, per year; and
- PHP 30,000 per month as a continuing penalty while the violation persists
For a third or subsequent offense, the consequence leads to suspension or revocation of the company’s primary or secondary license under the Commission.
Thus, these sanctions indicate that the SEC is serious about enforcement, not merely about compliance on paper.
What Companies Should Do Now
- Audit Tenure of Independent Directors Immediately – Companies should review historical board records to accurately compute the cumulative service of their independent directors, especially for IDs appointed before 2012.
- Plan for Board Succession – With no extensions allowed in such cases, companies must proactively identify new qualified independent directors.
- Align Governance Policies and By-Laws – Internal policies should be amended to be in accordance with the new computation rules, cooling-off requirements, and permanent disqualification provisions.
- Take Note of the Transitory Provision – Incumbent independent directors who have already reached the maximum term may continue serving until the 2026 ASM, or another SEC-approved ASM date. Once an ID has reached their 2026 ASM and fully exhausted their 9-year term limit, they can no longer serve as an independent director of the same company.
Bottom Line
The SEC’s enforcement of the nine-year term limit marks a decisive shift toward stronger corporate governance and a stronger commitment to board independence. What was once a flexible standard is now a firm rule, along with clear penalties and regulatory guidance.
For listed companies, it is now crucial to review and gradually update the rules and regulations that underpin their corporate governance.
If you need guidance in assessing independent director tenure, interpreting the transitory rules, or aligning your governance framework with the new SEC Circular — feel free to reach out to Babylon2k. We continue to translate regulatory developments into practical insights that help organizations stay compliant and competitive.
